Revised Conceptual Framework for Financial Reporting

The IASB has recently published its revised ‘Conceptual Framework for Financial Reporting’. The project was initiated in 2004 however due to a series of changed priorities and abandonment in 2010 followed by a phase by phase approach, the resultant framework does not constitute a substantial revision as was originally intended, but instead focuses on topics that were not yet covered or that showed obvious shortcomings that needed to be dealt with. The Board and Interpretations Committee will immediately begin using the revised Framework. It is effective for annual periods beginning on or after 1 January 2020 for preparers that develop an accounting policy based on the Framework.

The primary purpose of the Framework is to assist the IASB by identifying concepts that it will use when setting standards. The Framework is not an IFRS standard and does not override any
standard, so nothing will change in the short term. The revised Framework will be used in future standard-setting decisions, but no changes will be made to current IFRS. Preparers can use the
Framework to assist them in developing accounting policies where an issue is not addressed by an IFRS.

The Framework is structured into 8 chapters, however only chapters 1 to 7 were revised. Chapter 8 which discusses the concepts of capital and capital maintenance remains unchanged. The key
changes in the chapters are summarized below:

Chapter 1 – The objective of general purpose financial reporting

  • This chapter notes that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
  • This chapter also newly highlights increasing the prominence of stewardship in financial reporting emphasizing the need to provide information that is useful in making resource allocation decisions.

Chapter 2 – Qualitative characteristics of useful financial information

  • This chapter reintroduces an explicit reference to the notion of prudence and states that the exercise of prudence supports neutrality. Prudence is defined as the exercise of caution when making judgements under conditions of uncertainty.
  • Also new in this chapter is a clarification that faithful representation means representation of the substance of an economic phenomenon instead of representation of its legal form only.

Chapter 3 – Financial Statements and the reporting entity

  • This chapter states that the objective of the financial statement is to provide information about an entity’s assets, liabilities, equity, income and expenses that is useful to users in assessing the prospects for future net cash inflows to the entity and in assessing management’s stewardship of the entity’s resources.
  • The chapter notes that financial statements are prepared for a specific period of time and provide comparative information and under certain circumstances forward looking information. It also states IASB’s conviction that, generally, consolidated financial statements are more likely to provide useful information to users than unconsolidated financial statements.
  • New to the Framework is the definition of a reporting entity, which might be a legal entity or a portion of a legal entity.

Chapter 4 – The elements of Financial Statements

The main focus of this chapter is on the definition of assets, liabilities, equities, income and expenses.

  • Asset – A present economic resource controlled by the entity as a result of past events. An economic resource is right that has the potential to produce economic benefits
  • Liability – A present obligation of the entity to transfer an economic resource as a result of past events.
  • Equity – The residual interest in the assets of the entity after deducting all its liabilities.
  • Income – Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims
  • Expenses – Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims

New is the introduction of a separate definition of an economic resource to move the reference to future flows of economic benefits out of the definition of an asset and liability. The expression ‘economic resource’ instead of simply ‘resource’ stresses that the IASB no longer thinks of assets as physical objects but as sets of rights. The definition of assets and liabilities also no longer refer to ‘expected’ inflows or outflows. Instead, the definition of an economic resource refers to the potential of an asset/liability to produce/to require a transfer of economic benefits.

Chapter 5 – Recognition and derecognition

  • The Framework states that only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position and only items that meets the definition of income or expense are to be recognized in the statement of financial performance.
  • However, their recognition is dependent on providing the users with:
    i) relevant information about the asset or liability and of any income or expense or changes in equity; and
    ii) a faithful representation of the asset or liability and of any income or expense or changes in equity.

The Framework also discusses the concept of derecognition. The requirements are driven by 2 aims:

  • The assets and liabilities retained after the transaction or other event that led to derecognition must be presented faithfully; and
  • The change in the entity’s assets and liabilities as a result of that transaction or other event must also be presented faithfully.

