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.

Revenue recognition – how to account for free gifts and loyalty programmes

IFRS 15 includes specific requirements related to “customer options for additional goods or services” – for example free gifts, discount vouchers, etc – and requires a distinction to be made as to whether this option confers a “material right”. We will look at what is a “material right” and how do you make this assessment.

Performance obligations

A promise deemed to be free or deemed to be a marketing tool is probably a PO. One of the steps of IFRS 15 is the identification of performance obligations in the contract to enable the recognition of revenue. Performance obligations (POs) are promises to a customer that arise every time they enter a contract to supply a good or service. Not all POs need to be explicitly stated in the contract. Contracts may provide customers with the option to acquire additional goods or services either for free or at a discount through loyalty point programmes, customer award credits, sales incentives, contract renewal options, etc. Where the buyer has a valid expectation of an ‘extra’ or ‘free’ good or service being provided this is an additional PO and needs to be considered in the application of IFRS 15.

Material right

Retailers transfer goods directly to their customers on or close to the date the goods are paid for, so many retailers believe that the implementation of IFRS 15 will be straightforward. However, where incentives are offered, like free goods, coupons or loyalty points to keep customers returning this future offer is referred to as a material right under IFRS 15.

If the option provides a right the customer would not have received had they not entered into this contract, (e.g., a right incremental to the rights provided to other customers in the same region or market), the customer is in effect paying in advance for future goods and services. If such an option provides the customer with a “material right”, then the option should be accounted for as a separate performance obligation.

Entities may argue that the cost of the free goods is a marketing expenses. However, if a free good is promised to a customer, then it should be treated as a separate PO.

Accounting requirements

Once the determination has been made that a material right exists and it is a separate PO, a portion of the total transaction price must be allocated to this right. If the stand-alone selling price of the material right is not directly observable, it must be estimated. In determining this value, entities should factor into their estimate:

  • any discounts that could be obtained without exercising the option
  • the likelihood the option will be exercised.

How much is allocated to each item (or PO), will depend on how the transaction price is allocated.

Loyalty points are in substance the same as a coupon or free good. Some of the consideration received in exchange for the goods sold at the time when the points are earned should be deferred until the points are exchanged for goods or services in the future. The loyalty point is providing a right to a good or service to the customer, and therefore is a distinct PO.

Example – Free gift: If a customer buys a football and receives a voucher for a free cap if they buy another football in the following month, part of the consideration for the initial football would need to be allocated to the free cap.

What to consider?

In the process to determine when and how much revenue should be recognised, consideration should be given to all the promises being offered to the customer, those POs must be identified, including those which are implicit.

Example – Customer Loyalty Programme: A customer loyalty programme rewards a customer with one loyalty point for every R10 of purchases. Each point is redeemable for a R1 discount on any future purchases. During a reporting period, customers purchase products for R100,000 and earn 10,000 points that are redeemable for future purchases. The consideration is fixed and the stand-alone selling price of the purchased products is R100,000. The entity expects 9,500 points to be redeemed. The entity estimates a stand-alone selling price of 95 cents per point (totalling R9,500) on the basis of the likelihood of redemption. It was concluded that the promise to provide points to the customer is a PO. The entity allocates the transaction price (R100,000) to the product and the points on a relative stand-alone selling price basis as follows: 

  • Product = R91,324 [R100,000 × (R100,000 selling price ÷ R109,500)] 
  • Points = R8,676 [R100,000 × (R9,500 selling price ÷ R109,500)]

End of Year 1: 

  • 4,500 points have been redeemed and the expectation is still that 9,500 points will be redeemed in total. 
  • The entity recognizes revenue for the loyalty points of R4,110 [(4,500 points ÷ 9,500 points) × R8,676] and recognizes a contract liability of R4,566 (R8,676 less R4,110) for the unredeemed points at the end of the first reporting period.

End of Year 2: 

  • 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. 
  • The entity recognizes revenue for the loyalty points of R3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × R8,676 initial allocation] less R4,110 recognized in the first reporting period}. 
  • The contract liability balance is R1,073 (R8,676 initial allocation less R7,603 [R4110 + R3493] of cumulative revenue recognized).

VAT on Non-Executive Director Fees

What is the Binding General Ruling (BGR) about?

As no control or supervision is exercised by a company over the manner in which a non-executive director (NED) performs his or her duties or the NED’s hours of work NEDs are not regarded as common law employees.

