Roadmap IFRS changes for 2013
The International Accounting Standards Board (IASB) has completed a range of significant projects resulting in new accounting and disclosure requirements for entities preparing financial statements under International Financial Reporting Standards (IFRS). The effective date for these requirements is for financial years beginning on or after 1 January 2013 and now is the time to plan for implementation. The implementation of these new standards could have a significant impact on systems and resources. An executive summary of each standard is given below.
IAS 19 (R) Employee Benefits
The first change is to defined benefit plans. Prior to the amendments, actuarial gains and losses could be accounted for under three different accounting policies. Post the amendment all actuarial gains and losses are recognised in full in other comprehensive income.
In addition, interest is now calculated on a net basis (the defined benefit liability less any plan assets) instead of separately on the defined benefit liability and plan assets.
In implementing IAS 19 (R) an entity would have to obtain information about total actuarial gains and losses for the current and previous three years to complete the disclosure required by the change.
IFRS 10 Consolidated Financial Statements
IFRS 10 is the new standard on when an entity should be consolidated. It requires an assessment of whether the parent has the power to direct the relevant activities of an entity to obtain returns. The actual mechanics of the consolidation remain the same as
under IAS 27.
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
IFRS 10 also introduces the concept of de facto control in which an investor would be required to consolidate the investee. De facto control exists where an investor does not hold a majority interest in the entity, but due to the large size of the holding (e.g. 40%) and the large dispersion of the other shareholders, it is unlikely that the other shareholders will act together to outvote the investor.
The diagram below provides guidance on how entities that were previously not consolidated, but that are subsidiaries in terms of IFRS 10, should be consolidated:
The following decision tree can be used to classify joint arrangements as either joint operations or joint ventures:
A joint venture is equity accounted for in the same way as associates. A joint operation is accounted for by consolidating each part in the venture’s share of the assets, liabilities, income and expenses of the joint operation in a similar way to proportionate consolidation.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 is the new standard which contains the disclosure requirements for interests that an entity holds in subsidiaries, joint arrangements, associates and unconsolidated structured entities.
A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
The following disclosures are required by IFRS 12:
Interests in subsidiaries:
• the composition of the group
• the extent of non-controlling interest in the group’s activities and cash flows
• the nature/extent of significant restrictions on its ability to access/use assets, or settle liabilities
• the nature of the risks associated with its interests in consolidated structured with its ownership interest in a subsidiary that do not result in a loss of control
• the consequences of losing control of a subsidiary during the reporting period
Interests in joint arrangements or associates:
• the nature, extent and financial effects of its interests in associates or joint arrangements, including the nature and effects of its contractual relationship with the other investors with significant influence
• the nature of, and changes in, the risks associated with its interests associates or joint arrangements
Interests in unconsolidated structured entities:
• the nature and extent of its interests in unconsolidated structures entities
• the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.
IFRS 13 Fair Value
IFRS 13 provides guidance on how to measure fair value, the scope of which is summarised in the table below:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 requires that the principal market is used to measure fair value. Should the principal market not be determinable, the most advantageous market is used.
Fair value is determined based on the unit of account in terms of the relevant standard that the asset or liability is accounted for. Therefore, control or liquidity premiums or discounts are not taken into account when determining fair value.
The fair value of non-financial assets is determined by reference to the asset’s highest and best use irrespective of its current use. The highest and best use of an asset must be physically possible, legally permissible and financially feasible.
The diagram below summarises some of the key considerations in determining the fair value of financial instruments:
Authors: Author: Andrew Van Der Burgh CA(SA) is the Manager: Accounting and Auditing at Deloitte.
New Companies Act Directors and the CIPC
The new Companies Act, 2008 (the Act) has now been effective for almost two years, and despite much anxiety and uneasiness about the quality of the legislation prior to its implementation, the transition from the old to the new Act can be described as ‘almost‘ smooth.
Responsibility of directors
A key feature of the new Act is that it clearly emphasises the responsibility and accountability of directors. By accepting their appointment to the position, the directors indicate that they will perform their duties to a certain standard, and it is a reasonable assumption of the shareholders that every individual director will apply his or her particular skills, experience and intelligence to the advantage of the company.
