Auditors highlight lease accounting issues at Meik...

Auditors highlight lease accounting issues at Meikles Limited

Ngonidzashe Ndoro

CHIEF REPORTER

A red flag has been raised over Meikles Limited’s lease accounting practices, with Ernst & Young’s audit report highlighting the need for extra procedures to verify the completeness and accuracy of lease modifications.

Meikles Limited, the Zimbabwean conglomerate, received a clean audit opinion from auditors for its 2024 financial statements.

However, the audit report highlights a key area of concern regarding the company’s accounting for lease modifications. The report states that “Modifications of Right of Use Assets and Lease Liabilities” was a “matter of most significance” to the audit.

This is due to the “volume of lease contracts and transactions, the level of manual intervention in the process of determining lease modifications, and the complexity surrounding the determination of the Incremental borrowing rates that were used to discount lease payments.”

According to the report, EY performed extra procedures to assess the completeness and accuracy of Meikles’ lease modifications. This included obtaining a list of all modified leases and testing a sample for appropriate accounting treatment.

Furthermore, EY engaged its own valuation experts “to validate the incremental borrowing rate used by management to discount lease payments at each lease modification date.” The emphasis on lease accounting and the need for external validation raise questions about Meikles’ internal controls in this area.

While EY ultimately signed off on the financials, the focus on lease accounting issues suggests potential risks for investors.

“Therefore, given the volume of different lease agreements and the significance of the differences between these agreements, there was significant audit effort required to inspect the agreements, consider the appropriateness of the discount rate for each lease and consider management’s assessment of subsequent modifications and possible impairment indicators,” read part of the report.

The audit report, however, states that the financial statements present a true and fair view of the company’s financial position, performance, and cash flows. The report also notes that the financial statements were in compliance with International Financial Reporting Standards.

The auditors conducted a thorough examination of the company’s financial records, including its inflation-adjusted consolidated financial statements, and found no material misstatements or discrepancies. The audit also assessed the company’s internal control systems and found them to be effective in preventing material misstatements or losses.

Meikles Limited’s financial statements show a significant improvement in the company’s financial performance, with revenue increasing by 25% to ZWL4.3 billion and profit before tax increasing by 30% to ZWL1.2 billion. The company’s assets also increased by 20% to ZWL6.5 billion, while its liabilities decreased by 15% to ZWL2.3 billion.