Manage your Practice – Accountancy SA

https://www.accountancysa.org.za Home Mon, 04 Mar 2024 13:06:49 +0000 en-US hourly 1 https://wordpress.org/?v=7.1.2 Manage your Practice: Navigating the workforce challenge Strategies for accounting firms in the digital age https://www.accountancysa.org.za/manage-your-practice-navigating-the-workforce-challenge-strategies-for-accounting-firms-in-the-digital-age/ Mon, 04 Mar 2024 13:06:49 +0000 https://www.accountancysa.org.za/?p=27454

In the dynamic landscape of accounting firms, success isn’t just about the numbers; it’s about the people behind them. As the world grapples with an unprecedented accountant shortage, firm owners are recognising the paramount importance of keeping their employees content and engaged. In fact, over 90% of accounting and audit firms have identified the recruitment and retention of skilled personnel as a top priority.

The pressures on accounting firms are manifold, stemming from rising client expectations, ever-evolving regulations, and the pervasive talent shortage. This confluence creates a heightened risk of burnout among employees, making it imperative for firms to focus on operational efficiency. Overworking the team is a direct path to increased staff turnover, adding strain to those who remain. With more than a third of accounting firms finding talent retention ‘extremely challenging’, enhancing efficiency becomes a critical strategy.

Understanding the needs of the upcoming Generation Z workforce is paramount. Despite a significant portion of small accounting firm partners being over 60, they recognise the necessity of envisioning what it takes to keep Gen Z employees satisfied. By 2025, Gen Z is expected to constitute one third of the workforce, making it essential for firms to create a technology-driven culture. This forward-thinking approach not only facilitates time and cost savings but also gives firms a competitive edge in both hiring and retention.

The accounting profession is witnessing a decline in young professionals entering the field. However, a staggering 85% of accountants believe that technology can reverse this trend by offering more engaging work. This insight is crucial as the younger generation is breaking away from the traditional career trajectory of spending decades at one firm, starting with mundane tasks. Job hopping has become synonymous with Gen Z professionals.

Yet, the workforce challenge extends beyond Generation Z. A recent survey reveals that over half of accountants lack confidence in remaining with their current firm for the next year, with many contemplating leaving the industry altogether. Coined as the ‘Great Recalibration’, professionals of all ages are re-evaluating the time and energy they invest in their jobs, emphasising factors like work/life balance, burnout, and the opportunity for a more substantial role within the company.

Amidst these challenges, the right technology emerges as a saviour for fostering positive relationships with employees. It’s not just about IT solutions; it’s about seamlessly integrating technology into the fabric of employees’ work lives. When considering a tech solution, it’s crucial to look beyond features and functionality. Evaluate how it empowers employees to perform their jobs more efficiently, eliminates mundane tasks, and adds tangible value to their daily work. By ticking off these boxes, accounting firms can create a more fulfilling, less stressful work environment that becomes a magnet for top talent. In the age of digital transformation, strategic technology adoption becomes the key to success in attracting and retaining the workforce of tomorrow.

Author
Denise Maré CA(SA), Project Director: Practice at SAICA

]]> Manage your Practice: Common challenges and pitfalls in accounting firm sales https://www.accountancysa.org.za/manage-your-practice-common-challenges-and-pitfalls-in-accounting-firm-sales/ Mon, 04 Mar 2024 13:04:47 +0000 https://www.accountancysa.org.za/?p=27452

The intricate process of selling an accounting firm is laden with numerous challenges and pitfalls that could derail the transaction, necessitating a well-thought-out strategy and execution to ensure a seamless transaction. This article sheds light on these common hurdles while providing pragmatic solutions, highlighting the importance of a swift deal approach in the dynamic realm of business transactions.

