BAT's US$16.35m blockage raises accounting red fla...

BAT's US$16.35m blockage raises accounting red flags

By Nyashadzashe Ndoro

Chief Reporter

British American Tobacco Zimbabwe (BAT), a subsidiary of the British American Tobacco Group (BAT Group), one of the world's leading tobacco companies, has faced audit concerns over its handling of US$16.35 million blocked by the Reserve Bank of Zimbabwe, leading to a qualified review conclusion from its auditors, KPMG.

The blockage of funds is attributed to unpaid dividends and material payments. Despite compliance with Zimbabwe's exchange control regulations, the funds remain locked after BAT transferred the equivalent value in Zimbabwean dollars to the Reserve Bank of Zimbabwe.

The responsibility for these blocked funds transitioned from the RBZ to the Treasury in 2021. BAT maintains a 1:1 exchange rate valuation between US dollars and Zimbabwean dollars, but the release timeline remains uncertain.

However, the auditors noted that the company had accounted for these foreign liabilities at a rate of US$1: ZWG1, which is not in compliance with International Accounting Standard (IAS) 21.

The audit report is contained in BAT's condensed consolidated financial results for the half-year ended June 30, 2024.

According to KPMG, this non-compliance resulted in an understatement of other losses by ZWG 167.73 million, an overstatement of monetary loss by ZWG 322.98 million, and an understatement of trade and other payables by ZWG 207.67 million.

The auditors also noted that the company had not restated its condensed consolidated financial results to resolve the matter, as required by IAS 8.

BAT Zimbabwe stated that it remained committed to resolving the issue and is working closely with the RBZ to ensure the release of the funds.

"In line with the provisions of the February 2019 Monetary Policy Statement on the settlement arrangements for these blocked funds RBZ is now finalizing the appropriate instrument(s) to facilitate settlement of the registered blocked funds which were listed as approved blocked funds under Arinex 1 of the Finance Act (no 7) of 2021 (gazetted on 21 December 2021)," the company stated.

However, the auditors expressed concerns about the company's reliance on financial support from its parent company, British American Tobacco Holdings (UK) Limited.

"As highlighted in the basis of our qualified review conclusion, the Group continues to account for its foreign currency denominated payables, primarily related to dividends, at a rate of US$1: ZWG1.

"The impact of recognising this liability at the correct spot rate is detailed in the basis of qualified review conclusion and the Group continues to be reliant on British American Tobacco Holdings (UK) Limited not seeking repayment of the outstanding dividends. Our conclusion is not modified in respect of this matter," KPMG stated.

According to the company's chairman, Lovemore Manatsa, BAT Zimbabwe's revenue decreased by 38% to ZWG 400 million compared to the same period last year, primarily due to a 9% decline in sales volume. The company attributed the decline to monetary instability, substantial exchange rate distortions, and a shortage of the new currency.

The company's gross profit declined by 41% compared to the prior year, while production costs decreased by 21.7% to ZWG 47 million due to cost optimization initiatives. Administrative expenses also decreased by 20% to ZWG 33 million.

BAT Zimbabwe reported a loss before tax of ZWG 145 million, compared to a loss before tax of ZWG 28 million in the same period last year. The increased loss was attributed to foreign exchange losses from translation of monetary assets and liabilities.

Given the financial performance, the Board of Directors has not declared an interim dividend for the period ended June 30, 2024.

Despite the challenging operating environment, the company remains optimistic about its future and is reviewing its business model to ensure long-term sustainability and value creation for stakeholders. Manatsa expressed confidence in the company's resilience, citing its diversity, excellence in execution, world-class talent, strong brands, and effective business partnerships.

BAT Zimbabwe expects trading conditions to remain challenging in 2024 but remains confident in its ability to navigate the operating environment and deliver shareholder value.