26 February 2004

Zimbabwe: New Accounting Standard Announced

Harare — THE International Accounting Standards Board (IASB) has issued a new International Financial Reporting Standard (IFRS) for share-based payments to cover executive share options and employee share ownership schemes.

The new standard, issued last week, is expected to come into effect in January 2005.

IASB said the standard, known as the IFRS 2, comes out of the need for "high quality financial statements that provide neutral, transparent and comparable information to help users make decisions".

Prior to the issuing of IFRS 2, there was no international accounting standard covering the measuring of share-based payments, which have grown in popularity among corporates wishing to reward and incentivise management.

Although share options are a relatively novel phenomenon in Zimbabwe, IFRS 2 comes at a pertinent time following the award of a total of 47.5 million First Mutual Limited (FML) share options to key management and staff at a price of $35 per share. This was in the run-up to the demutualisation of First Mutual Life Assurance Society last year.

Employee share option schemes (ESOS) have also become an increasingly prominent feature of corporate Zimbabwe where employees have taken control of some major firms such as the privatised Cotton Company of Zimbabwe and Dairibord Zimbabwe Limited.

The requirements in IFRS 2 replace the disclosure requirements in IAS 19 on employee benefits that deal with equity compensation benefits.

Some listed local firms have in the past disclosed the share options held by company directors, although there was no mandatory compulsion to reveal the details, which the new standard would bring into force.

IASB chairman David Tweedie said that the new standard was meant to enhance transparency and accuracy of financial statements following a string of major corporate failures in the sophisticated markets of Europe and the United States.

"This standard addresses an area of accounting that has been a concern to users of financial statements for some time. Recently, those concerns increased substantially when major corporate failures demonstrated the importance of transparent, unbiased and complete financial statements," Tweedie said.

While some analysts have welcomed the standard, saying it would provide an additional dimension of disclosure, a contentious issue likely to arise is the requirement that the option grants be treated as expenses.

The new standard has already generated global debate, particularly on the issue of whether option grants constitute a cost to the company, but Tweedie has maintained that they have to be expensed.

"In particular, investors and others have highlighted the need for proper accounting for employee share options. Typically, transactions in which share options are granted to employees are not recognised in an entity's financial statements. As a result, the entity's expenses are understated and its profits are overstated, which is potentially misleading to users of financial statements.

"The objective of IFRS 2 is to require that, no matter what form of remuneration is used, the entity recognises the associated expenses. In this way, IFRS 2 will improve the quality of financial reporting by giving a clearer and more complete picture of an entity's activities, which will assist investors and other users of financial statements to make informed economic decisions," Tweedie said.

It remains, however, to be seen how local companies will react to IFRS 2, although compliance is likely to be selective, if the experience with the International Accounting Standard for Financial reporting in Hyperinflationary Economies (IAS) 29) is anything to go by.

Many public companies still refuse to comply with the standard, although Zimbabwe, with an annualised inflation rate of 622.8 percent as of January, fits the bill of hyperinflationary economies.

Institute of Chartered Accountants of Zimbabwe (ICAZ) president Matthew Kunaka said the adoption of the standard, just like any other, would be subject to the Accounting Standards Board (ASB) and the Public Accountants and Auditors Board (PAAB).

"The standards, once accepted by the ASB, are then put forward to the PAAB before they become mandatory," Kunaka said.

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