The Framework also describes alternatives when it is not possible to achieve both aims.

Chapter 6 – Measurement

  • This chapter is dedicated to the description of different measurement bases such as historical cost, current value, fair value, value in use and current cost. It explains in detail about the information they provide and their advantages and disadvantages.
  • Current cost is newly introduced in The Framework as it is widely advocated.
  • The Framework also sets out factors to consider when selecting a measurement basis.

Chapter 7 – Presentation and Disclosure

The Framework states that the statement of profit or loss is the primary source of information about an entity’s financial performance for the reporting period and that only in ‘exceptional circumstances’ the Board may decide that income or expenses are to be included in other comprehensive income.

Submission of Company Annual Financial Statements and Penalties for Non-compliance

Section 30 of the Companies Act, Act 71 of 2008, requires a company to prepare annual financial statements within six months after the end of its financial year.

Requirement to submit annual financial statements

Section 30 of the Companies Act – Annual Financial Statements

(1) Each year, a company must prepare annual financial statements within six months after the end of its financial year, or such shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7).

Regulation 30 of the Companies Act Regulations – Company Annual Returns

(2) A company that is required by the Act or Regulation 28 to have its annual financial statements audited must file a copy of those audited statements––
(a) on the date that it files its annual return, if the company’s board has approved those statements by that date; or
(b) within 20 business days after the board approves those statements, if they had not been approved by the date on which the company filed its annual return.
(3) A company that is not required in terms of the Act or Regulation 28 to have its annual financial statements audited may, at its option––
(a) file a copy of its audited or reviewed statements together with its annual return; or
(b) undertake to file a copy of its audited or reviewed statements within the time contemplated in sub-regulation (2)(b).
(4) A company that is not required to file annual financial statements in terms of sub-regulation (2), or a company that does not elect to file, or undertake to file, a copy of its audited or reviewed annual financial statements in terms of sub-regulation (3), must file a financial accountability supplement to its annual return in Form CoR 30.2.

What does this mean?

Regulation 30 requires the submission of a company’s financial statements together with its annual return by “all companies that is required to have its financial statements audited”.

The following companies are required to have its financial statements audited:

  • public companies
  • state owned companies,
  •  any company that falls within any of the following categories in any particular financial year:

(a) any profit or non-profit company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R 5 million;
(b) any non-profit company, if it was incorporated––
(i) directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or
(ii) primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or
(c) any other company whose public interest score in that financial year is
(i) 350 or more; or
(ii) at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

The above companies should therefore file a copy of its approved financial statements together with its annual return or within 20 business days after approval of the financial statements by the Board.

Reportable Irregularities

Section 45 of the Audit Profession Act requires an auditor that is satisfied or has reason to believe that a reportable irregularity has taken place or is taking place in respect of that entity to send a written report to the Independent Regulatory Board of Auditors (IRBA) with particulars of the reportable irregularity.

Companies and Intellectual Property Commission (CIPC)

The CIPC was established in terms of the Companies Act with one of its objectives to “promote compliance with the Act”. The CIPC received Reportable Irregularity reports from the IRBA, where companies were reported by their auditors for failure to comply with Section 30 of the Companies Act in respect of preparing its annual financial statements within six months after the end of its financial year end.

Where a company is required to be audited the financial statements must include the audit report which means that the audit must also be finalized within 6 months after year-end.

The CIPC recently utilized the provisions of Section 175 of the Companies Act, which provides for an administrative fine to be issued for a company where a Compliance Notice has been issued for specific continuous non-compliance with the requirements of the Companies Act.

As a result, court orders were granted for an administrative fine to be paid by these non-compliant companies. The administrative fine to be paid by each company is equal to 10% of their turnover during the period which the companies were found to be non-compliant.

Identifying if a Revenue or Purchase Transaction contains a financing element

There are different interpretations as to when one should “discount” revenue or purchases. There are two totally different views – the first one being that discounting begins on the day after the recognition of a sale or purchase and the second one allows for the concept of “extended payment terms” beyond “industry norms”. Note: This does not apply to debtors or creditors.

