Guidance on the IFRS 15 requirements relating to Contract Costs

Whilst IFRS 15 is primarily a standard on revenue recognition, it contains specific requirements relating to contract costs. Companies may therefore need to change their accounting for those costs on adoption of IFRS 15 for annual reporting periods beginning on or after 1 January 2018. View PDF

Approval of Company Financial Statements

The South African Companies Act has specific requirements on the approval of financial statements.

Section 30(3) of the Companies Act states the following:
“The annual financial statements of a company must:
a. Include an auditor’s report, if the statements are audited;
b. Include a report by the directors with respect to the state of affairs, the business and profit or loss of the company, or the group of companies…
c. Be approved by the board and signed by an authorised director; and
d. Be presented to the first shareholders meeting after the statements have been approved by the board.”

ISA 560.5(b) defines the date of approval of the financial statements as follows:
“The date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted that they have taken responsibility for those financial statements.”

The act of approval of the financial statements requires the completion of the following 2 steps:

  1. The board of directors must approve the financial statements; and
  2. The financial statements must be signed by a director who has been authorised by the board to do so.

If any of these steps are not completed, the act of approval has not occurred.

Note: If there is a change in the board of directors subsequent to year end but before the Annual Financial Statements (‘AFS’) are approved, the directors at the time of sign-off should approve and sign the AFS as they are the empowering directors at the time of sign-off.

The ISAs further require that the auditor’s report be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements.

Therefore, only once section 30(3)(c) of the Companies Act was satisfied, i.e. once the financial statements were approved by the board of directors and signed by an authorised director, will the auditor be able to date and sign the auditor’s report on the financial statements.


Audit documentation

Sufficient appropriate audit evidence of the following should be included in the audit file:

  • Approval process of the AFS
  • Evidence of the authorised director to sign the AFS (through inspection of minutes)
  • Evidence of the final set of AFS signed by the authorised director and should be marked as “final version”
  • Evidence of review of the final AFS
  • Final signed auditor’s report

The audit documentation must include identifying characteristics to allow an experience auditor, having no previous connection with the audit, to clearly identify the final and approved version of the company’s AFS and the final signed version of the auditor’s report in the audit file.

The draft versions of the financial statements should be removed from the audit file and only the final version should be placed on the audit file. It is recommended that a final version properly referenced to the lead sheets and the approved financial statements be kept on the final audit file.

Understanding low value assets

The IASB has developed IFRS 16 as a new leases Standard which supersedes IAS 17. A company is required to apply the new leases from 01 January 2019.

An exemption to the requirements of IFRS 16 relates to leases of ‘lowvalue’ assets held by the entity.

IFRS 16 does not require a company to capitalise leases of lowvalue assets—for example, leases of assets that, at the time of issuing IFRS 16, would have a capital value (i.e new sales price) of approximately US$5,000 (converted to approx. R70,000) or less.

Note: A company using this exemption is required to recognise the payments for those leases as an expense typically on a straight-line basis over the lease term. This results in no change to the accounting for those leases treated as off balance sheet leases applying IAS 17.

The correct determination of what constitutes a low-value asset within an entity is an activity which requires significant time and attention and which can have a significant impact on the transition from IAS 17 to IFRS 16.

1. Identification of low-value assets

It is important to note that the standard itself does not provide detailed guidance to assist in assessing what ‘low-value’ means. ‘Low-value’ is also not a defined term within the Standard itself.

The Basis for Conclusions of IFRS 16 provides the following insight and guidance regarding the type of leases to which the exemption is intended to apply:

“The IASB intended the exemption to apply to leases for which the underlying asset, when new, is of low-value (such as leases of table and personal computers, small items of office furniture and telephones). At the time of reaching decisions about the exemption in 2015, the IASB had in mind leases of underlying
assets with a value, when new, in the order of magnitude of US$5,000 or less”.

2. Assessment of ‘low-value’ assets

When making the assessment of what is low-value, the standard requires the lessee to assess the value starting from the value of the underlying asset when it was new, regardless of the age of the asset at inception of the lease.

It is important to note that the outcome of the assessment of whether an underlying asset is of low-value should not be affected by the size, nature, or circumstances of the lessee – ie the exemption is based on the value, when new, of the asset being leased; it is not based on the size or nature of the entity
that leases the asset.

3. Which assets may not be low-value assets?

Meeting the nominal threshold requirement alone is not in itself sufficient to warrant the classification of any particular asset as a ‘low-value’ asset.

