A recent financial reporting oddity from Zimbabwe…

The company in question is WestProp Holdings Limited, an entity “on a mission to create a brighter future for Zimbabwe by developing properties in our lifestyle communities where people can live, work, shop and play.” As far as I could tell, the company hasn’t made (and presumably isn’t required to make) its full annual or interim financial statements available online, but has provided “abridged versions.” The following is from note 5 to the “abridged reviewed financial results” for the six months to June 30, 2023:

• Revenue of USD 11,770,480 includes revenue from sale of residential stands amounting to USD 5,361,163 in respect of which the Group had not fulfilled the requirements for issuance of certificates of compliance by the local council. As at 30 June 2023, all documentation to evidence fulfilment of requirements for issuance of certificates of compliance had been lodged and the local council was still seized with the process of issuance. Servicing of the land is ongoing and will be completed within the 2023 reporting period. As a result, management considered it appropriate to recognize revenue from the sale thereof.

But Grant Thornton’s review report on those statements included a qualified conclusion on the matter, set out as follows:

• As described in note 5 to the abridged interim consolidated financial information, the Group’s revenue for the six months ended 30 June, 2023 of USD 11 770 480 includes revenue from sale of residential stands amounting to USD 5 361 163 for which the Group had not obtained certificates of compliance from the local council to allow for transfer of legal title to the customer. This constitutes a departure from the requirements of IFRS 15 which require revenue to be recognized when the entity has satisfied its performance obligations and has effected the transfer of legal title to the customer.

One would like more detail, but just going with what’s provided, it’s an interesting case study. It’s exceptionally unlikely that such a disagreement would work its way into a Canadian filing: the prominence of the auditor’s disagreement would presumably negate any perceived benefit to the company of applying its preferred policy. Without seeking though to over-analyze a business environment with which I’m unfamiliar, it appears a somewhat different dynamic may apply in Zimbabwe. As for the substance of the matter: again, neither the company nor the auditor provided enough information to fully analyze the issue, but IFRS 15 makes clear that the transfer of legal title is something that “may” indicate a customer has obtained control of an asset (as opposed to clearly doing so), and in this case the issue of legal title seems to be intertwined with whatever factors go into obtaining a “certificate of compliance.” For example, questions might arise over whether the company’s reference to servicing of land being ongoing as at June 30, 2023 indicates that the customer had not yet accepted the asset, obtained the significant risks and rewards of ownership, and so forth?

It appears the same issue didn’t apply at the 2023 year end, as the auditors’ report on those statements wasn’t qualified in that regard. We’re informed however: “The auditor’s report includes a section on key audit matters outlining matters that in the auditor’s professional judgement, were of most significance in the audit of the consolidated financial statements. The key audit matter was with respect to revenue recognition.” It would be somewhat surprising if that wasn’t the case, given the clear history of disagreement (again, the full auditor’s report isn’t available to be consulted online – in old-school manner it’s “available for inspection at the company’s registered office and the auditor’s report has been lodged with the Victoria Falls Stock Exchange.”) But the report was qualified for a different and seemingly unrelated reason:

• A qualified opinion has been issued on the audited consolidated financial statements for the year then ended. The qualified opinion was issued regarding the inclusion of unaudited financial statements of Sunshine Developments (Private) Limited in the consolidated financial statements of WestProp Holdings Limited.

Again, this isn’t something one would likely encounter in a Canadian context, and suggests that areas of, let’s say, unresolved debate between clients and auditors are perhaps more tolerable in the Zimbabwean context. Anyway, the company had a pretty good 2023, reporting profit of USD 50 283 million on revenue of USD 16 090 million. What’s that, I hear you say? Well, cash flows from operating activities were a mere USD 6 776 million: the profit was thanks to fair value adjustments on investment property of USD 49 514 million. And yet this area, it seems, wasn’t highlighted as a key audit matter. In the most recently reported results, those for the six months to June 30, 2024, the company didn’t report any fair value adjustments (it’s not clear whether that reflected an updated best estimate, or merely a lack of any interim valuation work) and reported a “a sharp drop of 471%” in its net profit. Well, as I said, it’s at the very least an interesting case study, and there’ll perhaps be more to come, as the company “continues to work towards its target of putting a billion bricks in the ground by 2050”…

The opinions expressed are solely those of the author.