This issue deals only with the initial identification of a financing component by sellers or buyers of goods in transactions that possibly contain financing elements. The assessment of whether the financing component should be separately identified and recognised – and the related determination of the sale and purchase price – should be performed on initial recognition at a contract or transaction level. This issue does not provide guidance for the application of transactions falling within the scope of IFRS 15.

Identification whether a transaction contains a financing element

The following should be considered in determining whether a transaction contains a financing element:

  1. Differential pricing between the cash payment price and the price paid on deferred settlement terms;
  2. Settlement terms deferred beyond industry norms and practice;
  3. The date from which an entity is entitled to levy interest on overdue payments;
  4. The existence of a transaction initiation process and credit assessment process;
  5. Any collateral required for the transaction or payment;
  6. A substantial amount of the transaction price is variable, the variability is outside the control of both parties, and the parties have decided to delay payment until a substantial amount of the variability is removed;
  7. The business purpose for the different timing between delivery of the goods/ services and the payment; or
  8. Volume of credit sales in relation to cash sales.

Example: View 1

Entity A sells goods to Entity B for R 1 000 on 30-day payment terms and expects payment in 30 days. Entity A does not charge its customers interest. Entity A has determined after considering qualitative factors that a financing element does not exist as the selling price will remain at R 1 000 at 30 days. Entity A should therefore recognise revenue for the sale of goods of R 1000. The following journal entry at transaction date is required.

At the transaction date: Entity A should record revenue at the fair value.

Account           Debit           Credit
Receivable      1 000
Revenue                                 1 000

Example: View 2

Entity A sells goods to Entity B for R 1 000 on 30-day payment terms and expects payment in 30 days. Although Entity A does not charge its customers interest, as a result of recent regulatory findings they have deemed it prudent to follow regulatory advice which is that discounting begins on the day after the recognition of a sale or purchase. If one assumes that the interest rate is 12% then it would be 1% for 30 days. The present value or sale price at initial measurement would be R 990 and the financing component would R10. Entity.

The following journal entry at transaction date is required.

At the transaction date: Entity A should record revenue at the fair value.

Account                                                                  Debit                Credit
Receivable                                                               990
Revenue (R1,000/1+[12%/365 days])                                              990
Receivable                                                                  10
Interest Received                                                                             10

Note: Neither view is right or wrong. It is important to verify each transaction by evaluating each of the 8 considerations as indicated as per “identification whether transaction contains a financing element” above.

Tax implications for Cryptocurrency

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the
transfer of assets.

Cryptocurrencies are increasingly becoming more popular today. This is a kind of currency that does not have any physical substance and only exists in the digital world. Investors see it as a great investment opportunity since the value of a digital coin like ‘bitcoin’ fluctuates over time. For instance, the value of bitcoin rose from USD32 in 2011 to USD19000 in 2017. However, recent price fluctuations and the lack of a regulated market has caused some uncertainty on how to account for crypto currencies. It is therefore important to understand its legal status and tax implications.

Legal Status of Cryptocurrency

The legal status of cryptocurrency is not yet fully established as it varies from country to country. According to SARS guidelines, cryptocurrencies are neither an official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.

Are cryptocurrencies taxable?

The short answer is Yes. The South African Revenue Service (SARS) stated in a guideline issued that it will apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties. Taxpayers who are uncertain about specific transactions involving cryptocurrencies may seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).

Tax treatment

Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. Alternatively such gains may also be regarded as “capital” in nature, and be subjected to “capital gains tax”. Determination of whether an accrual or receipt is revenue or capital in nature is tested depending on the circumstances of each case.

Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade. If the gain is recognised as capital in nature then base cost adjustments can also be made if falling within the CGT paradigm.

Classification of Gains or Losses

Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:

(i) A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.

This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.

