VFEX-listed Edgars grapples with audit backlash over accounting standards

HARARE – Independent auditors Axcentium have issued an adverse opinion on Edgars Stores Limited’s latest financial statements, citing significant non-compliance with International Financial Reporting Standards (IFRS) related to foreign exchange rate accounting and fair value measurements of assets.

Axcentium highlighted that in the prior year (ended January 7, 2024), Edgars Stores Limited prepared its financial statements using the Zimbabwean Dollar (ZWL) as its functional currency, despite strong indicators suggesting that the functional currency had, in fact, shifted to the United States Dollar (USD) from the beginning of that comparative period.

Furthermore, in the current year, which ended 5 January 2025, the Group and Company retrospectively accounted for a change in functional currency in a manner that did not comply with IAS 21.

IAS 21 mandates that when an entity’s functional currency changes, the new currency’s translation procedures must be applied prospectively from the date of the change, not retrospectively.

The auditors also noted that during the comparative period, Edgars Stores Limited applied exchange rates that did not meet the definition of spot exchange rates as required by IAS 21.

“The non-compliance with IAS 21 in the preparation of the opening balances and prior year comparatives, ……also has a carryover impact on current year transactions (such as depreciation, tax expense, effects of exchange rate fluctuations on cash held) and non-monetary balances on the statement of financial position and the effects of the non-compliance are considered to be material and pervasive to the consolidated and separate financial information as a whole,” the auditors stated.

Adding to these concerns, the auditors pointed out that Edgars Stores Limited failed to present a third statement of financial position, as required by IAS 1, despite a material restatement of prior period financial information and a change in accounting policy.

Axcentium was unable to quantify the full effects of these IAS 21 departures but reiterated their material and pervasive nature.

The audit report also raised concerns about the fair valuation of property, plant, and equipment in the prior year.

The prior year fair values were determined internally through a directors’ valuation exercise, and the Group did not disclose the unobservable significant inputs used in this determination, which is a requirement of IFRS 13.

“IFRS 13 further requires a fair value to be determined using the assumptions that market participants would use when pricing the asset, assuming market participants act in their economic best interests; and fair value to reflect the price that would be received to sell the asset in an orderly transaction in the principal market at the measurement date under current market conditions, regardless of whether that price is directly observable or estimated using another valuation technique.

“We were therefore unable to obtain sufficient appropriate evidence to support the determination of fair valuations presented for the prior period,” the auditors noted.

Edgars reported a 9.1% decline in revenue to US$30.7 million, down from US$33.7 million in the prior year, alongside an adverse audit opinion regarding its financial statements.

According to the Chairman’s Statement, the operating environment for the period was characterised by persistent liquidity challenges in both local and foreign currencies, elevated real interest rates, and the severe impact of the El Niño-induced drought.

These factors, combined with retrenchments across various sectors, negatively impacted disposable incomes and led to a 15.6% decline in total Group units sold, from 2.36 million to 1.99 million.

A significant development in the company’s reporting is the change in functional currency from ZWG to USD, effective from the beginning of the previous financial year.

This change, driven by the increasing dollarisation of the economy and VFEX listing requirements, necessitated a complex translation process for comparative figures.

The Directors acknowledged that standard International Accounting Standard (IAS) 21 procedures for hyperinflationary economies might lead to “material misstatement,” and therefore, they employed “alternative procedures and techniques” to present what they believe is a “true and fair view.”

This deviation from IAS 21 has led the external auditors to issue an adverse audit opinion. The company is anticipating moving towards full IFRS compliance in FY2025 with the objective of returning to an unqualified audit opinion in the same year.

Despite the revenue decline, the Group’s profit before tax for the year was USD 0.8 million, a slight decrease from USD 1.0 million in the prior year.

Finance costs saw an 11.1% reduction to USD 2.4 million, attributed to the shift to lower-cost USD borrowings. Basic earnings per share marginally increased to 0.15 cents (2023: 0.13 cents).

The retail segment experienced significant pressure. The Edgars chain recorded a turnover of USD 17.2 million, down 5.3%, with units sold decreasing by 13.8%.

The Jet chain saw a more substantial decline, with total sales at USD 13.4 million, down 13.57%, and units sold falling by 16.9%.

The Express Stores, launched in the last quarter of the year and targeting the low-income cash-only segment, are part of the Group’s strategy to build critical mass, with six stores already opened and four more planned for FY2025.

In a bid to enhance supply chain control and improve margins, Edgars’ Carousel Manufacturing division increased its contribution to Group sales by 58.2%, from 194,000 units to 305,000 units. The Group invested USD 1.0 million in retooling and expanding Carousel’s production capacity.

The financial services division also reflected the market’s dollarization, with the USD retail debtors’ book closing at USD 11.6 million, a 7.4% decline, while the ZWG retail debtors’ book saw a 602% increase to ZWG 3.99 million.

Active USD accounts decreased to 81.3k, as customers reduced borrowings in a difficult environment. Club Plus Microfinance closed its loan book at USD 1.7 million with a healthy asset quality.

Looking ahead, the Group said it remains cautiously optimistic, planning to continually review its retail propositions, expand its geographic footprint with new stores, and invest further in solar power to mitigate rising utility costs and power outages.

Stringent cost-containment measures, including headcount rationalisations and enhanced supply chain efficiencies, are also underway.

Due to these ongoing investments and the challenging environment, the company decided not to declare a dividend for the year ended January 5, 2025, focusing instead on long-term growth and sustainability.