IFRS 16 does not permit a lessee to break an asset down into many underlying assets of low-value unless:

  • The lessee can benefit from use of the underlying asset on its own or together with other resources that are readily available to the lessee, and
  • The underlying asset is not highly dependent on, or highly interrelated with, other assets.

Where a lessee sub-leases an asset, or expects to sub-lease an asset, the head lease cannot qualify as a lease of a low-value asset.

Note: A company using this exemption is required to recognise the payments for those leases as an expense typically on a straight-line basis over the lease term. This results in no change to the accounting for those leases treated as off balance sheet leases applying IAS 17.

Note that the recognition of a right-of-use asset and corresponding lease liability on the balance sheet is likely to lead to improved EBITDA. This may result in some entities electing not to apply the exemption.

Accounting for non-cash consideration in terms of IFRS 15

Consideration for the sale of goods can be received in cash as well in a form other than cash. IFRS 15 provides specific guidance when it comes to determining the transaction price for contracts in  which a customer promises consideration in a form other than cash.

Note: The requirements for accounting for non-cash consideration are prescribed by IFRS 15. The determination of the fair value of the non-cash consideration to be accounted for must be done in accordance with IFRS 13.

If a customer provides goods and/or services to assist an entity in fulfilling its contract, the entity should assess whether it obtains control of such goods or services. In the event that the entity does obtain control of such goods and services, the goods and services will be considered to be non-cash consideration and should be accounted for as such.

This document will provide a brief snapshot regarding the treatment which IFRS 15 prescribes when accounting for non-cash consideration.

  1. What is non-cash consideration?
    Non-cash consideration can typically be defined as consideration which is received or receivable by the customer which is in a form other than cash.Examples of non-cash consideration typically include:
    ➢ Shares
    ➢ Material, equipment and labor
    ➢ Contribution of assets from the customer for the purposes of the contract being met where the entity gains control of these assets.
  2. How should non-cash consideration be measured?
    IFRS 15 prescribes that an entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair value as defined in IFRS 13. Therefore, the fair value of such the non-cash consideration (or promise of non-cash consideration) should be as at the measurement date of the transaction, which would typically be the transaction date. It is therefore extremely important to ensure that your client has accounted for the fair value of any non-cash consideration receivable at the correct date.Note that if an entity cannot reasonably estimate the fair value of the non-cash consideration, the entity shall measure the consideration indirectly by reference to the stand-alone selling
    price of the goods or services promised to the customer (or class of customer) in exchange for the consideration.
  3. How should subsequent changes in fair value of the non-cash consideration receivable be accounted for?
    If the fair value of the non-cash consideration promised by a customer varies for reasons other than only the form of the consideration (for example, the fair value could vary because of
    the entity performance), an entity shall apply the requirements in paragraphs 56 – 58 of IFRS 15.

Remember to take note of the following important points when accounting for non-cash consideration:

  • The general rule to follow is that if the consideration in the contract is received or is to be received in a form other than cash, the entity will measure such non-cash consideration at
    fair value, as defined in IFRS 13.
  • The requirements of IFRS 13 with regards to the measurement therefore need to be applied when accounting for non-cash consideration.
  • It is also crucial to note that, in accordance with IFRS 13, fair value is market-based measure of an exit price that is receivable and NOT an entity-specific value.
  • Therefore, an entity’s intention with regards to any non-cash consideration received (for example, an asset) is not relevant for the purposes of determining its fair value.

October 2018 edition

In this Issue

Your tax deadlines for October

The due date for non-provisional taxpayers who submit their income tax via eFiling or electronically at a SARS branch is 31 October.

Time is running out and SARS is cracking down on late lodgements and failure to submit returns.

The penalty amount that will be charged for late lodgement depends on your taxable income and, says SARS, “can range from R250 up to R16,000 a month for each month that the non-compliance continues.”

Treat this deadline seriously!

Will the 21st century really be Africa’s time to flourish?

“We really need to have a third wave, and it needs to happen in sub-Saharan Africa” (Bill Gates)

Two factors often cited as to why “Africa’s time is coming” are:

  • Demographics – the huge populations of India and China are cited as a key factor in their rapid growth. Currently Africa is the fastest growing continent and its population is set to double by 2050.
  • Leapfrogging technology – for example, developing countries have set up banking in remote areas of East Africa by using cell phones powered by small solar panels. They have thus bypassed the whole process of setting up banking and electrical infrastructure.