(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.

(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.

Value Added Tax (VAT) implications

The 2018 annual budget review indicated that the VAT treatment of cryptocurrencies still needs to be reviewed. Pending policy clarity in this regard, SARS has directed that it will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.

Things to consider with the VAT increase

As of 1 April 2018, the effective VAT rate will rise from 14% to 15%. There are important aspects to consider as a result of the increase. The VAT rate to apply to transactions depends on the “time of supply rules”. This is the date on which the transaction is deemed to occur according to the VAT Act. The general time of supply rule is the “earlier” of when (a) an invoice is issued or (b) payment is received.

Accounting Systems

Accounting systems must be updated to process transactions at the new VAT rate of 15% from 1 April 2018. However, in some instances, transactions processed after 1 April 2018 may be subject to the VAT rate of 14%. It must therefore be ensured that the accounting system is able to accommodate the different rates. The following are examples of such transactions:

  • Goods delivered or services performed before 1 April 2018 – VAT at the rate of 14% applies to goods (excluding non-residential fixed property) delivered, or services actually performed before 1 April 2018, even though the time of supply is triggered on or after 1 April 2018. This rate specific rule, however, does not apply if the time of supply has been triggered (for example, by the issuing of an invoice or payment being made) before 1 April 2018.
  • Supplies starting before and ending on or after 1 April 2018 – Where goods are delivered or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018, the VAT-exclusive price of the supply must be apportioned on a fair and reasonable basis and allocated to the respective periods. The VAT rate is then applied accordingly. That is, the rate of 14% is applied to the value of supplies before 1 April 2018 and the rate of 15% is applied to the value of supplies from 1 April 2018 onwards. This rule does not apply if the time of supply is triggered before 1 April 2018.This rate specific rule applies to – goods supplied under rental agreements; goods supplied progressively or periodically; goods or services supplied in construction activities; and services rendered over the period concerned, but does not apply to supplies of fixed property (including residential fixed property).
  • Goods delivered or services actually performed on or after 1 April 2018 where the time of supply is triggered between 21 February 2018 and 31 March 2018 – Rate specific rules also apply where the time of supply occurs between 21 February and 31 March 2018 (that is, on or after the date of the announcement of the increased VAT rate, but before the effective date of the increased rate). Under this rule, when goods are delivered on or after 23 April 2018, or services are performed on or after 1 April 2018, but the time of supply is triggered between 21 February and 31 March 2018 as a result of any invoicing or payment in relation to the supply, then VAT at the rate of 15% applies. However, if the goods are delivered before 23 April 2018 (that is, within 21
    days after 1 April 2018), or the services are rendered before 1 April 2018, then the supplies concerned will be subject to VAT at 14%. These rate specific rules do not apply –
    – where it is an established business practice for payments to be made, or invoices to be issued before the supplies are made;
    – in respect of the sale of residential property, certain real rights in residential property and shares in residential share block companies;
    – to the construction of a new dwelling by a construction enterprise.The rate specific rules do, however, apply to non-residential fixed property.
  • Supply of residential fixed property
    Even if the time of supply is triggered after 1 April 2018 due to payment or registration of the property in the purchaser’s name in a Deeds Registry taking place, the supply of residential fixed property could be subject to VAT at 14%. This rate specific rule only applies if –
    – the contract for the supply was concluded before 1 April 2018; and
    –  both the payment of the purchase price and the registration of the property will occur on or after 1 April 2018; and
    – the VAT-inclusive purchase price was determined and stated as such in the agreement.For purposes of this rule, “residential property” includes a dwelling and certain real rights and shares in share block companies relating to a right of occupation of or interest in a dwelling. The construction of a new dwelling by a construction enterprise is also included.
  • Lay-by agreements
    The VAT rate of 14% applies in the case of goods supplied under a lay-by agreement if that agreement was concluded before 1 April 2018 and the lay-by amount to set aside the goods was also paid by that date. The supply of goods under lay-by agreements concluded on or after 1 April 2018 is subject to VAT at 15%.If the lay-by agreement is later cancelled or terminated, the supplier must account for VAT on any amount retained in the VAT reporting period concerned. The old tax fraction of 14/114 must be used where the agreement was concluded and the amount to set aside the goods was paid before 1 April 2018. Otherwise the new tax fraction of 15/115 must be used.