The fees earned for services rendered as a NED do not constitute “remuneration” and should therefore not be subject to the mandatory deduction of employees’ tax (PAYE) by the company concerned. It was clarified that NEDs are carrying on an “enterprise” in respect of services rendered as a NED and should therefore register for VAT where the fees exceed the VAT registration threshold.

Who does the BGR apply to?

The Ruling applies to any person appointed as an NED under the Companies Act 71 of 2008. It does not matter what type of company the NED serves – whether it be a public, private, state owned or non-profit company. This also applies to the extent that the member is a NED, serving in the various committees of a company. This includes, for example, Board committees, Risk and Audit committees, Remuneration committees and Social and Ethics committees.

What about executive directors?

Executive directors are normally regarded as employees of the company which they serve. The BGR only deals with individuals that are appointed as NEDs to serve on the board of a company as contemplated in the Companies Act. As such, NEDs are regarded as independent contractors (sole proprietors) that provide services to the company concerned in their personal capacity and are therefore treated differently to employees of the company.

Should all NEDs register for VAT?

Only those NEDs that earn NED fees and other income from taxable supplies that have, in total, exceeded the compulsory VAT registration threshold of R1 million in any consecutive period of 12 months (or will exceed that amount in terms of a written contractual arrangement). NEDs that earn fees below the compulsory VAT registration threshold can choose to register voluntarily if the minimum threshold of R50 000 has been exceeded and all the other requirements for voluntary registration have been met.

How to determine total fees and income from taxable supplies?

  • The value of all taxable supplies of goods or services made in the course or furtherance of the enterprises conducted by the NED as a sole proprietor must be added together.
  • For example, if, in addition to your NED fees for serving on the board of a company, you also supply forensic accounting services to other clients in the normal course of conducting an enterprise as a sole proprietor, then you need to add the total value of NED fees and the total value of service charges from the forensic accounting business together. The resultant total value of income from taxable supplies in a 12 month consecutive period must then be compared to the R1 million compulsory VAT registration threshold to see if you have to register.
  • Any salary (or any other type of remuneration) earned in the capacity as an employee is not taken into account when determining the VAT registration liability. The reason is that NED fees or other charges for goods or services supplied constitute consideration received for the taxable supply of goods or services, whereas remuneration earned for services supplied to your employer is not.
  • The value of other benefits (for example company car) received by the NED forms part of the calculation of the consideration charged in respect of the NED services. The NED is therefore required to account for VAT based on the open market value of the benefit as well as any other component of consideration which is used to calculate the total of the NED fees.

What about income tax?

The fact that the payments to an NED are not subject to PAYE, does not mean they are not subject to normal tax. The normal tax liability arising from the income earned must be settled via the provisional tax system during the year of assessment.

Effective Date

The levying and accounting for VAT on NED fees earned was already effective from 1 June 2017.

Those NEDs that became liable to register before 1 June 2017, but have not done so, will be required to register and start accounting for VAT from 1 June 2017 on NED fees earned from this date, unless the NED chooses an earlier date of registration.

IFRIC 22 – Foreign Currency Transactions and Advance Consideration

IFRIC 22 Foreign Currency Transactions and Advance Consideration clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after 1 January 2018.

What is the interpretation about?

IAS 21, The Effects of Changes in Foreign Exchange Rates requires an entity to record a foreign currency transaction, on initial recognition in its functional currency by applying to the foreign currency amount, the spot rate at the date of transaction. However, there are circumstances when an entity pays or receives consideration in advance in a foreign currency. This gives rise to a non-monetary asset or liability before recognition of the related asset, expense or income.

Scope of IFRIC 22

  • This Interpretation applies to a foreign currency transaction (or part of it) when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income (or part of it).
  • This Interpretation does not apply when an entity measures the related asset, expense or income on initial recognition:
    • at fair value (FV); or
    • at the FV of the consideration paid or received at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability arising from advance consideration (for example, the measurement of goodwill applying IFRS 3 Business Combinations).
  • An entity is not required to apply this Interpretation to income taxes or insurance contracts (including reinsurance contracts) that it issues or reinsurance contracts that it holds.

What is the Date of Transaction?

The ‘date of the transaction’ for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. In case there are multiple payments or receipts in advance, the entity should determine a date of transaction for each payment or receipt of advance consideration.

Illustrative Examples

Example 1: On 1/2/2017, Entity A enters into a contract with Supplier B to purchase machinery. Entity A pays Supplier B in advance $1000 on 1/3/2017 and takes delivery of the machinery on 27/3/2017.