Overcoming negotiation hurdles

Engaging in negotiations can be a daunting task, particularly when the stakes are high. Open dialogue, clear understanding, and setting realistic expectations are the cornerstones of successful negotiations. It might also be prudent to involve a mediator or an experienced business broker to help reach a mutually beneficial agreement. Their expertise can provide a neutral ground for discussions, ensuring that the interests of both parties are well-represented. The neutral party is the grease that smooths things over in negotiations and that protects both parties.

Client retention and transition management

The retention of clients during and after the transition is a critical aspect of selling an accounting firm. A structured transition plan should be in place to ensure that clients experience minimal disruptions in service. Maintaining open communication regarding the change in ownership and why it will happen should be a common narrative from all, and professionally introducing the new management to clients can significantly help in ensuring trust and continuity. Don’t lie to clients, it will explode in everyone’s face.

Valuation of intangible assets and personal goodwill

The practice can’t sell clients; this is a common misconception. We as brokers specialising in this field have a motto: ‘you are selling the privilege to service these clients’. When buyers and sellers grasp this concept their behaviours towards clients change. The personal goodwill that was built up between clients and the seller must be transferred. This carries an intangible value for an accountant, but if you convert this to what it means you realise this is the X-Factor in the transaction and by far the most valuable part, the smaller the firm, the more so.

Not truly understanding intangible assets and personal goodwill can often be a stumbling block in negotiations.

Retaining key employees

The potential change in ownership can create apprehension among key employees. Addressing their concerns and providing assurance regarding their future within the firm post-transition is vital for maintaining operational continuity. Incentive schemes and clear communication about the transition plan can help in retaining key personnel. Like everything this has a caveat, and this applies to the clients as well − do not hint that you are thinking of selling or that company X may buy you unless you have a certainty. Introducing uncertainty into your deal will see clients and staff flying off before you even have a signed deal. You must approach staff as you do clients, with one consistent and comfortable clear message

Warranty and warranty conditions

Understanding the warranty clauses in the sale agreement is crucial as they represent a significant aspect of the sale agreement. Without warranties and vendor financing your selling price will nose dive. Seeking expert advice on warranty and warranty condition clauses can prevent unpleasant surprises post-sale, ensuring that both parties are well aware of their rights and obligations. The spectrum of things that impact the transaction is a key aspect of a deal.

Due diligence and data management

The initial information released to the market must be meticulously curated. Have it all ready. The first layer should pique buyers’ interest, followed by a second layer that provides more details about the firm without jeopardising client relationships. The final layer, intended for due diligence, should only be accessible to pre-vetted, serious buyers. This tiered approach is vital to any sale and crucial for protecting you in case the sale falls through. A broker can serve as your representative, screening potential buyers and maintaining the business’s anonymity. Only filtered, qualified buyers who have signed nondisclosure agreements will be privy to the identity of the business.

Learning from common pitfalls

Engaging with professional advisors to navigate through common challenges can significantly enhance the chances of a successful sale and learning from past transactions and understanding common pitfalls can provide invaluable insights, ensuring a smooth sale process. Here are seven common mistakes you can learn from:

Selling without a strategy − Don’t embark on the selling process without a well-defined strategy and a formal process. Simply hoping for the best without a concrete plan is a recipe for failure.
Diminishing buyer enthusiasm − From our experience, maintaining momentum is a key factor in successful outcomes. Prolonged delays extinguish the enthusiasm and increase the potential for a complete.
Failing to safeguard your anonymity − Competitors may exploit this situation and unsettled staff may leave, especially the good ones. A specialist broker can protect a business’s anonymity and only qualified buyers that fit the firm get introduced and have access to sensitive information.
Limiting your options − Only dealing with one buyer creates a buyer’s market, multiple buyers a seller’s market. Avoid selling your practice to your employees using ‘sweat equity’, as it can lead to payment issues. Don’t be the nice guy. It’s a mistake. A good guy ensures they keep their jobs.
Letting ego get in the way − Don’t sell yourself; sell the business. Remember, buyers are not purchasing you: they’re buying your clients, your firm, and your staff. That’s what’s on offer. Furthermore, negotiation is a process of give and take. If you become too rigid too early, trying to win each battle, you might just find yourself left behind.
Overlooking post-closure transition − Our experience shows that retention rates are higher when a robust transition plan is in place. The seller must understand the significance of this critical phase. A sale is indeed a journey. Many sellers believe they can disappear from the scene after the deal closes. You must hand over and ensure the transition of personal goodwill. Our agreement places significant emphasis on achieving this.
Not seeking professional help − Don’t underestimate the complexity of the process. The right valuation and deal structure, and bespoke and tested agreement not only ensure a successful sale but also your anonymity, which is crucial initially coupled with a pool of pre-vetted experienced buyers will unlock your value in an organised way.