Review existing agreements

Existing agreements and those relating to offers accepted before 1 April 2018 must be reviewed and the other parties to the agreement should be informed of the increase in the total contract price as a result of the increase in the VAT rate. All new agreements entered into from 1 April 2018 should reflect the new VAT rate of 15%.

Using Data Analytics in Audits

Data Analytics is the process of inspecting, cleansing, transforming and modeling raw data with the purpose of discovering useful information, drawing conclusions and supporting decision making.

Traditional audit methods served auditors for decades but as technology advances and stakeholders’ expectations evolve, so does the need for auditors to innovate and transform their approaches in order to keep pace with demand. Advances in technology and software solutions like Computer Aided Audit Tools (CAATS) and Audit Data Analytics (ADA) make it possible for auditors to fundamentally change the way a financial statement audit is done.

What is new about Audit Data Analytics (ADA)?

Classical analytical procedures consist of absolute comparisons of balances with prior year balances or with budgets and forecasts, ratio comparisons and trend analyses. They may also consist of comparisons based on financial or operational data designed to predict the balance in a financial statement classification and form part of the audit judgment process by challenging financial information or the lack of such information.

Audit data analytics is much broader and deeper than traditional analytical procedures. It involves using powerful software tools and statistically complex procedures. These can include: cluster analysis; predictive models; data layering; visualizations; and “what if” scenarios that allow the exploration of new ways to analyse large sets of audit relevant data sourced from internal and external sources in order to produce audit evidence during risk assessment, analytical procedures, substantive procedures and control testing.

What benefits do ADA bring to auditors?

The advances in technologies and software solutions in ADA will enable auditors to improve audit quality in a number of ways, including:

  • deepening the auditor’s understanding of the entity;
  • facilitating the focus of audit testing on the areas of highest risk through stratification of large populations;
  • aiding the exercise of professional skepticism;
  • improving consistency and central oversight in group audits;
  • enabling the auditor to perform tests on large or complex datasets where a manual approach would not be feasible;
  • improving audit efficiency;
  • identifying instances of fraud; and
  • enhancing communications with audit committees.

How ADA can enhance audit quality?

ADA techniques and methods enable audit teams to start analysing client data early in the audit process and begin identifying areas that need further investigation. This enables problems to be identified as early as possible, and audit teams can tailor the audit approach to deliver a more relevant audit by adapting their audit plans accordingly.

ADA can be used to evaluate and assess large volumes of information quickly and can result in better understanding the entity and its systems. This provides opportunity for auditors to make better informed risk assessments so that further audit procedures responsive to those risks are more focused and effective. Since more time is spent focusing on the areas where greater risk is detected, a better and more sophisticated risk analysis, fraud identification and monitoring is possible, enabling increased auditors’ focus.

ADA techniques can also enable auditors to perform more frequent testing at shorter intervals, rather than concentrating audit work around year-end. Engaging in continuous testing and monitoring of data again leads to better risk identification, more accurate control assessments, and more timely and relevant audit reporting.

What is important to ensure that ADA can be used successfully?