Entity A would recognise a non-monetary asset converting the $1000 at the spot exchange rate on 1/3/2017. When Entity A receives delivery of machinery on 27/3/2017, it will derecognise the non-monetary asset and recognise the machinery as an asset (applying IAS 16) at the same exchange rate used at the date of initial recognition (1/3/2017).

Example 2: On 1/2/2017 Entity B enters into a contract to supply machinery for $10,000. The terms of the contract stipulate that an advance payment of 40% should be paid on 1/3/2017 and balance on 30/4/2017. The machinery will be delivered on 1/4/2017.

On 1/3/2017 Entity B receives $4000 and recognizes a non-monetary liability by converting the advance receipt at the spot exchange rate on 1/3/2017.

On 1/4/2017 Entity B:

  • derecognizes the contract liability of $4000 and recognizes revenue using the exchange rate on 1/3/2017; and
  • recognizes revenue of $6000 and a corresponding receivable using the exchange rate on that date (1/4/2017).

The receivable of $6000 recognized on 1/4/2017 is a monetary item. Entity B updates the translated amount of the receivable until the receivable is settled.

Effective Date and transitional provisions

An entity shall apply this Interpretation for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted. If an entity applies this Interpretation for an earlier period, it shall disclose that fact.

An entity could apply IFRIC 22 initially either:

  • Retrospectively applying IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or
  • Prospectively to all assets, expenses and incomes in the scope of the Interpretation initially recognised on or after
    • The beginning of the reporting period in which an entity first applies the interpretation or;
    • The beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which an entity first applies the interpretation.

On prospective application of IFRIC 22, an entity should apply it to assets, expenses and incomes initially recognised on or after the beginning of the reporting period as given above for which non-monetary assets and non-monetary liabilities arising from advance considerations have been recognised before that date.

IFRIC 23 – Uncertainty over tax treatments

IFRIC 23 Uncertainty over tax treatments issued in June 2017 provides clarification on the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. IFRIC 23 is applicable for annual periods beginning on or after 1 January 2019 but earlier adoption is permitted.

What is the interpretation about?

IFRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by the relevant tax authority and provides guidance on considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances.

What are the requirements?

  • Uncertainties should be assessed individually or collectively depending on which approach provides the best prediction of the resolution of the uncertainty.
  • An entity should assume that the tax authority will examine all the information and that it will have full knowledge of all related information when making those examinations.
  • The entity must consider whether it is probable or not that a tax authority will accept an uncertain tax treatment or group of uncertain tax treatments.
  • When it is not probable that the authority will accept the uncertain tax treatment, the effect of the uncertainty must be factored into the related taxable profit (tax loss), unused tax losses, unused tax credit or tax rate by using the most likely amount or the expected value (whichever better predicts the resolution of the uncertainty).
  • The following decision tree can be used:

Judgements or accounting estimates will be revised, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, if the facts and circumstances on which they were based change or new information becomes available. In determining when to apply the effects of a change that occurs after the reporting period an entity applies IAS 10 Events after the Reporting Period.

Impact of the Interpretation

  • IAS 12 Income taxes must be applied to account for an uncertain tax treatment.
  • Entities need to evaluate whether they have established appropriate processes and procedures to obtain information, on a timely basis, that is necessary to apply the requirements in the Interpretation and make the required disclosures.
  • The entity must reassess its judgements and estimates whenever there is a change in circumstances.
  • Depending on the entity’s current practice it may need to increase the tax liability or recognise an asset and the timing of derecognition may also change.
  • If it is probable that the tax authority will accept an uncertain tax treatment then the tax amounts in the financial statements are consistent with the tax return (no uncertainty is reflected in measurement current or deferred taxes).
  • Uncertain tax treatments are reflected in the measurement of current and deferred tax (no separate provision is recorded for uncertain tax treatments).
  • The challenge is to estimate the income tax due with respect to tax inspections when tax authorities examine different types of taxes together and issue an assessment with a single amount due.
  • Where interest and penalties on taxes are recognised in terms of IAS 37 Provisions, Contingent Liabilities and Contingent Assets then IFRIC 23 should not be applied (regardless whether there is an uncertainty) but when IAS 12 is applied to these amounts an there is an uncertainty then IFRIC 23 also applies.
  • The existing disclosure requirements are still applicable namely:
    – Judgements made
    – Assumptions and other estimates used
    – The potential impact of uncertainties that are not reflected

IFRIC 23 must be applied retrospectively. An entity can either:

  • Restate the comparatives using IAS 8 if this is possible without the use of hindsight
  • Adjust the equity on initial application without adjusting comparative.

