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.

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.

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).

2017 Standard Bank Top Women Awards

Since 2003, Standard Bank Top Women has been South Africa’s leading gender empowerment brand; celebrating visionary organisations that prioritise gender empowerment as integral to their strategy for growth and success.

The elegant awards ceremony was held on the 17 August 2017, at Emperors Palace.

In an evening that was all about South Africa’s most inspiring women our CEO, Bashier Adam, got to share the spotlight for a moment having been recognised as the Top Male Driving Gender Transformation in South Africa for 2017.

Being a firm that provides equal opportunities to all and in particular seeks to provide opportunities to those who previously were not afforded the same has always been a part of Bashier’s vision for Nexia SAB&T.

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