ADDITIONAL DISCLOSURES FOR FINANCIAL ASSETS
In December 2008 the International Accounting Standards Board (IASB) published an exposure draft with proposals to require entities to provide additional disclosures on all investments in debt instruments, other than those classified in the fair value through profit or loss category with a 30 day comment period. Please take note of the proposed backdated effective date. This exposure draft proposes that these amendments be applicable to entities whose annual periods end on or after 15 December 2008. This document was issued in South Africa as ED 255.
The deadline for comment to the IASB was 15 January 2009. The opportunity to submit comment has passed, however, a copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee sub-committee can be found on the SAICA website under submissions.
The exposure draft proposed that the following additional disclosures be provided;
• Pre-tax profit or loss as though the investments in debt instruments were carried at fair value and accounted for at amortised cost.
• Comparison between the carrying amount in the statement of financial position, fair value and amortised cost.
This exposure draft proposes that the above disclosures be presented in tabular format.
ED 255 – Investments in Debt Instruments – Proposed amendments to IFRS 7 can be downloaded from the SAICA website.
PROPOSED AMENDMENTS TO CLARIFY ACCOUNTING FOR EMBEDDED DERIVATIVES
The IASB has published an exposure draft for public comment with proposals to clarify the accounting treatment of embedded derivatives. This exposure draft was issued by the IASB in December 2008 with a comment period of 30 days. Please take note of the proposed backdated effective date. This exposure draft proposes that these amendments be applicable to entities whose annual periods end on or after 15 December 2008. This document was issued in South Africa as ED 254.
The comment deadline for this exposure draft was 21 January 2009 and due to this time constraint a sub-committee meeting was held on 8 January 2009 at which a SAICA comment letter was drafted. The comment letter submitted to the IASB can be found on the SAICA website under submissions.
The exposure draft proposes that:
• An entity assess whether an embedded derivative be separated from a host contract when a financial asset is reclassified from fair value through profit or loss (as required by the amendment Reclassification of Financial Assets – Amendments to IAS 39(AC 133) – Financial Instruments: Recognition and Measurement and IFRS 7(AC 144) – Financial Instruments: Disclosures;
• This assessment be made at the date at which an entity first became a party to the contract;
• If the fair value of the hybrid instrument cannot be measured reliably, the entire hybrid instrument should remain in the fair value through profit or loss category.
ED 254 – Embedded Derivatives – Proposed amendments to IFRIC 9 and IAS 39 can be downloaded from the SAICA website.
CHANGES IN EFFECTIVE DATE FOR RESTRUCTURED IFRS 1
In November 2008, the IASB issued a revised version of IFRS 1 – First-time Adoption of International Financial Reporting Standards (IFRSs). This revised version has an improved structure, but does not contain any technical changes.
The IASB has subsequently amended the effective date of this revised version of IFRS 1 from 1 January 2009 to 1 July 2009. This amendment corrects a potential technical problem arising from the interaction of IFRS 1 and the revised IFRS 3 – Business Combinations and amended IAS 27 – Consolidated and Separate Financial Statements, both published in January 2008. The amendment does not affect the application of IFRS 1 by first-time adopters.
This amendment has been issued as an amendment to Statements of Generally Accepted Accounting Practice (GAAP) by the Accounting Practices Board.
This document IFRS 1 – First-time Adoption of International Financial Reporting Standards, can be accessed on the SAICA on-line handbook.
SIMPLIFYING RELATED PARTY DISCLOSURES
The IASB has published an exposure draft with revised proposal to simplify the disclosure requirements that apply to state-controlled entities. This document has been issued in South Africa as ED 251.
Currently, IAS 24(AC 126) – Related Party Disclosures, requires entities to provide disclosures about transactions with related parties. However, state-controlled entities may find it difficult and costly to provide all the required details for transactions with other state-controlled entities. The IASB believes that it is possible to omit some of the required details while still providing sufficient information to users of financial statements.
The comment deadline for this exposure draft was 13 March 2009. A copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee sub-committee can be found on the SAICA website under submissions.
ED 251 – Relationships with the State – Proposed amendments to IAS 24 can be downloaded from the SAICA website.
SINGLE STANDARD FOR CONSOLIDATED FINANCIAL STATEMENTS
The IASB has published for public comment proposals to strengthen and improve the requirements for identifying which entities a company controls. This document has been issued in South Africa as ED 252.