IFRS 17 – Insurance Contracts

IFRS 17 Insurance Contracts which establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts have been issued in May 2017. IFRS 17 supersedes IFRS4 and is effective for annual periods beginning on or after 1 January 2021.

When should the standard be applied?

An entity should apply IFRS 17 to the following:

  • Insurance contracts (issued)
  • Reinsurance contracts (acquired)
  • Investment contracts with discretionary participation features (provided the entity also issues insurance contracts)

IFRS 17 does not apply to insurance contracts in which the entity is the policyholder; the only exception is when those contracts are reinsurance contracts.

What is an insurance contract?

A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

The following contracts may be excluded from IFRS17:

  • product warranties issued by a manufacturer, dealer or retailer—these contracts are accounted for by applying IFRS 15 and IAS 37;
  • financial guarantee contracts—the entity can choose to account for some financial guarantee contracts using the requirements for financial instruments in IFRS 9; and
  • fixed-fee service contracts—the company can choose to account for some fixed-fee service contracts using the revenue recognition requirements in IFRS 15.

Requirements of IFRS 17

IFRS 17 requires an entity that issues insurance contracts to report them on the balance sheet as the total of:

  • the fulfilment cash flows—the current estimates of amounts that the entity expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts; and
  • the contractual service margin—the expected profit for providing insurance coverage.

Under some circumstances, IFRS 17 requires an entity to:

  • separate the non-insurance components from an insurance contract if a separate contract with the same features would be within the scope of another IFRS Standard; and
  • account for those non-insurance components applying that other IFRS Standard
    Recognition criteria of IFRS 17

An entity should recognise a group of insurance contracts it issues from the earliest of the following:

  • the beginning of the coverage period;
  • the date on which the first payment from a policyholder is due; and
  • for a group of onerous contracts, when the group becomes onerous.

Initial measurement

All insurance contracts are initially measured as the total of:

  1. the fulfilment cash flows; and
  2. the contractual service margin, unless the contracts are onerous.

The fulfilment cash flows are the current estimates of the amounts that an insurer expects to collect from premiums and pay out for claims, benefits and expenses, adjusted to reflect the timing and the uncertainty in those amounts (risk adjustment).

Subsequent measurement

The fulfilment cash flows are measured using current assumptions. Those assumptions are updated at each reporting date, using current estimates of the amount, timing and uncertainty of cash flows and of discount rates

Simplified approach

An entity can use a simplified approach to measure some simpler insurance contracts or contracts for which the coverage period is less than a year. In the simplified approach, a company measures the liability for remaining coverage as follows:

  • on initial recognition, the liability for remaining coverage is measured at the premiums received under the contract, less any acquisition cash flows paid.
  • subsequently, as the entity provides coverage, the measurement of the liability for the remaining coverage reduces to reflect the coverage provided during the period.

Early adoption: Where an entity chooses to apply IFRS 17 before the effective date it should also apply IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

Determining of other information for audit reporting ISA 720 (revised)

A variety of reporting requirements and voluntary reporting practices exist in South Africa, which may give rise to the inconsistent application of ISA 720 (Revised). The auditor has certain responsibilities under ISA 720 (Revised) when other information has been identified in an entity’s annual report.

To whom does the standard apply?

ISA 720 (Revised) applies to all ISA audits and also affects the audits of non-listed entities. It does not apply to preliminary announcements of financial information or securities offering documents, including prospectuses.

What is considered other information?

ISA 720 (Revised) defines other information as “financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report. It identifies the scope of other information as information included in an entity’s annual report.

Although the Companies Act, 2008, prescribes the content of a company’s annual financial statements it does not require or address the preparation of an annual report. The JSE Limited Listings Requirements prescribe certain disclosures that should be included in a listed entity’s annual report, but also do not define the annual report.

An entity’s annual report may include information that has been the subject matter of an assurance engagement other than the audit of the financial statements. ISA 720 (Revised) does not contain a scope exemption for such information and it is therefore other information within the scope of ISA 720.

What information is not considered to be other information and excluded from the scope of ISA 720?

Regulatory reports and sustainability reports that are issued as standalone documents, and do not form part of the entity’s annual report, are not part of the combination of documents that comprise an entity’s annual report.