The Act codifies the standard of directors’ conduct in section 76. The standard sets the bar very high for directors, with personal liability where the company suffers loss or damage as a result of the directors’ conduct not meeting the prescribed standard. The
intention of the legislature seems to be to encourage directors to act honestly and to bear responsibility for their actions – directors should be accountable to shareholders and other stakeholders for their decisions and their actions.
With the standard set so high, the unintended consequence may be that directors would not be prepared to take difficult decisions or expose the company to risk. Since calculated risk taking and risk exposure form an integral part of any business, the Act includes a number of provisions to ensure that directors are allowed to act without constant fear of personal exposure to liability claims. In this regard, the Act has codified the business judgement rule,1 and provides for the indemnification of directors under certain circumstances, as well as the possibility to insure the company and its directors against liability claims in certain circumstances.
In addition to the codified standard of directors’ conduct, the Act also provides for personal liability in instances where anybody has suffered loss or damage as a direct result of non-compliance with the provisions of the Act (see Section 218(2)). The intention of the legislature here seems to be the decriminalisation of corporate law, and to move the onus for ensuring compliance to the directors individually, and to the company.
The regulator and the State will only be required to ensure compliance in very specific instances (i.e. where the Act provides for the Companies and Intellectual Property Commission (CIPC) to issue a compliance notice, or where non-compliance is specifically classified as an offence). In every other instance the provisions of the Act may be ‘enforced’ by means of civil action by the stakeholders of the company (shareholders, employees, creditors, members of the community, etc.).
Revised role of the CIPC
The Act specifically reduces the company’s reliance on the regulator, the CIPC. Although companies still have to comply with an administrative process to inform the CIPC of its decisions (for example the appointment of directors, changing of auditors, change of year end, or amendment of the Memorandum of Incorporation), none of these decisions are dependent on the approval of the CIPC.
In most instances, the company’s decision is effective immediately and it merely needs to inform the CIPC of decisions or actions. However, in a few instances the effect of the decision is delayed until the necessary notices have been ‘filed’ with the CIPC.
Companies are often required to ‘file’ a notice with the CIPC. Section 1 provides that ‘file’, when used as a verb, means to deliver a document to the Commission in the manner and form, if any, prescribed for that document. If one looks at the Regulations (Regulation 7 and Annexure 3), it clearly indicates that when a document is ‘delivered’ to the CIPC, the date and time of delivery is determined as follows:
No subsequent requirement for the CIPC to check or approve the particular action. Of course, the company needs to ensure that the particular filing complies with the provisions of the Act (relevant form completed correctly, required supporting documents attached, and the prescribed fee paid). Where the company fails to comply with the provisions of the Act, the company and its directors may be liable.
In order to illustrate the above conclusion, the provisions of the Act with respect to a few company actions will be investigated. To date, the CIPC still adheres to the approach followed by the old CIPRO, in that they regard it as a core function to check and approve all documents filed with them, and then inform the company as to whether the particular company action is approved or rejected.
This approach is out-dated, and not provided for in the new Act. On the contrary, Sections 6(8) and (9) clearly provides for a ‘substance over form’ approach, and indicates that even if there is a deviation from the design or content of a prescribed
form, or in the manner of del very, it does not invalidate the action taken.
Appointment of directors
In terms of section 66(7):
“A person becomes entitled to serve as a director of a company when that person
(a) has been appointed or elected in accordance with this Part, or holds an office, title, designation or similar status entitling that person to be an ex officio director of the company; and
(b) has delivered to the company a written consent to serve as its director.” In turn, Section 70(6) requires every company to
file a notice (CoR39) within 10 business days after a person becomes or ceases to be a director of the company.
Thus, in terms of the Act the appointment of a director is effective as soon as he/she is appointed or elected, and has confirmed in writing that they are prepared to accept the appointment to the board.
The CIPC has no role to play in the appointment of directors. The filing of the relevant notice does not affect the validity or the time of the appointment.
The question arises as to what the consequence would be if the CIPC failed to update its register of directors, delayed the updating of the register, or included incorrect information in the register. Despite the requirement to file to the CIPC a notice of the appointment or removal of a director, the company is obliged to keep a record of its directors (Sections 24(3)(b) and 24(5)).