The main objectives of the proposals are to improve the definition of control contained in SIC 12(AC 412) – Consolidations – Special Purpose Entities and IAS 27(AC 132) – Consolidated and Separate Financial Statements and the related application guidance so that a single control model can be applied to all entities, and to improve the disclosure requirements about consolidated and unconsolidated entities.
The proposals present a new, principle-based, definition of control of an entity that would apply to a wide range of situations and be more difficult to avoid through special structuring. The proposals also include enhanced disclosure requirements that would enable an investor to assess the extent to which a reporting entity has been involved in setting up special structures, and assess the risks to which these special structures expose the entity.
The comment deadline for this exposure draft was 20 March 2009. A copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee sub-committee can be found on the SAICA website under submissions.
ED 252 – ED 10: Consolidated Financial Statements can be downloaded from the SAICA website.
CONSTITUTION REVIEW PART 2
The Trustees of the International Accounting Standards Committee Foundation (IASCF), the body that oversees the IASB, has published for public comment a discussion document on the second part of the five-yearly review of the IASCF’s Constitution. This document has been issued in South Africa as ED 250.
The IASCF’s Constitution sets out the governance structures and the operating procedures of the IASCF and the IASB. The IASCF seeks comments on a broad range of Constitutional matters not dealt with in its first part of the five-yearly review, as follows;
• Governance of the IASCF.
• Composition of the IASB, the IFRIC, etc.
The comment deadline for this exposure draft was 31 March 2009. A copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee sub-committee can be found on the SAICA website under submissions.
ED 250 – Review of the Constitution – Identifying issues for Part 2 of the Review can be downloaded from the SAICA website.
ELIMINATING INCONSISTENCIES BETWEEN REVENUE STANDARDS
The IASB and the US Financial Accounting Standards Board (FASB) have published for public comment a discussion paper setting out proposals for a joint approach for the recognition of revenue. This document has been issued in South Africa as ED 253.
The IASB and the FASB have initiated this joint project on revenue recognition primarily to clarify the principles for recognising revenue. In IFRSs, the principles underlying the two main revenue recognition standards {IAS 18(AC 111) – Revenue and IAS 11(AC 109) – Construction Contracts} are inconsistent and vague, and can be difficult to apply beyond simple transactions. In particular, those standards provide limited guidance for transactions involving multiple components or multiple deliverables.
The boards have reached some preliminary views in developing a revenue recognition model. The proposed model would apply to contracts with customers. A contract is an agreement between two or more parties that creates enforceable obligations. Such an agreement does not need to be in writing to be considered a contract.
The deadline for comment to SAICA is
22 May 2009. ED 253 – Preliminary Views on Revenue Recognition in Contracts with Customers can be downloaded from the SAICA website.
PROPOSED ENHANCEMENTS TO FINANCIAL STATEMENTS PRESENTATION
The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published for public comment a discussion paper on financial statement presentation. This discussion paper has been issued in South Africa as ED 249.
On June 30, 2008, the boards issued tentative and preliminary views on how financial information will be presented. The first working principle is that financial statements should portray a cohesive financial picture of an entity. Ideally, financial statements should be cohesive at the line-item level, thus to the extent practical, an entity would label line items similarly across the financial statements and present categories and sections in the same order in each financial statement. Classifications are based on the different functional activities of an entity using terminology similar to today’s cash flow statements (see Exhibit 1).
Exhibit 1: Working format for presenting information in the Financial Statements
| Statement of Financial Position | Statement of Comprehensive Income | Statement of Cash Flows |
Business
|
Business
|
Business
|
Financing
|
Financing
|
Financing
|
| Income Taxes | Income Taxes (related to business and financing) | Income Taxes |
| Discounted operations | Discounted Operations, Net of Tax |
Discounted operations |
| Equity | Other Comprehensive Income, Net of Tax | Equity |
AUDITING
GOING CONCERN UNCERTAINTIES ARE EXPECTED TO AFFECT 2008 AUDITED FINANCIAL STATEMENTS
Due to the current economic environment, it is expected that a significantly higher proportion of 2008 year end annual reports are likely to contain disclosures relating to going concern and liquidity, together with an increase in the number of modified audit reports, as compared to previous years. The nature of the market reaction, and the full market implications of a rise in these disclosures and modified audit opinions, will be heavily affected by the levels of understanding and awareness regarding the cause of this likely rise. If investors and others do not respond appropriately to “emphasis of matter” paragraphs explaining going concern uncertainty, and do not take into account the current exceptional economic circumstances, the issue has the potential to undermine wider business confidence.
