Responding to Non-compliance with Laws and Regulations

Responding to Non-compliance with Laws and Regulations is an international ethics standard for auditors and other professional accountants. It sets out a first-of-its-kind framework to guide professional accountants in what actions to take in the public interest when they become aware of a potential illegal act, known as non-compliance with laws and regulations, or NOCLAR, committed by a client or employer.

To whom does the standard apply?

The standard applies to all categories of professional accountants, including auditors, other professional accountants in public practice, and professional accountants in organizations, including those in businesses, government, education, and the not-for-profit sector. It addresses breaches of laws and regulations that deal with matters such as fraud, corruption and bribery, money laundering, tax payments, financial products and services, environmental protection, and public health and safety.

What is NOCLAR under the proposed framework?

Any act of omission or commission, intentional or unintentional, committed by a client or employer, or by those charged with governance, management or employees of a client or employer which is contrary to the prevailing laws and regulations.

What is included in the scope of laws and regulations?

  • Laws and regulations that have a direct effect on the determination of material amounts and disclosures in the financial statements
  • Other laws and regulations, compliance with which may be fundamental to the entity’s business and operations, or to avoid material penalties.

What is not in the scope?

  • Matters that are clearly inconsequential
  • Personal misconduct unrelated to the business activities of the client or employer
  • NOCLAR acts committed by persons other than the client or employer, or those charged with governance, management or employees of the client or employer.

What is required of Auditors under the proposed Framework?

Raising the identified or suspected NOCLAR with management or those charged with governance

  • To clarify their understanding of the matter and substantiate or dispel their concerns
  • To prompt management or those charged with governance to:
    o Investigate the matter and rectify or mitigate consequences for stakeholders
    o Prevent the act of NOCLAR where it is yet to occur
    o Report the matter to the appropriate authority if required by law or regulation or disclose the matter if necessary in the public interest.

Fulfilling professional responsibilities by understanding and complying with applicable laws and regulations and professional standards.

Considering if further action is needed to achieve the objectives by determining

  • The appropriate timelines for management or those charged with governance’s response
  • Evidence of actual or potential substantial harm to the entity or stakeholders
  • Disclosing the matter to the appropriate authority
  • Withdrawing from the engagement

Documenting, among other matters, how they are satisfied that the objectives have been met.

The IESBA believes that the proposed framework focusses on the desired outcomes in the public interest i.e., that professional accountants do not turn a blind eye to the matter, that NOCLAR consequences are addressed or that NOCLAR be deterred, and that further appropriate action be taken as needed in the public interest.

Completion date:
The IESBA is targeting December 2017 for completion of this work to restructure and strengthen the Code. The restructured Code, which will be renamed International Code of Ethics for Professional Accountants (including International Independence Standards), and will contain significant new requirements and revised provisions that the IESBA has already finalized.

Amendments becoming effective 1 January 2017

Amendments to IAS 7 Cash flow statement


As part of the disclosure initiative a standalone amendment to IAS 7 was issued in January 2016. This amendment requires entities to provide disclosures on changes in liabilities arising from financing activities, including non-cash changes and changes arsing from cash flows.

How to meet the requirement?

An entity shall disclose the following changes in liabilities arising from financing activities:

  • changes from financing cash flows;
  • changes arising from obtaining or losing control of subsidiaries or other businesses;
  • the effect of changes in foreign exchange rates;
  • changes in fair values; and
  • other changes.

One way to meet this disclosure requirement is to provide a reconciliation between the opening and closing balances for liabilities arising from financing activities.

Effective date: The amendments are effective for periods beginning on or after 1 January 2017. It is not required to provide comparative information for preceding periods.

Amendments to IAS 12 Income taxes


This amendment clarifies the requirement on the recognition of deferred tax assets for unrealised losses related to debt instruments measured at fair value.

What are the amendments?

It was clarified that the following circumstances give rise to a deductible tax difference regardless of whether the holder expects to recover the carrying amount by holding the debt instrument until maturity or by selling the debt instrument:

  • an entity holds a debt instrument classified as available-for-sale and, therefore, measured at fair value but whose tax base is cost;
  • the entity estimates that it is probable that the issuer of the debt instrument will make all the contractual payments but changes in market interest rates have caused the fair value of the debt instrument to be below its cost;
  • tax law does not allow a loss to be deducted until it is realised for tax purposes;
  • the entity has the ability and intention to hold the debt instrument until the unrealised losses reverses (which may be at its maturity);
  • tax law prescribes that capital losses can only be offset against capital gains, whilst ordinary losses can be offset against both capital gains and ordinary income; and
  • the entity has insufficient taxable temporary differences and no other probable taxable profits against which the entity can utilise deductible temporary differences.

How to estimate future taxable profits?

  • The amendments clarify that when estimating taxable profit of future periods, an entity can assume that an asset will be recovered for more than its carrying amount if that recovery is probable and the asset is not impaired. All relevant facts and circumstances should be assessed when making this assessment.
  • The amendments make clear that, in evaluating whether sufficient future taxable profits are available, an entity should compare the deductible temporary differences with the future taxable profits excluding tax deductions resulting from the reversal of those deductible temporary differences.
  • If the tax law only allows deductible temporary differences to be deducted from profits of a particular type, that should be taken into account when considering the availability of future profits. For example: If capital losses can only be offset against capital gains, you cannot take these into account when assessing availability of operating profits.
  • Future taxable profit used to support the recovery of deferred tax assets should exclude the effect of the deduction representing the reversal of the deductible temporary difference. This is to avoid double counting. For example: If you had a deductible Temporary Difference of 100 this year, and were looking at the profits 5 years ahead to determine if you could raise the deferred tax asset, you would exclude the 100 from that assessment.

