Financial Reporting in Hyperinflationary Economies and the Value Relevance of Accounting Amounts: Hard Evidence From Zimbabwe

Abstract

We examine the relative and incremental value relevance of inflation-adjusted (IA) and historical cost (HC) amounts in a hyperinflationary economy. Using an innovative setting and a unique dataset drawn from annual reports of firms listed on the Zimbabwe Stock Exchange for the 2000-2005 period, we find that both sets of amounts are value relevant, but HC amounts are superior to IA amounts. We also show that inflation gains and losses provide incremental information content beyond that provided by the HC amounts and that the power of this incremental content model is equivalent to that of the HC model but superior to that of the IA model. Furthermore, we find that during the period of relatively low inflation, HC amounts are more value relevant than IA amounts, but the differences are less discernible during the period of relatively high inflation. Our analyses further show that the value relevance of both IA and HC amounts increases with the inflation rate, but the increase is greater for IA amounts. Finally, we show that HC amounts have a greater ability to predict future cash flows than IA amounts, which suggests that the superiority of the value relevance of HC amounts relative to that of IA amounts stems from their ability to predict future cash flows. Overall, our results suggest that in periods of relatively low inflation, HC amounts are more value relevant, while in periods of relatively high inflation, the two sets of amounts are equally value relevant and provide incremental information beyond that provided by the other.

Decision Usefulness and Inflation Accounting: The Case of Turkey

“…They document that inflation adjusted financial statements should be reported as supplementary information, instead of supplanting historical cost information. Consistent with these studiesChamisa et al (2018) explore the same issue in Zimbabwe under hyperinflationary conditions. They compare inflation adjusted financial statements with historical costs for the period 2000-2005.…”

“…Also, Adwan et al ( 2020) find that firms with fair value financial statements are less vulnerable to impact of the financial crises. Contrary to these views other studies show that providing historical cost and fair values shouldn't be supplanted by each other rather they should be provided as supplemental information since they complement each other (see Kirkulak & Balsari, 2009;Filip & Raffournier, 2010;Chamisa et al, 2018).…”

Is Bitcoin an Opportunity or a Threat to the Relevance of Accounting Information?

“…Although some financial variables are often used in theoretical models of value relevance, some research sought to add non-accounting variables, intrinsic or extrinsic to the company, in order to identify the reaction of accounting information before such an inclusion. Examples are the research from Chamisa, Mangena, Pamburai and Tauringana (2018), Sutopo, Kot, Adiati and Ardila (2018) and Tshipa, Brummer and Du Toit (2018). They added respectively inflationary effects of social liability factors and factors relating to the corporate governance to the Ohlson model (1995).…”

Using Expected Geometric Values to Calculate the Cost of Interest in Hyper-inflationary Environments: the Case of Venezuela

“…A hyperinflationary setting provides a unique environment with respect to pension plan projections. In an examination of the value relevance of inflation-adjusted (IA) and historical cost (HC) amounts in a hyperinflationary economy, Chamisa et al (2018) use a unique dataset drawn from annual reports of firms listed on the Zimbabwe Stock Exchange from 2000 to 2005. They find that both sets of amounts are value relevant, but HC amounts are superior to IA amounts.…”