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Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: hard evidence from Zimbabwe

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Abstract

We examine the value relevance of inflation-adjusted (IA) and historical cost (HC) amounts in a hyperinflationary economy. Using a unique dataset drawn from annual reports of firms listed on the Zimbabwe Stock Exchange from 2000 to 2005, we find that both sets of amounts are value relevant but HC amounts are superior to IA amounts. We also show that inflation gains and losses provide incremental information content beyond that provided by the HC amounts and that the power of this incremental content model is equivalent to that of the HC model but superior to that of the IA model. Further analyses indicate that, in periods of relatively low inflation, HC amounts are more value relevant, while in periods of relatively high inflation, the two sets of amounts are equally value relevant. Finally, we show that HC amounts have a greater ability to predict future cash flows than IA amounts, which suggests that the superiority of their value relevance stems from this.

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Notes

  1. IAS 29 states that an economy is hyperinflationary if (inter alia) “the cumulative inflation rate over three years is approaching, or exceeds, 100%” (IASB 2011, p. A938).

  2. The distortions arise primarily because the HC measurement system (a) violates the monetary unit assumption of a stable currency or constant purchasing power over time, (b) impairs comparability across firms and over time (given the mixing of dollars from different periods with different purchasing power), and (c) ignores inflation gains and losses such as gains that accumulate over time in nonmonetary assets (Konchitchki 2011, 2013).

  3. These studies included, among many others, those by Beaver et al. (1980), Gheyara and Boatsman (1980), Beaver et al. (1983), Beaver and Landsman (1983), and Board and Walker (1984) (discussed in Section 3) and were a response to the 1970s and 1980s debate, particularly in the United States and United Kingdom, about the value of HC accounting amounts in periods of high inflation.

  4. ZAPB members are drawn from accounting professional bodies, the business community and the ZSE (Chamisa 2000).

  5. In our sample, all ZSE listed firms (except one) were audited by one of the Big Four accounting firms (Deloitte and Touche, Ernest &Young, KPMG, and PwC).

  6. In addition, listed firms are required by the Companies Act (Chapter 24:03) (1996) to publish their results (in summary form) in national newspapers.

  7. The standards include Statement of Standard Accounting Practices (SSAP) 16 in the United Kingdom and Statement of Financial Accounting Standard (SFAS) 33 in the United States, both of which are now defunct. During the 1970s and 1980s, the inflation rates ranged between 3.43 and 24.24% in the United Kingdom and between 1.86 and 13.51% in the United States (Bartley and Boardman 1990; International Monetary Fund 2010).

  8. This is because (a) such data are costly and more complicated to process than HC data (Beaver and Landsman 1983; Konchitchki 2011) and (b) the manner in which inflation impacts HC amounts is complex and potentially confusing (Beaver and Landsman 1983; Ashton et al. 2011).

  9. For a general summary of this work, see Konchitchki (2016).

  10. Our decision to limit the sample period to 2005 is underpinned by the fact that the post-2005 period saw the Zimbabwean dollar being revalued in 2006, 2008, and 2009 before it was scrapped and a multi-currency system was introduced (see Section 2.1). Thus including data for the post-2005 period would have been problematic in drawing conclusions from the analyses.

  11. Computed as the change in the adjusted R2s of the low inflation period relative to high inflation period.

  12. Due to the small number of observations, we do not run yearly regressions for 2000.

  13. Mandating an IA reporting system in a low inflation country like the US “may impose public- and firm-level costs that do not necessarily outweigh the benefits” (Konchitchki 2011, p. 1048).

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Acknowledgements

We appreciate the invaluable comments and suggestions made to earlier versions of this paper by the anonymous reviewers and the manuscript editor, Professor Stephen Penman. We are also grateful to participants at the 2011 Southern African Accounting Association Conference in George, South Africa, 2014 African Accounting and Finance Association Conference at Stellenbosch University, South Africa, and seminar hosted by the Accounting, Governance and Risk Research Group at the Nottingham Business School, Nottingham Trent University, UK, for the helpful comments and suggestions. We also acknowledge the research assistance by Shingirai Changunda and research funding award from the University Research Committee, Faculty of Commerce Block Grant, University of Cape Town.

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Authors and Affiliations

  1. Department of Finance and Tax, University of Cape Town, Private Bag, Rondebosch, Cape Town, 7701, South Africa

    Eddie Chamisa & Hamutyinei Harvey Pamburai

  2. Accounting Group, Essex Business School, University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, UK

    Musa Mangena

  3. Southampton Business School, Centre for Research in Accounting, Accountability and Governance, University of Southampton, University Road, Southampton, SO17 1BJ, UK

    Venancio Tauringana

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  1. Eddie Chamisa
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Correspondence to Eddie Chamisa.

Appendix 1

Appendix 1

An example of IA and HC financial statements presentation format

figure afigure a

Source: Delta Corporation (Zimbabwe) Ltd (2007, pp. 27 and 44).

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Chamisa, E., Mangena, M., Pamburai, H.H. et al. Financial reporting in hyperinflationary economies and the value relevance of accounting amounts: hard evidence from Zimbabwe. Rev Account Stud 23, 1241–1273 (2018). https://doi.org/10.1007/s11142-018-9460-4

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