Management Performance Measures (MPMs) and their Tax Implications in Zimbabwe
Navigating IFRS 18
Overview.
With the International Accounting Standards Board (IASB) issuing IFRS 18 Presentation and Disclosure in Financial Reporting (effective for annual periods beginning on or after January 1, 2027, with early adoption permitted), the landscape of corporate reporting is undergoing a structural shift. A cornerstone of IFRS 18 is the formalization of Management Defined Performance Measures (MPMs).
For Zimbabwean reporting entities—already navigating hyperinflationary accounting (IAS 29), multi-currency regimes, and evolving tax regulations—MPMs present both an opportunity for clear management communication and a potential compliance minefield. This article explores the definition and disclosure requirements of MPMs under IFRS 18, analyzes their taxation and tax-reconciliation implications under the Zimbabwe Revenue Authority (ZIMRA) framework, and examines recent disclosure practices among listed counters on the Zimbabwe Stock Exchange (ZSE) and Victoria Falls Exchange (VFEX).
What are Management Defined Performance Measures (MPMs)?
Under IFRS 18, MPMs are defined as sub-totals of income and expenses that:
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Are used in public communications outside financial statements (e.g., analyst briefings, press releases, director reports).
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Complement IFRS-specified totals or subtotals to communicate management’s view of financial performance.
Key Criteria and Exclusions
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Inclusions: Measures such as Adjusted EBITDA, Normalized Operating Profit, Headline Earnings per Share (HEPS), or Operating Profit before Non-Recurring Items.
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Exclusions: Subtotals specifically required by IFRS Accounting Standards (e.g., Gross Profit, Operating Profit, Profit before Tax), as well as non-financial measures (e.g., ESG metrics, subscriber counts) and balance sheet or cash flow metrics (e.g., Free Cash Flow, Net Debt).
Mandatory Disclosures for MPMs
When an entity discloses an MPM, IFRS 18 mandates a single note disclosure containing:
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Description and Justification: Why the measure provides useful information and how it reflects management’s view.
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Calculation Methodology: How the measure is calculated.
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Reconciliation: A clear, step-by-step reconciliation to the most directly comparable IFRS-specified subtotal or total.
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Tax and Non-Controlling Interest (NCI) Effects: The tax effect and NCI impact for each reconciling item individually.
Tax Implications of MPMs in Zimbabwe
While MPMs are financial reporting constructs designed to give investors a clearer view of underlying operational health, they frequently intersect with tax determination under the Income Tax Act [Chapter 23:06] administered by ZIMRA.
Financial Reporting (IFRS 18) Tax Compliance (Income Tax Act [Cap 23:06])
┌────────────────────────────────────┐ ┌─────────────────────────────────────────┐
│ IFRS Profit Before Tax (PBT) │ │ Taxable Income Computation │
├────────────────────────────────────┤ ├─────────────────────────────────────────┤
│ +/- Management Adjustments (MPM) │ ───────────> │ +/- Income Tax Act Adjustments │
│ • Exchange Gains/Losses │ Divergence │ • Unrealized Forex (Sec 8/15) │
│ • IAS 29 Inflation Adjustments │ Analysis │ • Capital Allowances vs Depreciation │
│ • Impairments & Restructuring │ │ • Non-Deductible Expenses │
└────────────────────────────────────┘ └─────────────────────────────────────────┘
A. Income Tax Reconciliation vs. MPM Reconciliation
Taxable income in Zimbabwe is derived starting from accounting profit before tax (PBT) and applying statutory adjustments under the Income Tax Act. When management presents an MPM (e.g., Adjusted EBITDA or Normalized Operating Profit), stakeholders must carefully distinguish between:
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The MPM Reconciliation: Adjusts IFRS Operating Profit to Management’s “Normalized” Profit.
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The Tax Computation Reconciliation: Adjusts IFRS Profit Before Tax to Taxable Income.
Tax Allocations for Reconciling Items
IFRS 18 requires disclosure of the tax effect for each item reconciling the MPM to the IFRS subtotal. In Zimbabwe, determining this tax effect involves evaluating the statutory status of each reconciling item against the base Corporate Income Tax (CIT) rate of 25% plus the statutory 3% AIDS Levy (yielding an effective tax rate of 25.75%):
| Common Zimbabwean Reconciling Item | Accounting Treatment | Tax Treatment (ZIMRA) | IFRS 18 Tax Impact Analysis for MPM Disclosure |
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Unrealized Foreign Exchange Gains/Losses
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Excluded in “Normalized” MPM to show core performance
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Taxable/Deductible upon accrual/realization depending on nature
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High Impact: Tax effect must be computed at the statutory Corporate Income Tax rate of 25% plus 3% AIDS Levy (effective 25.75%).
