IFRS Buzz 013
P C Finance Research Clarifying Complexities
Registration Number: 1985/000022/23
Members: P E Hattingh and C P Hattingh
Tele: 011 476-3626; Fax: 011 476-3627; Email: ; Web: www.mafiabuzz.co.za; Add: P O Box 731625 Fairland 2030
IFRS Buzz 026
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IFRS Buzz 013
Foreign Irredeemable Preference Capital
A company’s equity is as follows (Rm):
Ordinary share capital - 200m shares / 200Retained income / 2 500
Irredeemable preference shares – 150m shares / 300
3 000
The 10% p.a. preference shares were issued 30 years ago at £1 per share when R2 bought £1.
The company’s earnings for the year totalled R450m. The preference dividend declared at the year end was R210m and the ordinary dividend was R40m.
If you were the auditor of this company, would you be happy to leave the preference share capital at R300m in the equity section of the balance sheet?
I can find nothing in IFRS that requires this preference capital to be restated from pounds to rands. Irredeemable preference share capital is defined as equity in IAS 32 and equity, by definition is not a financial instrument. However, do these ratios make sense?
Net asset value per share – cents / 1350Return on total equity / 15%
Return on preference equity / 70%
Return on ordinary equity / 9%
The preference share capital should, in my opinion, be R2,1bn (150m shares at £1 multiplied by R14 exchange rate). The return on preference share capital is then 10% p.a., which is correct.
The write-up of the preference share capital should not be an income statement charge but should go through the changes in equity statement. The equity would then be R900000 and the return on this equity would be 27%. The real net asset value of an ordinary share is, then, 450 cents and not 1350 cents.
When there is no standard governing something, one should, after exhausting all other avenues, resort to fair presentation. Agree?
Fully Depreciated Assets
Someone asked me why some listed companies disclose the cost of assets that are fully depreciated. I checked IAS 16, IAS 36, Schedule 4 of the Companies Act and the JSE requirements and could not find the source for this disclosure. I think that this information is valuable information for the user. However, if it is volunteered by the company, some bright spark will ask: “Why did you not revise the asset lives regularly?” One should not end up with fully depreciated assets if one regularly revises the useful lives of assets and adjusts the depreciation charge accordingly.
If you know the source of this disclosure, please help me. I have a feeling that it may come from an old standard that has since been replaced.
Headline Earnings
A few years ago a listed company reversed reconstruction costs in calculating headline earnings. The auditor was indicted for negligence but got off because he was able to show that, at the time, about 30% of companies did this. I would not rely on this defence in future. Circular 07/2002 issue 4 reads: “All gains and losses directly attributable to the sale or termination of a business (other than trading results up to the date of sale), whether or not the business constitutes a discontinued operation as defined in terms of IAS 35 (presumably this also now applies to IFRS 5) should be excluded from Headline Earnings. Any other restructuring or similar costs relating to ongoing operations shall be included in Headline Earnings.” There is some doubt here but I would tend to be on the safe side and not reduce headline earnings by reconstruction costs.
Show Me!!!!!!!
An auditor threatened to qualify the audit report of a company that had a massive assessed loss because management refused to provide for a deferred tax liability on the temporary difference between the tax value and book value of plant. The auditor wrote to SAICA for guidance on this (no definitive guidance was forthcoming). Had the auditor bothered to read IAS 12.35 she would have found that one provides for a debit deferred tax asset only up to credit temporary differences unless there is convincing evidence that it will be able to recover the amount over and above the temporary difference in the case of recent tax losses. In this case there was no such convincing evidence. Paragraph 71 to 73 explains the netting story. When will small audit practitioners learn to go to the source to find the answers? Stop pestering SAICA with silly questions that can be answered by a 10 minute read of the relevant standard.
Here is another case of “Show me”. H Limited owns 75% of S Limited. S bought 90% of a listed shelf company, T Limited. T then acquired the business of company X for cash. The partner of one of the big four told the accountants of T that they do not have to comply with IFRS 3 for the purpose of this takeover. If someone is prepared to make such an assertion, all you have to say is: “I am not an IFRS expert. However, I a do not follow advice unless the dispenser of such advice can show me where in the standard it states this. Please show me where in the standard it says that T does not have to comply with IFRS 3?” And do NOT take “I don’t know but our technical department said so” for an answer! This situation is NOT a business combination under common control.
Kind regards,
Charles Hattingh
March 2007
CPD 10 Minutes
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