Market participants need to be fully aware of what emphasis of matter paragraphs mean in the current business environment.
In many cases, the damaging potential reactions to modified audit opinions may be caused by misinterpretations of the ‘emphasis of matter’ in those modified audit opinions – and, as such, may be avoidable given sufficient market understanding and awareness.
Where a material uncertainty exists, which leads to significant doubt about a company’s ability to continue as a going concern, the auditor has the following choices:
Where the directors have concluded that the going concern basis is appropriate:
• Where the uncertainty has been adequately disclosed in the financial statements, the auditor will issue an unqualified opinion, modified by including an emphasis of matter paragraph. If there are significant multiple other material uncertainties, auditors may disclaim their opinion instead of adding an emphasis of matter paragraph.
• Where the uncertainty has not been adequately disclosed in the financial statements, the auditor will issue a qualified opinion, stating the reasons why, or give an adverse opinion.
Where the directors have concluded that the going concern basis is not appropriate:
• Where the directors have followed an alternative basis, with which the auditor agrees, and have provided adequate disclosure in the financial statements, the auditor can issue an unmodified report (in relation to going concern). Such situations are rare. An audit opinion that does not refer to going concern is not a guarantee that a business is a going concern.
The UK Financial Reporting Council (FRC), in its press statement of 27 November 2008, says that it ‘recognises that the global liquidity squeeze and its impact on the wider economy increases the challenges for directors in preparing corporate reports this year…. more time may need to be spent by directors and audit committees planning the year end activities, reviewing key assumptions and models used in financial reporting and in reviewing the significant accounting and disclosure judgments. ‘The FRC has therefore published an Update for directors of listed companies on reporting on going concern and liquidity risk. The publication can be downloaded from the FRC website: www.frc.org.uk/press/pub1781.html.
EXCHANGE CONTROL CIRCULARS
The Exchange Control department of the South African Reserve Bank (EXCON) has issued Exchange Control Circular No. 01/2009 – Annual withdrawal and retention of Circulars.
Authorised Dealers are referred to Exchange Control Circular No. 1/2005 dated 2005-07-15 and advised that, with the exception of the Circulars mentioned below, all other Circulars are hereby withdrawn. See table 1 above.
Please direct any specific queries regarding the Exchange Control Circulars or Rulings to eugenem@saica.co.za.
Table 1
| Exchange Control Circular No. | Caption |
| 1/2005 | Re-issue of Exchange Control Rulings |
| 16/2005 | Statement on Exchange Control |
| 2/2006 | Study facilities – Church of Scientology |
| 7/2006 | Loans extended by South African development finance institutions to African companies or projects |
| 15/2006 | Export Pilot Project |
| 26/2007 | United Nations Security Council resolutions against Iraq, Liberia, Democratic Republic of the Congo, Cote d’Ivoire and Sudan |
| 4/2008 | Statement on Exchange Control |
TAX
WHAT’S NEW AT SARS?
SAICA’S NATIONAL TAX COMMITTEE SUBMISSIONS
SAICA made the following submissions to SARS/National Treasury during November/December 2008.
Comment Submitted
SAICA Submission to National Treasury on 2009 Budget Proposal VAT issues
10 November 2008
SAICA Submission to Treasury on Supporting Documentation to Tax Returns
29 July 2008
SAICA Submission to Treasury regarding Generator Allowances
8 December 2008
SAICA Submission to SARS on Reportable Arrangements: Definition of a promoter
2 December 2008
SAICA Submission to SARS on s79 Employee Tax and Prescription
2 December 2008
Copies of these and previous submissions are available on our website at
www.saica.co.za.
STC revamp eliminates negative international perceptions
Sweeping upcoming changes to the legislation governing Secondary Tax on Companies (STC) will help eliminate international double taxation perceptions of the South African company tax regime.
The changes are heralded in the amendments to the Revenue Laws Amendment Acts of 2008.
With the introduction of STC in 1993 came a reduction in the corporate tax rate, the primary objective of which was to encourage companies to adopt a modest dividend distribution policy. STC is a tax on the company and is not a withholding tax on dividends.