Effective date:

The amendments are effective for periods beginning on or after 1 January 2017. Amendments must be applied retrospectively in accordance with IAS 8. However, in applying the amendments in the first opening statement of financial position, an entity is not required to make transfers between retained earnings and other components of equity to restate cumulative amounts previously recognised in profit or loss, other comprehensive income or directly in equity. If an entity does not make such transfers, it should disclose that fact.

Interest-free loans to Trust

The 2016 draft Taxation Laws Amendment Bill introduced a new section – Section 7C – to the Income Tax Act which provides detail and measures to prevent Estate Duty and Donations Tax avoidance through the transfer of assets to a Trust on interest-free loan accounts.

Current situation

When transferring assets to a Trust, a person has the following three options:

  1. A person can donate the assets to the Trust and trigger Donations Tax at 20% of the fair market value of the assets in the hands of the person. The attribution rules contained in sections 7(3) to 7(8) may also apply to any income earned by the Trust as a consequence of the donation and have the effect of taxing such income in the hands of the donor;
  2. A person can sell the assets to the Trust on loan account at an arm’s length interest rate. The transferor will be taxed on the interest received from the Trust and there could be scope for the Trust to deduct the interest expenditure to the extent that is incurred in the production of income; or
  3. A person can sell the assets to the Trust on loan account at an interest rate below that considered to be an arm’s length rate. Traditionally, such loans have been interest-free.

The new section 7C is designed to prevent the avoidance of tax which arises under option 3 outlined above. The section applies in respect of the following:

  • A person made a loan or advance to a trust
  • No interest is incurred by the trust for the loan/advance
  • The person giving the loan/advance is a connected person to the trust

The following is also included in this scope:

  • The loan is made by any company which the founder is connected; and
  • Interest is charged but at a rate less than the official rate of interest as contemplated in the Seventh schedule to the Income Tax Act, No 58 of 1962 (Act).

The above is explained as follows:

  • A person is connected to the trust if the person or any relative is a beneficiary of the trust.
  • A company is connected if any person individually or jointly with another connected person holds directly or indirectly at least 20% of the company’s equity share capital or voting rights.

What are the implications of s7c?

  • Interest will be deemed to be charged at the official rate;
  • The interest due will be imputed to the lender. In other words, the interest will be added to the lender’s taxable income, for assessment;
  • The lender will not be able to deduct such deemed interest from his interest income by availing himself of the interest free exemption set out in s10(1) (i) of the Act;
  • If the lender fails to reclaim the additional tax payable from the trust within three years, the said amount will be treated as having been donated by the person to the trust; and
  • The lender will not be able to reduce the loan (either the original or the subsequent loan), by utilising the donation exemption set out in s56(2) of the Act, yearly or at all.


Certain loans to trusts are specifically excluded and, therefore, the proposed section would not apply. These are:

  • Loans to Public Benefit Organisations
  • Loans provided in return for a vested interest in the income and assets of the trust – further conditions for this exemption to apply. It should also be noted that if a person obtains a vested interest in the income and assets of a trust, then these will translate to assets and deemed assets in the individual’s estate for estate duty purposes. In a number of the cases, the aforesaid will negate some or all of the (estate duty) benefits of the trust
  • Loans to special trusts, but limited to special trusts that were created for disabled persons
  • Where the trust used the loan capital to acquire a property that is used by the creditor or his/her spouse as their primary residence (as defined)
  • If the transfer pricing provisions of section 31 applies to the loan. This provision, therefore, applies to loans to offshore trusts. (There was uncertainty under the previous draft about the interaction between the application between sections 7C and 31, which has now be clarified)
  • Loans to trusts that are subject to Sharia-compliant financing arrangements
  • Loans that are subject to section 64E(4). In other words, loans that are subject to the deemed dividend provisions would not be taxed under this section.

Effective date: The new requirement is effective from 1 March 2017 and applies in respect of any amount owed by a trust in respect of a loan, advance or credit provided to that trust before, on or after that date.

How to choose a good BEE verification agency

How to choose a good BEE verification agency

Our belief is that the implementation of a BEE strategy is not about statutory compliance, but rather about the economic growth of the organisation and thereafter the national economy, through meaningful up-skilling, planned procurement and the engagement in enterprise and social initiatives.

Having been involved in the B-BBEE verification and consulting industry since the inception of the codes, we have been exposed to just about all of the idiosyncrasies within the industry.

A lot of the advice we have given in this article, has been based on client satisfaction surveys that we have conducted over the years, and below is some of the feedback that we have received from our clients and strategic partners, as well as some facts one needs to consider when looking for a BEE verification agency:

• The agency should be SANAS accredited as a sign of their credibility. SANAS is the only accrediting body in the B-BBEE verification industry, so it is imperative that the agency be able to demonstrate this.

• The agency should have an exceptional BEE level themselves, to show that they truly understand transformation as being a national, social and business imperative. The agency should have a succinct process that determines verification from start to end. Their process should be highlighted to the client before deciding on which agency to appoint.

• The agency’s marketing & verification staff should be up to date with all relevant BEE knowledge.

• The agency should be price competitive whilst maintaining a high degree of quality and service delivery.

• Conduct market research by approaching businesses within your industry and establishing which are the common verification agencies that are appointed. This will ensure that you are appointing an agency that understands your environment and most importantly your business.

• Pay attention to how well the agency strives to understand your business.

• A great agency makes verification a simple, hassle free and informative process for their client.

Should you wish to engage SAB&T BEE Services in order to understand more about B-BBEE feel free to visit our website at or contact us at

By Mr Abisha Katerere, Nexia SAB &T BEE Services