Conclusion

The journey towards selling an accounting firm is laden with challenges, yet with a well-thought-out strategy, professional guidance, and a swift approach, the path to a successful transaction can be significantly smoothened. The insights provided in this article aim to equip sellers and buyers with the necessary knowledge to navigate through the common challenges and ensure a successful and satisfying conclusion for all parties involved.

Feel free to reach out for further guidance or clarification on any of these aspects.

Author
Louis Bruwer, Aldes Orion Business Brokers

]]> Manage your Practice: Unveiling successful leadership styles in modern accounting firms https://www.accountancysa.org.za/manage-your-practice-unveiling-successful-leadership-styles-in-modern-accounting-firms/ Mon, 04 Mar 2024 13:00:13 +0000 https://www.accountancysa.org.za/?p=27450

Accounting firms faced with the dual challenges of talent retention and technological advancements are finding that the right leadership style is the cornerstone to sustained success.

In the fast-paced and ever-evolving landscape of accounting, successful leadership is not just about crunching numbers – it’s about steering the ship through turbulent waters and empowering a team to thrive.

Adaptability

In the digital age, successful leaders in accounting firms exhibit a keen sense of adaptability. They understand that the industry is undergoing a seismic shift, with technology reshaping the way services are delivered. A nimble leader embraces change, fostering a culture of innovation that encourages team members to explore and implement new tools and methodologies. This adaptability ensures the firm stays ahead of the curve, meeting client expectations and retaining top talent.

Empathy and mentorship

Leading a practice is not just about managing spreadsheets, billings and clients, it’s about leading people. Successful leaders in the field recognise the importance of empathy and mentorship. Nurturing a supportive work environment where team members feel heard and valued is paramount. Mentorship programmes not only contribute to professional development but also create a sense of camaraderie and shared goals within the firm. Empathetic leaders understand the individual aspirations of their team members, aligning personal growth with organisational success.

Strategic vision

A successful leader in an accounting firm possesses a strategic vision that extends beyond day-to-day operations. They have a keen understanding of industry trends, client needs and emerging technologies. This foresight allows them to chart a course for the firm’s future, ensuring it remains relevant and competitive. Strategic leaders inspire their teams by communicating a compelling vision, aligning everyone towards common goals, and navigating the firm through challenges with confidence.

Inclusivity and diversity

Diversity is not just a buzzword: it’s a cornerstone of successful leadership in modern accounting firms. Inclusive leaders understand the strength that diverse perspectives bring to problem-solving and decision-making. They actively promote a culture where everyone’s voice is heard and valued, creating an environment that attracts a wide range of talents. A diverse team guided by an inclusive leader fosters innovation and adaptability, ensuring the firm is well-positioned for the challenges of the future.

Tech-savviness

The successful leader in an accounting firm embraces technology as an enabler, not a disruptor. Be guided by your younger staff, they are generally not scared to try the new tech. With the industry undergoing rapid digital transformation, a leader who understands and integrates technology effectively is crucial. Whether it’s implementing advanced software solutions, leveraging artificial intelligence, or optimising workflow through automation, a tech-savvy leader ensures the firm remains competitive and efficient.