The following is also not regarded as “other information” in the context of ISA 720 and the South African environment:

  • Announcements of information that has been reviewed in accordance with the International Standard on Review Engagements (ISRE) 2410, Review of interim financial information performed by the independent auditor of the entity (in the context of entities listed on the JSE).
  • Announcements on SENS and/or in the press that relate to information that has been audited or reviewed do not form part of the combination of documents that comprise an annual report.
  • Information that a listed entity may prepare on a voluntary basis for a specific stakeholder grouping, such as analysts, has a different purpose from that of an annual report. Where such information are presented separately from the annual report, it is not other information within the scope of ISA 720.

Auditing and reporting of other information

Where the other information was obtained at the date of the auditor’s report

  • Identification of the other information obtained prior to the date of the auditor’s report
  • In respect of information obtained prior to the date of the auditor’s report, either:
    o A statement that the auditor has nothing to report; or
    o If there is an uncorrected material misstatement of the other information, a statement that describes the uncorrected material misstatement of the other information

Where the other information is only expected after the date of the auditor’s report

  • Listed entities: Identification of the other information expected to be obtained after the date of the auditor’s report
  • Entities other than listed entities: No reporting required, although the auditor still has responsibilities to perform the necessary procedures on the other information

The reporting on ‘Other information’ includes the following:

  • A statement that that management is responsible for the other information
  • A statement that the audit opinion does not cover the other information
  • A description of the auditor’s responsibilities relating to reading, considering and reporting on the other information.






New accounting developments and proposed amendments

The IASB has recently issued a number of papers with proposed amendments to reporting standards. Although these amendments are not yet finalised it is important to take note of these proposed changes.

Disclosure Initiative

The ‘disclosure problem’ includes the following three main concerns about disclosures in the financial statements:

  • Not enough relevant information – this could lead to investing or lending decisions
  • Irrelevant information – this can obscure relevant information and reduce understandability
  • Ineffective communication – this can reduce understandability of financial statements

Proposed amendments

The preliminary proposed developments include the following:

  • Development of disclosure principles either in amendments to IAS 1 or in a new general disclosure standard
  • Development of principles of effective communication that entities should apply when preparing the financial statements (either in a general disclosure standard or issued as non-mandatory guidance)
  • The general disclosure standard should:
    o specify that the ‘primary financial statements’ are the statements of financial position, financial performance, changes in equity and cash flows;
    o describe the role of primary financial statements and the implications of that role
    o describe the role of the notes and include the guidance on the content of the notes
    o include a principle that an entity can provide information that is necessary to comply with IFRS Standards outside financial statements if the information meets the necessary requirements
    o any specific information that is inconsistent with IFRS should be required to be identified or should be prohibited from being included in the financial statements

IFRS 9 Financial Instruments

IFRS 9.B4.1.11(b) states that the prepayment of a debt instrument at an amount that includes ‘reasonable additional compensation’ for the early termination of the instrument results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. The issue is whether the term ‘compensation’ includes negative compensation, i.e. where the party exercising the option receives compensation from, as opposed to paying compensation to, the other party for early termination.

Proposed amendment

The proposed amendment includes a narrow-scope exception to IFRS 9 to allow a prepayable financial asset to be measured at amortised cost if:

 the financial asset would otherwise meet the requirements of IFRS 9.B4.1.11(b) but fails it only because the option holder may receive reasonable additional compensation for early termination; and
 the fair value of the prepayment feature is insignificant when the entity initially recognises the financial asset.

IFRS 8 Operating Segments

Proposed amendments

The following amendments have been proposed:

  • emphasise that the chief operating decision maker is a function that makes operating decisions and decisions about allocating resources to, and assessing the performance of, the operating segments of an entity;
  • add to the existing requirements an explanation that the chief operating decision maker may be either an individual or a group;
  • explain the role of non-executive members when identifying an entity’s chief operating decision maker;
  • require the disclosure of the title and description of the role of the individual or the group that is identified as the chief operating decision maker;
  • require an explanation in the notes to the financial statements when segments identified by an entity differ between the financial statements and other parts of its annual reporting package;
  • add further examples of similar economic characteristics to the aggregation criteria in paragraph 12A of IFRS 8;
  • clarify that an entity may disclose segment information in addition to that reviewed by, or regularly provided to, the chief operating decision maker if that helps the entity to meet the core principle in paragraphs 1 and 20 of the Standard; and
  • clarify that the explanations of reconciling items shall be given with sufficient detail to enable users of financial statements to understand the nature of the reconciling items.