This record may be accessed by any person who holds or has a beneficial interest in any securities issued by a profit company, or who is a member of a non-profit company. Any other person has a right to inspect or copy the register of directors of a company, upon payment of a prescribed amount. As such one may conclude that the register held by the company should be regarded as the ‘official’ register of its directors, and it is this register that should be consulted where there is a discrepancy between the company’s register and CIPC’s register, or where there is confusion or uncertainty as to the identity of the company’s directors.
Change of the financial year end
In order to determine the exact date and time on which the financial year end is changed, one needs to look at the provisions of the Act. Section 27(4) of the Companies Act determines that:
“The board of a company may change its financial year end at any time, by filing a notice of that change, but—
(a) it may not do so more than once during any financial year;
(b) the newly established financial year end must be later than the date on which the notice is filed; and
(c) the date as changed may not result in a financial year ending more than 15 months after the end of the preceding financial year.”
As pointed out above, ‘filing’ in terms of the new Act simply means that the notice is received by the CIPC (recorded in the CIPC’s computer system, or the date on which registered or other mail is received by the CIPC). The CIPC is not required to approve
or vet any decisions or actions of the company.
The changing of the company’s financial year end will be complete once the relevant notice (CoR25) is received by the CIPC.
Change of auditor
The Act requires certain companies to appoint an auditor (public companies, state owned companies, and any other category of company that meet the requirements set out in the Regulations).
The Act provides for the appointment of the auditor by shareholders at the annual general meeting, and where a vacancy exists for the directors to fill the vacancy within 40 business days. Section 85(3) requires the company to file a notice (CoR44) within
10 business days after making the appointment.
In addition, the company has to maintain a record of its auditors (Section 85(1)). Again, the Act does not link the filing of the relevant notice to the effectiveness of the appointment. However, where an auditor resigns, the Act expressly states that the resignation of the auditor is effective when the notice is filed (Section 91(1)).
This implies that a resignation letter submitted to the company by the auditor is not sufficient to terminate the appointment of the auditor. In order to complete the action, the company has to file the CoR44.The resignation will only be effective on the date and time when the notice is received (and recorded) by the CIPC.
Amendment of the Memorandum of Incorporation (MOI)
Where a company amends its MOI, it has to file a Notice of Amendment (CoR15.2) within 10 business days after such amendment (section 16(7) read with Regulation 15(3)). Where a company amends its MOI by means of a special resolution of shareholders (as provided for in section 16(1)(c)), the amendment will not be effective immediately.
This constitutes the one instance where the Act delays the effectiveness of a special resolution of shareholders. Under other circumstances, a special resolution will take effect as soon as the required number of votes is obtained. However, where a special resolution is obtained to amend the MOI, the amendment to a company’s Memorandum of Incorporation takes effect on the date of filing the Notice of Amendment, or the date, if any, set out in the Notice of Amendment (section 16(9)), whichever is later.
The new approach to enforcement of the Act, as illustrated by the examples above, is in line with the Government’s objectives for reform of our corporate law. The high-level objectives of the new Companies Act (as per a DTI presentation to Cabinet, dated 31
January 2007) were to:
• Reduce the regulatory burden for small and medium-sized firms (mostly owner-managed, privately owned)
• Enhance protection of investors through enhanced governance and accountability (esp. public interest companies), minority protection and shareholder recourse
• Create a more flexible environment, without compromising regulatory standards and objectives, to enhance investment.
The effect of the corporate law reform is clearly that the regulator now regulates with a much lighter touch, and that companies and directors need to bear responsibility for their actions.
As a consequence, this new regulatory regime allows companies to take and implement their own decisions seamlessly, without having to wait for approval or a go-ahead by the CIPC. In most instances, mere ‘filing’ and ‘delivery’ will suffice to ensure compliance with the Act. Where documents are rejected by the CIPC, it does not invalidate the particular company action – it merely implies that
the company needs to improve its administrative game. Of course, the new approach also points to the need for directors to carefully consider their decisions and actions, and to take into account the wider context and impact of such decisions.
The Act clearly makes it easier for companies to conduct business and has increased the responsibilities of directors.
1. In terms of the business judgment rule a director will have met the required standard if he or she has taken reasonable diligent steps to become informed about the subject matter, does not have a personal financial interest (or has declared such a conflicting interest) and the director had a rational basis to believe that the decision was in the best interest of the company.
Author: Dr Johan Erasmus, BLC, LLB, LLD is a Director at Deloitte.