It is important to first confirm the feasibility of ADA in an audit. The following would need to be considered:

  • Availability of data
  • Transportability of data
  • The client’s data media and format
  • Costs of using ADA

Once the feasibility of ADA is confirmed the next steps would need to be taken:

  • Decide which areas will be subjected to ADA (amend audit plan accordingly)
  • Define the objectives of each procedure (what outcome is required?)
  • Involve the IT specialists (where necessary)
  • Identify the data fields that would be needed to produce the required reports
  • Discuss the objectives and benefits with the client and identify a primary client contact person that will assist the audit engagement team
  • Request the data files in an acceptable format
  • Perform a test run (where ADA is being used for the first time) to ensure that data is correct
  • Develop and run the test on the data (as developed to address audit objectives)
  • Inspect reports with test results and follow up on any exceptions
  • Evaluate the results and conclude
  • Communicate findings to the client in an understandable manner (charts and graphs with simple notes can be used)

Tax compliance for Small Businesses

Many SMEs face tax-related regulatory burden, and there is little doubt that navigating through all the tax requirements can be a daunting. Tax is levied on income and profit received by a  taxpayer, which includes individuals, companies and trusts.

The three types of taxes that small businesses are required to pay are as follows: (a) turnover tax, (b) employee taxes (PAYE, UIF and SDL) and (c) value-added tax (VAT).

The following is a brief overview of small businesses’ tax obligations, the process and taxation laws.

How do small businesses qualify to pay for taxes?

If a small business is trading as a company or close corporation, it must register for income tax. If the business employs staff it must also register for PAYE, UIF and SDL (if total annual payroll exceeds R500k per annum). If the small business has turnover exceeding R1 million per annum it is required to register as a VAT vendor.

What is Turnover Tax?

Turnover tax is a simplified tax system for small businesses with a qualifying turnover of not more than R1 million per annum. It is a tax based on the taxable turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives. Turnover tax takes the place of VAT (in the instance that you have not decided to elect back into the VAT system), provisional tax, income tax, capital gains tax, secondary tax on companies (STC) and dividends tax. So qualifying businesses pay a single tax instead of various other taxes. It’s elective – so you may choose whether to participate. Below are the tax rates for financial years ending on any date between 1 April 2017 and 31 March 2018:

How do small businesses register for turnover tax?

Small businesses or individuals will need to complete a short test to see if they quality for turnover tax, which is available on the SARS website. If they qualify for turnover tax, they will need to complete and submit the relevant application form. The application should be submitted before the beginning of a year of assessment, which runs from 1 March to 28 February.

Should a new micro business start trading during a year of assessment and wishes to register for turnover tax, an application must be submitted within two months from the date that the business started. Existing micro businesses can register for, or switch to turnover tax before the start of a new tax year.

How do small businesses account for VAT?

In accordance with the VAT Act, if registered for VAT, small businesses have to issue proper tax invoices and charge their customers VAT at 14%, and pay any calculated net VAT amounts over to SARS on a monthly or bi-monthly basis. This payment is calculated by reducing the VAT charged with the input VAT that the small business paid to its suppliers.

What type of records should small business owners keep for tax purposes?

If you’re a small to medium sized business owner, it’s up to you to maintain records of all documents pertaining to your tax return, such as bank statements, sales invoices, credit notes, suppliers invoices and payroll records. These records should not only be kept during the course of the tax year for filing purposes, but you are also required to keep these records.

What are the consequences of not complying with tax requirements?

Interest on unpaid taxes and severe penalties, an Administrative Non-Compliance Penalty is a penalty a taxpayer must pay for non-compliance with various requirements. An admin penalty comprises of fixed amount penalties as well as percentage-based penalties. The penalty amount that will be charged depends on a taxpayer’s taxable income, for each month that the non-compliance continues.

Why is the tax process for small businesses still so complicated?

There are far too many regulations and statutory requirements. The registration system for VAT and payroll taxes is very detailed and can become a long process. Small businesses may consider to acquire the services of an accountant or tax practitioner to assist them in this process.

Has SARS made it easier for small business owners to register and pay for taxes independently, or are they still reliant on tax practitioners?

It is still far too complicated and involved to register for taxes. E-filing has made things easier to process and pay taxes, however this system can still be complicated in certain areas. Many small businesses therefore prefer to make use of tax practitioners, or go to a SARS office for assistance.

