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“In June 2011, SAICA issued a guide that will radically affect the accounting by share block companies, including timeshare companies, structured share block companies and units in share block structures. It is called the Guide on Financial Reporting by Share Block Companies.”

Share Block: Retrospective Application

In June 2011, SAICA issued a guide that will radically affect the accounting by share block companies, including timeshare companies, structured share block companies and units in share block structures. It is called the Guide on Financial Reporting by Share Block Companies and can be accessed via:

Immediate application is required irrespective of the reporting period
Several users and auditors have assumed that this Guide is only applicable for periods ending February 2012. However, it is applicable from the date it was issued and therefore applies to all financial statements that had not been issued by June 2011.

Retrospective application is required
Because the guide does not introduce new accounting standards, it must be applied retrospectively. Using December 2010 financial statements as an example, the December 2010, December 2009 and opening retained earnings at January 2009 should be compliant with the guide. Retrospective application also means that three statements of financial position are required if either International Financial Reporting Standards (IFRS) or South African Statements of Generally Accepted Accounting Practice (SA GAAP) is applied, but not if International Financial Reporting Standards for Small and Medium and Entities (IFRS for SMEs) is applied.

Changes to the statement of financial position (SOFP)

Property, plant and equipment (PPE)/investment property (IP) should be derecognised because no future economic benefits will flow to the Share Block Company (SB Co) on sale, or through use of the property:

a. PPE/IP has no potential to contribute, directly or indirectly, to the flow of cash and cash equivalents of the SB Co.
b. The shareholders have the usufruct over the property whereas the SB Co has the bare dominium.

All property-related assets (immovable, movable and communal) should not continue to be recognised as assets by the SB Co for the same reasons as those outlined above for PPE/IP.
Loan asset recognition (replaces the PPE/IP)

a. The SB Co is owed an amount equal to the value of its shareholder or third party loans.
b. This amount is owed by the shareholders in order for the SB Co to be able to settle the shareholder or third party loans.
c. This loan asset should be recognised as it meets the definition of a financial asset.

Summarised SOFP of the SB Co

a. Loan asset (debit) and shareholder or third party loans (credit).
b. Share capital.
c. Value of any bare dominium that the SB Co is entitled to in respect of any immovable, movable or communal property.
i. Value is expected to be immaterial where the shareholders have indefinite right of use.
ii. However, where the right of use is finite (e.g. 10 years), the value of the bare dominium could be more material.

Changes to the statement of comprehensive income (SOCI)

Include all items of income and expense in connection with the property.
The only exception is if it is agreed that certain items are not to be borne by the SB Co because the shareholders will incur these amounts directly themselves.

Levy statements

Prepare levy statement

a. In terms of section 13(5) of the Share Blocks Control Act, No 59 of 1980 (Act), a levy statement should be prepared “to reflect and explain the state of affairs in respect of the moneys received and expended by or on behalf of the company”. It is unlikely that the SB Co's SOCI will meet this requirement and therefore a levy statement should be prepared as additional disclosure, so as to comply with the requirements of the Act.

Levy statement versus annual financial statements (AFSs)

a. Consider the impact of the cash basis/limited accrual basis in the levy statement versus the accrual basis in the AFSs. Levies might include amounts for capital expenditure on a different basis from that applied in the AFSs. For example, capital expenditure may be financed by levies collected over a number of years and this may be reflected differently in the levy statement from the way it is recognised and disclosed in the AFSs.

Summary
Although the changes outlined above are easy to apply, the effect of the changes is significant. Some preparers may be concerned that the users will not understand the new financial statements, and may therefore panic, particularly because the PPE/IP has “disappeared”. This could be explained by:

adding a note on the change in the basis of accounting and the effect thereof, and referring to this throughout the AFSs, or
adding an appendix to the AFSs that contains the financial statements in the format that they were previously prepared. However, such appendix should not be part of the AFSs as it is merely meant to explain to shareholders how the share block has operated. It should therefore be clearly marked as supplementary information, for information purposes only, as it does not comply with IFRS, SA GAAP or IFRS for SMEs. asa

Authors: Glynnis Carthy CA(SA) is an independent financial reporting consultant.