Is it likely that these predictions will materialise and if so what impact will all this have on South Africa?

Demographics – the unseen flaw

It is accepted that large populations create a large potential market as has happened in Brazil for example. However to reap this benefit, populations need to start declining once development begins to take off. The reason for this is what is known as the “dependency ratio”.

In 1960, in developing countries in Asia, Africa and South America women had an average of six children. Since then the number has declined in Asia to 2.2 children and to 3 children in South America. However Africa has remained high at just under 5 children per woman.

Having fewer dependents allows parents to focus on their careers, grow their wealth and afford to spend more on things like education and health care on smaller families. As these smaller families rapidly join the middle class, this helps to provide the momentum for infrastructure development and rapid economic growth. As long as Africa has a high care dependency ratio, it will be extremely difficult to mirror China and India.

In South Africa our average number of births is 2.4 per woman which puts us in between Asia and South America. If we can get some basics right, like education, we could start to rapidly develop.


Mobile phones have been used for more than developing banking in Africa but smart phones are also used, for example, to help rural farmers. Satellites scan a farm and can tell the farmers which of their fruit trees have rot and need to be pulled out before the disease spreads to other trees. They can get advice on what crops to plant and how much fertiliser to use etc. Technology thus is enabling some African countries to progress at a rapid rate.

African countries still need infrastructure. There is no point in doubling your farming yield if you cannot get your product quickly and cost effectively to market. Without decent roads, ports, an effective legal system and no bottlenecks at border posts, Africa will struggle to fulfil its potential.

Many breakthroughs can be made with technology but without a decent foundation, leapfrogging will only have a limited impact.

We in South Africa have reasonable infrastructure but very high inequality and still need to focus on uplifting the poorer sections of the country and creating a more enabling environment to attract investment.

In a nutshell, South Africa is potentially well placed to move rapidly ahead. Things are unfortunately less certain for the bulk of our continent.

Surviving a business crisis: Consider your turnaround options

“Turnarounds seldom turn”
(Warren Buffett)

In the life cycle of any business, it will almost inevitably experience a crisis. This is always a very difficult time and it will be a test of judgment and experience how senior management respond. Usually, it will be some issue that is solvable and the business will continue to operate.

Sometimes however it is an existential threat and this will need careful thought and planning.

Stress drains your energy

Deciding whether to try and turn around a business or put it into liquidation is enormously stressful. Many careers and the family of staff and key stakeholders could suffer depending on the outcome.

It is unlikely there will be a second chance if the first decision made by management turns out to be incorrect.

What is the problem?

So the first thing to do is identify the core problem. There are many things to look at:

  • Is your business in a mature to old stage?
  • Are there disruptors like Uber in the industry?
  • Is there still demand for the product or service your business provides?
  • What sort of shape is your business in? Are systems and infrastructure creaking or worse?

Money, planning and analysis

Once the problem and a solution have been identified, don’t forget that turning around a business will take resources. Plan your cash flow carefully.

Business turnarounds are also high risk – remember they will often not work out. But careful planning and analysis will improve the odds of success – ask your accountants for their specialist help and advice at this crucial time.

Directors Beware! You could be held personally liable for data breaches

Hacking into computers has become common place. In the United States it grew by 45% in 2017. Yahoo, one of America’s largest Internet search engines, was recently the victim of cyber crime and disgruntled shareholders are suing the directors for dereliction of their fiduciary duties.

Hacking is a reality in South Africa also, which raises the issue of your personal liability as a director in the event of your company being exposed to cyber crime.

What do the Companies Act and King IV expect of directors?

Directors need to have “taken reasonably diligent steps to become informed about the matter” – in other words directors would be expected to know cyber crime has become commonplace and to take steps to ensure the company takes all the necessary actions to prevent outsiders getting access to company information. King IV specifically charges directors to “identify and respond to incidents, including cyber attacks…”.

Your risk is that as a director you are personally liable for any costs, losses or damages resulting from a breach of your duties.

How to protect yourself from liability

If a company suffers loss from a hacking incident, then directors need to show they have addressed the issue to the best of their ability if they want to avoid attracting such liability.

Whilst many of us may feel lost when it comes to technology, it is clearly an issue that exposes a company to significant risk. Make sure you and your board of directors gain an understanding of how to protect your business. You need also to ensure that in need you can show documentation to a court to prove that you acted with diligence to counter the risk of being hacked.