IFRS 9 Impairments – Interim and Transitional arrangements applicable to Banks

IFRS 9 will become effective on 1 January 2018 and represents a fundamental change in the impairment of financial instruments. This will have a significant impact on how banks are required to calculate provisions for credit losses (impairments). The South African Reserve Bank (SARB) issued Directive 5 as a transitional arrangement and to provide clarity to banks in South Africa on how to categorise expected credit loss provisions. The transitional arrangement only applies to new provisions that did not exist prior to the adoption of the expected credit loss model.

Categorisation of provisions

As banks transition from the previous “incurred loss approach” in terms of IAS 39 to the “expected credit loss” (ECL) model in terms of IFRS 9, banks must still distinguish which portions must be regarded as “general provisions” and those regarded as “specific provisions”. The accounting provisions should be categorised as follows:

  • Provisions with no significant increase in credit risk since initial recognition as at reporting date (Stage 1 exposures as per IFRS 9) = General provisions
  • Provisions with no significant increase in credit risk since initial recognition as at reporting date but which are credit-impaired (Stage 2 exposures as per IFRS 9) = General provisions
  • Provisions that are credit-impaired as at reporting date (Stage 3 exposures as per IFRS 9) = Specific provisions

Transitional arrangements

The transitional arrangements are as follows:

  • Banks can apply a transition period by sending a notification to SARB before adopting IFRS 9.
  • Banks must apply a 3-year transition period, amortised on a straight-line basis, on a bank legal entity and a bank controlling company (consolidated basis).
  • A once-off calculation needs to be done as follows:
    o A comparison of the common equity tier1 (CET1) capital (which is based on the opening balance sheet by using IFRS 9) with the CET1 capital (which is based on the closing balance sheet by using IAS 39 ie 1 day prior to opening day).
    o The above calculation is made to isolate the impact of using the ECL model in terms of IFRS 9.
    o The decrease in the net qualifying CET1 (reflected as pre- and post-implementation) shall be phased in over a 3-year period (line item 64 of the form BA700).
    o The impact must be reflected net of the tax effect and all deductions such as shortfalls of eligible provisions compared to expected loss and threshold deductions.
    o No separate adjustments shall be made in respect of banks showing changes to shortfalls of eligible provisions compared to expected loss (since this impact would already be included in line item 64 of the form BA700).
    o The IFRS 9 transitional adjustment amount (as explained above) must be shown as follows for each year of the transitional period (as per line item204, column 1 of the BA700 form and line item 12 of the BA600 form):
    Year 1 : 3/4 of adjustment amount
    Year 2 : 2/4 of adjustment amount
    Year 3 : 1/4 of adjustment amount
    o The additional amount of special provisions (not phased in yet) shall be risk-weighted at a risk weight of 100% (this must be included in line item 5, column 1 of the BA700 form) post the adoption of IFRS 9. This amount shall be decreased annually on a straight-line basis over a 3-year period.
  • The impact of deferred tax assets as a result of the adoption of IFRS 9 and changes to taxation rules must be phased-in over a 3-year period.
  • Banks must calculate the difference between deferred tax assets arising from temporary differences, based on opening balance sheet by using IFRS 9, and closing balance under IAS 39 (ie one day prior to the opening day).
  • A portion of the deferred tax difference (which must be calculated as per the table above) shall be deducted (line item 110 of form BA700) from the deferred tax amount arising from temporary differences, net of deferred tax liabilities.
  • Banks using the SA to measure credit risk shall, on a static basis, calculate the difference between the combined stages 1 & 2 provisions (based on opening balance using IFRS 9 and closing balance of general provisions under IAS 39). The increase in general provisions as a result of IFRS 9 must be phased-in over 3 years using the table above. During the transitional period a portion of the increase in line with the table must be deducted from total general provisions before applying the limit of 1.25% of credit risk-weighted assets. 
  • Banks using the internal ratings-based (IRB) approach to measure credit risk must phase in all the new excess provisions exceeding expected losses amounts over the 3-year transitional period using the table above. A portion of the excess amount (in line with the table) must be deducted from total eligible provisions before determine the maximum amount that can be added to Tier 2 capital (0.6% of credit risk-weighted assets).
  • Banks must prepare a set of special purpose financial information within the first 5 months of implementing IFRS 9 for the 1st time, demonstrating the impact of IFRS 9 on opening retained earnings of the first year. This must include a reconciliation from the previously audited retained earnings (before IFRS 9) to the retained earnings balance at that date as adjusted for the IFRS 9 impact.
  • The information must contain a basis of preparation note setting out all the accounting policies relevant to the calculation of the IFRS 9 retained earnings adjustment, and other relevant notes as necessary.
  • The special purpose financial information must be audited within the first 5 months in accordance with ISA 805.

