Functional Currency
Functional currency is the currency of the primary economic environment in which the entity operates. The functional currency is determined by looking at a number of relevant factors. This currency should be the currency in which an entity usually generates and spends cash. Functional currency should be the one in which the business transactions of an entity are normally denominated. All of the transactions which are not in the functional currency are treated as foreign transactions.[1]
Factors to determine Functional Currency
The following are considered the most important factors an entity considers in determining its functional currency:
- the currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and
- the currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
- the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).[2]
Functional Currency in Zimbabwe
Up until 2018, virtually all entities in Zimbabwe had determined their functional currency to be United States Dollars. In 2018, questions started to arise as to whether most entities continued to use a functional currency of United States Dollars. This was complicated by the fact that Zimbabwe continued to officially use the multi-currency system with the US$ being predominant but, various forms of quasi US$’s started to show significant value differences. This included forms held in bond notes and coins and those held electronically in mobile banking platforms and the Real Time Gross Settlement (RTGS) system. Whilst legally these other forms remained on par with the United States Dollars, in substance they started to resemble other forms of “currency”.
In October 2018 the Reserve Bank of Zimbabwe (RBZ) moved to officially separate and track FCA accounts into Nostro and RTGS forms. It was not however until 22 February 2019 that the legal position was confirmed by the introduction of the RTGS Dollars as an official electronic currency, through statutory instrument 33 of 2019 (S.I 33 of 2019).
Accordingly it becomes somewhat blurred for those that assess their functional currency to have changed, as identifying when it actually occurred. Unfortunately no one answer fits all scenario. Some arguments suggest it occurred in October 2018 when the Nostro/RTGS bank account split occurred. Others argue that it occurred even earlier and with others saying it occurred on the legal recognition on 22 February 2019. In reality the change may have occurred gradually and over time.
The Public Accountants and Auditors Board (PAAB) in their Financial Reporting and Auditing Guidance on Currency Considerations under the Environment Prevailing dated 21 March 2019 stated “Since there was no official and legal local currency prior to the 22nd of February 2019, in particular given the provision of S.I 33, the presentation currency of most entities in the country is expected to remain as the United States Dollar as at 31 December 2018 and for the year then ended. This is a matter, however, that remains the sole prerogative of directors or those charged with governance of respective entities”
For privately owned businesses and smaller entities (SME’s) without public accountability, it is likely that the determination will be assessed to occur with effect form 22 February 2019 in line with the legal position stated in SI 33 i.e. “That, for accounting and other purposes, all assets and liabilities that were, immediately before the effective date, valued and expressed in United States Dollars (other than Nostro bank balances and foreign loans and obligation), shall from the effective date be deemed to be opening balances in RTGS dollars at par with the United States dollar”
Lack of transparency on Functional Currency
The reluctance by the government to realise that the local currency is yet to attain the normal status of a functional currency is quite worrisome. Officials continue announcing monetary and fiscal measures basing on a currency they do not believe in. When they want to set the capital requirements of banking institutions, they prefer to calibrate the amounts in the greenback.[3]
