P C Finance Research CC
P C Finance Research Clarifying Complexities
Registration Number: 1985/000022/23
Members: P E Hattingh and C P Hattingh
T: 011 476-3626; F: 011 476-3627; E: ; W: www.mafiabuzz.co.za; A: P O Box 731625 Fairland 2030
IFRS Buzz 036
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Mini-Gaap
I had the privilege of being afforded the opportunity to comment on SAICA’s Exposure Draft called “Framework for non-public entities”. The purpose of the Buzz is to bring this document to your attention (only 4% of the CAs I surveyed knew that it existed!) and to follow up on our “Wish-list” for this framework that I published last year.
To download the exposure draft from SAICA’s website go to www.SAICA.co.za, under members click onto Technical Information, Online Resources, • Accounting, on left side click onto Exposure Drafts and Submissions, Accounting – Private Sector, ED 257 and save onto your computer.
There is no point in running workshops on this as all you need to do is to study the 64 pages and the list of improvements below and you will be up and running – set aside a Sunday morning for this before the family awakes.
Wish-List
Last year we listed 30 suggestions for this framework. Below is the list together with the outcome in the exposure draft:
1. Allow practice note 19 for depreciating assets.
The ED went further by stating that you must use tax allowances. This is not a good idea in that in the year a company buys plant they could end up making a fat loss and lose their bank overdraft facilities. I recommended that they make the use of PN 19 an option.
2. Scrap the component approach to depreciation.
The ED has accepted this principle.
3. Scrap residual values, i.e. making reporting entities pretend that they are going to sell the assets today at the end of their useful lives.
The ED has accepted this principle.
4. Allow the major replacement of parts to be expensed in line with tax allowances.
The ED has accepted this principle.
5. Scrap having to provide for leave pay, which SARS does not allow anyway.
There is no mention of this in the standard so I am not sure whether this will be necessary.
6. Scrap having to disclose cost of sales when you go the nature disclosure route.
They did not accept this. I agree that, in retrospect, this was not a good idea.
7. Scrap having to disclosure inventory losses (can’t be calculated anyway).
They did not accept this principle. I have requested that they delete it.
8. Scrap having to depreciate buildings. If a building is impaired, write it down.
The ED has accepted this principle.
9. Scrap having to separate land from buildings. They are really seen as one asset.
The ED has accepted this principle.
10. Scrap having to disclose fair value of investment property if leave at cost (is allowed in SME GAAP).
The ED has accepted this principle.
11. Allow all leases to be operating leases.
The ED has accepted this principle.
12. Scrap having to straight-line lease revenue and costs.
The ED has accepted this principle.
13. Scrap having to equity accounting (SME GAAP has), proportionate consolidation (SME GAAP has) and consolidating subsidiaries (SME GAAP has NOT).
The ED has accepted this principle.
14. Allow the matching concept, e.g. audit fee provision.
The ED has not accepted this principle. In retrospect, this was a bad idea because we are using the balance sheet concept in the framework and one should only raise a liability when the service has been performed.
15. Scrap the concept of embedded derivatives where it is part of the business of the company to base service costs or purchases on commodity prices.
The ED has accepted this principle.
16. Allow companies to use the cover rate to cost assets.
The ED has accepted this principle.
17. Scrap having to discount debtors and creditors (unless clearly a financing operation)
The ED has accepted this principle.
18. Scrap having to account for settlement discounts as deductions from revenue, inventory or cost of sales.
The ED did not specifically address this issue. I made a plea that they do.
19. Allow goodwill to be written off directly to equity – users do this anyway.
The ED recommends amortising goodwill over a period of 10 years. This is probably a better suggestion.
20. Scrap having to allocate “goodwill” to ludicrous intangible assets, which is a subjective exercise at best.
The ED has accepted this principle.
21. Allow the completed contract method for service revenue and construction revenue.
The ED has not accepted this principle. I am not going to push it as the new IFRS ED on revenue has come out with a much better idea. I have requested that we follow the new revenue recognition ideas in IFRS.
22. Scrap fair valuing investment property and equity financial instruments through profit and loss – they should go directly to equity.
The ED has accepted this principle.
23. Replace the cash flow statement with a simple reconciliation between profit after tax and cash flow.
The ED has not accepted this principle. In fact, it has gone much further than IFRS on this issue. I have made a plea to make their complex cash flow statement an option in an appendix and to revert back to our original wish.