 

Making Materiality Judgements – Practice Statement 2

The IFRS Practice Statement 2 was issued in September 2017 by the IASB to provide companies with guidance on making materiality judgements when preparing financial statements. The practice statement is non-mandatory guidance and is aimed at promoting greater application of judgement. Companies are permitted to apply the guidance in the Practice Statement to financial statements prepared any time after 14 September 2017.
What is meant by “materiality”?

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information.

The need for materiality judgements is pervasive in the preparation of financial statements. It is required to make materiality judgements when making decisions about presentation, disclosure, recognition and measurements. The requirements contained in IFRS standards only need to be applied if their effect if material.

The Materiality Process

The materiality process is a four-step process and incorporates the materiality requirements that a company must apply to state compliance with IFRS Standards.

STEP 1 – Identify information that has the potential to be material

Identify information about transactions, other events and conditions that primary users might need to understand to make decisions about providing resources to the entity. In identifying this information, an entity considers, as a starting point, the requirements of the IFRS Standards applicable to its transactions, other events and conditions.

STEP 2 – Assess whether the information identified in Step 1 is material

In making this assessment, the entity needs to consider whether its primary users could reasonably be expected to be influenced by the information when making decisions about providing resources to the entity on the basis of the financial statements. The entity performs this assessment in the context of the financial statements as a whole. An entity might conclude that an item of information is material for various reasons. Those reasons include the item’s nature or size, or a combination of both, judged in relation to the particular circumstances of the entity. Therefore, making materiality judgements involves both quantitative and qualitative considerations. It would not be appropriate for the entity to rely on purely numerical guidelines or to apply a uniform quantitative threshold for materiality.

Quantitative factors – assessing whether information is quantitatively material is done by considering the size of the impact of the transaction, other event or condition against measures of the entity’s financial position, financial performance and cash flows. Consideration should also be given to any unrecognised items that could overall perception of the entity’s financial position, financial performance and cash flows (eg contingent liabilities or contingent assets). The entity needs to assess whether the impact is of such a size that information about the transaction, other event or condition could reasonably be expected to influence its primary users’ decisions about providing resources to the entity.

Qualitative factors – qualitative factors are characteristics of an entity’s transactions, other events or conditions, or of their context, that, if present, make information more likely to influence the decisions of the primary users of the entity’s financial statements. The mere presence of a qualitative factor will not necessarily make the information material, but is likely to increase primary users’ interest in that information.

STEP 3 – Organise the information within the draft financial statements in a way that communicates the information clearly and concisely to primary users

An entity exercises judgement when deciding how to communicate information clearly and concisely. An entity considers the different roles of primary financial statements and notes in deciding whether to present an item of information separately in the primary financial statements, to aggregate it with other information or to disclose the information in the notes.

STEP 4 – Review the draft financial statements to determine whether all the material information has been identified and materiality considered from a wide perspective and in aggregate, on the basis of the complete set of financial statements.

When reviewing its draft financial statements, an entity draws on its knowledge and experience of its transactions, other events and conditions to identify whether all material information has been provided in the financial statements, and with appropriate prominence.