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IAS 29 Monetary Gain/Loss
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Stripped out in “Core Operating Profit” MPM
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Ignored for tax purposes (ZIMRA operates on historical cost basis)
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Permanent Difference: The tax effect is 0%, but explicit disclosure is required to explain why no tax expense attaches to the adjustment.
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Impairment Losses (e.g., Property, Goodwill)
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Excluded as non-recurring in MPM
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Non-deductible for tax purposes until realized
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Deferred Tax Impact: Creates a temporary difference or permanent disallowance; tax effect attribution requires clear disclosure using the 25.75% rate where applicable.
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Fair Value Adjustments (Biological Assets / Investment Property)
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Stripped out to reflect cash/operational yield
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Taxed only upon disposal or governed by specific capital gains rules
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Deferred Tax Adjustment: Requires allocating deferred tax at the statutory rate (25.75%) or Capital Gains Tax (CGT) rate.
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B. Currency Distortions and Dual-Currency Tax Rules
Zimbabwe’s multi-currency environment and transition to the ZiG (Zimbabwe Gold) present unique complexities:
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Functional Currency vs. Tax Currency: Entities reporting in USD or ZiG must maintain parallel tax records if functional currency differs from statutory tax settlement requirements (e.g., Finance Act provisions requiring tax payment in the currency of transaction).
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Forex Volatility in MPMs: Management frequently excludes volatile forex losses from operating subtotals to highlight underlying operational margins. However, because ZIMRA levies tax on realized foreign currency gains at the effective 25.75% rate, an entity may show an MPM indicating strong performance while facing severe liquidity drain from local currency tax obligations on unrealized accounting gains.
Practical Insights – Disclosure Practices in Zimbabwe
Financial reporting among ZSE and VFEX-listed entities illustrates how Zimbabwean companies utilize alternative performance measures that fall under IFRS 18 MPM rules:
1. Delta Corporation Limited (ZSE: DLTA)
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Observed Measures: Delta frequently highlights operational metrics such as EBITDA, Volume Growth, and Normalized Operating Profit in its financial reporting and commentary.
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Context: Operating across beverage segments, Delta often segregates hyperinflation adjustments (IAS 29) and foreign currency distortion gains/losses from its operational performance review.
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IFRS 18 Impact: Delta will need to centralize the reconciliation of its adjusted EBITDA/Operating Profit directly in a dedicated note, specifically detailing the tax effect of items like foreign currency revaluations and monetary gains using the 25.75% tax rate.
2. Innscor Africa Limited (VFEX: INN)
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Observed Measures: Following its migration to the USD-denominated Victoria Falls Stock Exchange (VFEX), Innscor emphasizes Core Operating Profit and EBITDA Margin to demonstrate underlying volume-driven growth amidst shift in functional currency.
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Context: Historical hyperinflation indices distorted comparability across reporting periods. Innscor utilized management performance views to provide historical comparability in USD terms.
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IFRS 18 Impact: Under IFRS 18, any “Core” or “Adjusted” operating profit used in press releases or management summaries must be formally reconciled in the audited notes, complete with item-by-item tax allocations.
3. Econet Wireless Zimbabwe Limited (ZSE: ECO)
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Observed Measures: Telecoms routinely rely on EBITDA, ARPU (Average Revenue Per User), and Adjusted EBITDA margin.
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Context: Econet encounters significant finance costs and forex losses arising from foreign currency-denominated obligations. Management commentary often separates operational performance from heavy non-cash forex adjustments.
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IFRS 18 Impact: Forex loss adjustments to EBITDA will require transparent disclosure of the tax shield associated with those losses, especially where tax deductibility is capped or subjected to ring-fencing provisions under ZIMRA rules.
Key Recommendations for Zimbabwean Preparers and Tax Practitioners
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Conduct an MPM Audit: Identify all performance metrics used in board packs, earnings releases, investor presentations, and directors’ reports to determine which fall under the IFRS 18 definition.
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Establish Tax-Effect Calculation Workpapers: Build robust internal processes to calculate the specific income tax effect (current and deferred at the 25.75% effective rate) for every individual item reconciling an MPM to an IFRS subtotal.
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Align Finance and Tax Teams: Ensure tax teams review proposed MPM reconciliations before publication to prevent inconsistencies between accounting adjustments and tax return positions filed with ZIMRA.
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Prepare for Audit Scrutiny: Because MPM notes fall within the scope of the external audit under IFRS 18, reconciliations and their underlying management justifications will be subject to full audit validation.
Conclusion
The formalization of Management Defined Performance Measures under IFRS 18 brings much-needed transparency to non-GAAP metrics globally. In Zimbabwe, where economic volatility often prompts management to present adjusted measures, IFRS 18 will bridge the gap between management reporting and audited statements. However, finance leaders must pay close attention to the intricate tax effects of these measures, ensuring that the narrative presented to investors aligns seamlessly with tax realities under ZIMRA regulation.