In February 2007, the Finance Minister announced a two phased approach to reform STC. The first entailed the reduction of the STC rate and a revision of the dividend tax base for distributions beyond the narrow dependence on the availability of profits in the company from which a distribution is made. The Revenue Laws Amendment Act of 2007 gave effect to these changes. Thus, with effect from 1 October 2007 the STC rate was reduced from 12,5% to 10%.
The second phase of the STC reform entails the replacement of the STC with a new tax on distributions of companies; one that is levied at a shareholder level and a revision to the tax base by amending the definition of “dividend”, on which STC relies.
One of the major reasons cited by National Treasury for reforming this regime was that an international comparison sees distributions of dividends by companies generally taxed at the shareholder level as opposed to the company level.
This is part of the reason why international investors cannot comprehend and come to grips with this concept of STC, which to them is a form of double tax on companies.
The most recent amendments to the Revenue Laws Amendment Acts of 2008 encompass the proposed changes to the second phase of the STC reform process outlined in what follows.
Dividend tax will be levied at 10% of the amount of any dividend paid by a resident company (i.e. accrual to the shareholder). The trigger now is payment of the dividend, not its declaration. Exemptions apply to dividends paid to exempt “beneficial owners”, among them SA-resident companies, any sphere of the SA Government and approved public benefit organisations.
Any resident company that pays a dividend will be required to withhold an amount of 10% of that dividend from the payment unless the exemption from liability to withhold applies. The exemption to withhold depends on whether the share generating the dividend is certificated or uncertificated.
For certificated shares, the general rule is that the paying company must withhold dividend tax unless the shareholder has formally confirmed its exempt status or where the payment is made in the same “group” company.
For uncertificated shares, the general rule is that the paying company must not withhold dividend tax. The obligation to withhold then falls on the intermediary or the beneficial owner. Usually the intermediary will have to decide whether or not to withhold the dividend tax, based on the shareholder details held on register by the intermediary.
The new dividend definition includes as dividend any amount distributed or otherwise paid, unless the distribution is made out of “contributed tax capital” (a new definition). Broadly, “contributed tax capital” is the amount received by the company as consideration for the issue of shares by that company less the amount transferred (distributed) in relation to those shares.
STC credits will continue to exist for five years after the effective date of the new legislation. STC credits will be exhausted first. In other words, the company paying the dividend will not be entitled to decide whether or not it is declaring the dividend out of STC credits. This is a notable and welcome change from when it was initially announced that all STC credits would be completely eliminated.
The company paying the dividend will have to notify the recipient shareholders of the STC credit content of the dividend being paid.
Dividends declared before the effective date of the new Dividend Tax but that are paid after the effective date will be subject to STC and exempt from Dividend Tax.
The effective date for these changes, yet to be determined by the Minister of Finance, must be at least three months after the Minister’s notice. This effective date will end STC and introduce the commencement of the new Dividend Tax, including the introduction of the new definition of “dividend” and “contributed tax capital”.
The proposed amendments only cover core elements. A number of other issues must still be addressed by National Treasury (probably next year) as follows:
• Taxation of foreign dividends
• Taxation of deemed dividends
• Specific matters related to financial services, e.g. insurers and collective investment schemes
• Anti-avoidance rules.
The introduction of the new Dividend Tax will also see the introduction of an anti-avoidance measure for passive holding companies, because an arbitrage opportunity exists owing to the exemption of company-to-company dividends from dividend tax under the new regime.
The passive holding company will be liable to:
• a 10% charge on incoming dividends;
• a 40% charge on other passive income from financial instruments (e.g. interest); and
• a 28% charge on all other taxable income.
The passive holding company will not have to withhold any dividend tax on dividends paid out arising out of tainted earnings.
Among entities excluded from the definition of a passive holding company are listed companies, banks, insurers and public benefit organisations.
A passive holding company exists where passive income (essentially dividends and interest but not rental and royalties) exceeds 80% of the total gross income for the year, and more than 50% of the shareholding is held by persons other than “excluded shareholders”.
Excluded shareholders include non-residents, any sphere of the South African Government and approved public benefit organisations.
All queries: www.saica.co.za
Telephone: 011 621 6641 | Telefax: 011 621 6819
Website: http://www.saica.co.za