24. Scrap having to disclose related party transactions between related parties. (Continue to require directors’ emoluments and major transactions with related parties, e.g. sales of assets, administration fees, etc. mainly for tax purposes.)
The ED has not accepted this principle.
25. Ban re-opening past financial statements, i.e. require prior period errors and changes in accounting policies to be dealt with in the current period.
The ED has accepted this principle.
26. Permit the cost model for biological assets and agricultural produce.
The ED accepted this principle for agricultural produce but not for biological assets. It suggests that biological assets be expensed. I have made a plea for accounting for biological assets at cost. Most farmers know what the cost is of planting a crop so this will not be a burden.
27. Allow companies to provide for dividends out of current profits. The fact that the declaration was after the year is irrelevant. The matching concept should apply.
The ED, quite rightly, did not accept this principle. If the dividend is declared after the balance sheet date it is not a liability at the balance sheet date.
28. Allow companies to present a normal profit line and “extraordinary items” below the line (with explanations) so that users can understand the long term annuity profits and the once off item.
The ED did not accept this principle. I did not push it.
29. Scrap having to break assets into current and non-current. Big GAAP does allow this but only if it would be a better way to present the balance sheet.
The ED did not accept this principle.
30. Scrap having to prove hedge effectiveness. If the company’s intention is to hedge, let it use hedge accounting.
The ED accepted this principle. It does not mention hedge accounting.
Other Comments
1. The name of the proposed standard leaves much to be desired!
2. I have recommended that we change the name balance sheet to statement of assets and liabilities and the income statement to statement of income and expenses. The name balance sheet will fall away in the foreseeable future and it would be nice if we, in SA, were proactive and logical.
3. I recommended that the statement of income and expenses ends with profit for the year and a note be given reconciling opening and closing equity.
4. We need to be able to reference back to IFRS if a transaction or an event is not covered by this framework as this framework purports not to cover all situations.
5. I suggested that the framework deal with impairment under the section dealing with that asset: having one section dealing with receivables, inventory, intangibles, PPE, goodwill, financial instruments, etc. is confusing.
6. I recommended that changes in accounting policies and prior period errors be accounted for in the current statement of income and expenses. The ED suggests that they be adjusted to opening retained income. If this happens, they never get to hit the statement of income and expenses.
7. I suggested that the ED reverts to the term “Land and buildings”. They are using “Real estate” in the ED.
8. The standard on when an asset is recognised should be improved – it is too vague.
9. The statement states that one may only capitalised improvements if allowed for tax purposes. I feel that we should not allow tax rules to affect accounting rules.
10. I recommended that the ED should deal specifically with settlement discounts.
11. I suggested that goodwill be separated from intangible assets.
12. The ED does not permit financial instruments to be fairly valued. I suggested that if there is an active market for them, they should be fairly valued through profit and loss.
13. I suggested that we get rid of contingent assets.
14. I suggested that if a company does not consolidate, the subsidiary’s financial statements it should make the subsidiary’s financials available to the users of the financial statements.
15. The ED does not address preference shares. These are common in SMEs.
16. I suggested that discounts given (other than settlement discounts) should go to reduce revenue and discounts received (other than settlement discounts) should go to reduce purchases.
17. I was not happy with recognising revenue when the entity invoices the client and have suggested that they have a proper revenue recognition standard in place.
18. I suggested that we delete references to STC as STC is on the way to oblivion.
19. I feel that there should be some guidance for accounting for foreign branches.
20. The ED does not permit debit deferred tax to be raised for tax losses and tax credits. I would prefer it if this were allowed as it would result in a better measure of profitability. If the user does not like the asset on the statement of assets and liabilities, he or she can reverse it.
I also made some editorial suggestions.
Conclusion
I withdraw my reservations about this idea. I think that SAICA is on the right track here. Practitioners cannot wait for the demise of all the stupidities they have to put up with for little entities where no value is added.
Please give this initiative your full support and help the authors to push for completion in time for preparation of the 28 February 2010 financials.
Congratulations to all those involved in this initiative. I really did not think that SA would win on this issue but it looks like I was wrong.
Kind regards,
Charles Hattingh
May 2009
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