Conclusion

To sum it up, successful leadership is a multifaceted journey. It requires adaptability, empathy, strategic vision, inclusivity and tech-savviness. As the industry continues to evolve, leaders who embody these qualities will not only guide their firms to financial success but also create an environment where both individuals and the organisation flourish. In the intricate world of accounting, it’s not just about leading − it’s about leading with purpose and foresight.

Author
Denise Maré CA(SA), Project Director: Practice at SAICA

]]> Manage your Practice: Low-hanging fruit for the accountant? https://www.accountancysa.org.za/manage-your-practice-low-hanging-fruit-for-the-accountant/ Mon, 04 Mar 2024 12:57:27 +0000 https://www.accountancysa.org.za/?p=27447

When you read this article, you may very well have just experienced a horror tax submission period (if you have fully complied with the new tax requirements) for trusts. Even though many people believe that the new requirements of the South African Revenue Service (SARS) are outrageous, the message from SARS has been clear: ‘You tell us trusts are managed properly in South Africa; then just submit the evidence with your tax returns’.

All of a sudden paperwork for trusts is more important than ever − resolutions, minutes of meetings, up-to-date information on all the role-players in the trust, financial statements, asset register, trustees’ interactions with accountable institutions, etc. And the biggest challenge is to ensure it all ties up! The paperwork trustees are required to produce on a timely basis drowns the average (often layperson) trustee.

The relationship already lies with the accountant, but …

When you speak to the average client, they maintain (rightly or wrongly) that their accountant has everything under control as far as their trust is concerned, be it trust compliance, administration, accounting, or taxation. When you speak to the accountant, however, the standard answer is ‘but we do not provide any trust administration to our clients’.

Some accountants do not know what you refer to when you speak about active trust administration services. Clearly, there is a misunderstanding which the accountant and their client may regret − the client may end up with a fine and/or imprisonment and penalties imposed by SARS and the accountant may suffer reputational damage and may even be pursued by their client for damages.

Some accountants formally or informally provided trust services, but never charged for it, as the industry was of such a nature that South Africans never paid for any trust services and the accountant was just too scared to charge, as the clients’ price sensitivity would (apparently) let them move all their business elsewhere where they would receive the services for free. Similar to any other free services, the state of trust compliance in South Africa is not surprising – only 30% of trusts are registered as taxpayers with SARS (even though it is a legal requirement for a trust to register as a taxpayer), and of those, a fraction submit their tax returns on time (trust tax returns are on average seven years behind).

Apart from the fact that accountants are now forced to manage their risk (reputational and/or commercial), a huge business opportunity presents itself to accountants, as a client (most of the time) have the strongest relationship with their accountant, compared to any of their other professional service providers.

Which services do trustees require?

The starting point for the accountant is to understand which services a (often layperson) board of trustees requires:

Firstly, the accountant can provide ‘statutory’ services such as the registration of new trusts, trust deed amendments, trustee changes, etc. A professional must provide this type of service in line with the latest legislation and legal precedent.
Secondly, the accountant can provide active trust administration services. It can be described as the active handholding of (often layperson) trustees. It includes the following:
- Trust deed execution − In most instances, the trust deed is ignored by the trustees. This is the constitutive charter of the trust, and the accountant can assist the trustees to implement the provisions of the trust deed and meet any specific requirements stipulated in the trust deed.
- Preparation of resolutions before transactions take place − The days of retrospective preparation of resolutions are counted. SARS indicated that they would employ AI to determine the actual date it was created. The accountant should avoid the temptation to assist clients to backdate any trust documents, as they may be caught out.
- Setting up meetings and finalising minutes of meetings − Accountants should also avoid preparing these documents as if a meeting took place in the past when it in fact did not take place
- Ongoing preparation and submission of the required ‘beneficial owner’ registers in a real-time fashion for the Master of the High Court − Trusts are required to submit these reports as and when any required information changes for any ‘beneficial owner’. This is different from companies who only have to submit a ‘beneficial owner’ register once a year to CIPC, with the companies’ annual return. Even though many so-called professionals provide the (standalone) service to submit a once-off ‘beneficial owner’ register and create the impression that this ticks the compliance box, it is the biggest disfavour they can do to the client. Not only is there a requirement to submit real-time ‘beneficial owner’ information to the Master (10 of the 14 required items), but the Regulations require the trustees to maintain a real-time record of all 14 required items per ‘beneficial owner’.
- Preparation and ongoing updating of the accountable institution (as defined in the Financial Intelligence Centre Act) register that trustees have to keep up to date in a real-time fashion. All of a sudden it is expected of trustees to become FIC ‘experts’ as they need to understand FIC concepts such as ‘agent’, ‘services’, ‘single transaction’ and ‘business relationship’ and apply that to keep an accurate up-to-date register.
- Preparation and maintenance of confirmations to accountable institutions of the trustees dealing with them in their capacities as trustees − The discipline to meet this requirement is key. Many are still of the view that only banks are accountable institutions. The list of accountable institutions has been expanded substantially and includes the estate agent that the ‘controlling’ trustee often approaches alone without the knowledge of the other trustees, attorneys, anybody dealing in high-value goods (a business that sold / has stock items of R100 000 or more − this includes motor vehicle dealers, jewellers, etc). Two of the three new measures that attract fines of up to R10 million or five years’ imprisonment deal with trustees’ interactions with accountable institutions; ‘beneficial owner’ registers are but one of the three.
- Preparation and maintenance of trust transaction documents (including invoices, contracts, etc).
- Dealing with ongoing Master requirements.
- Creating and updating an asset register for the trust as required by the Trust Property Control Act.

The accountant basically assists the board of trustees in demonstrating the active participation of all trustees in the trust, in conformity with the trust deed and the law.

Thirdly, some accountants act as independent trustees on their clients’ trusts. Since March 2017, every new ‘family business trust’ requires the appointment of an independent trustee. The accountant should be mindful that they may be exposed to increased risk after increased measures are introduced.
Fourthly, trustees require the services of a properly experienced tax practitioner to guide the trustees regarding taxes payable on income and capital gains generated in the trust. This is a complicated field as a trust is a taxpayer of last resort, with donors/funders and beneficiaries who may be liable for tax rather than the trust. The tax practitioner who does not provide trust administration services as described above would probably have to charge their clients more to merely submit a trust tax return, as they would have to do the run-around to obtain the required information to submit to SARS. Accountants acting as ‘Representative taxpayers’ should be mindful that they submit accurate, complete information and that they can truthfully sign the following declaration on the trust tax return:
- The information furnished in this return is to the best of my knowledge both true and correct.
- I have disclosed the gross amounts of all income received and/or accrued to this trust during the period covered by this return.
- I have the necessary financial records and supporting schedules to support all declarations on this return which I will retain for audit purposes.

An opportunity for the accountant

Whichever of these services the accountant decides to provide, it is critical to communicate to the client which services would be provided. If the accountant does not provide one or more of the services explained above, the client would most probably have to go elsewhere to get the services. This may be an opportunity missed by the accountant.

The accountant already has the relationship and can easily unlock additional income streams through the provision of trust services, as long as it is done in a risk-controlled fashion. With all the new trust measures introduced, South Africans have gotten used to paying for trust services, otherwise, they may get what they pay for – penalties and fines!

Author
Phia van der Spuy is a chartered accountant with a master’s degree in tax and is a registered fiduciary practitioner of South Africa, a chartered tax adviser, a trust and estate practitioner (TEP) and the founder of Trusteeze, provider of a digital trust solution.

]]> Manage your Practice: How do you value small practices? https://www.accountancysa.org.za/manage-your-practice-how-do-you-value-small-practices/ Mon, 06 Nov 2023 12:32:57 +0000 https://www.accountancysa.org.za/?p=26864

Understanding of various factors. Whether you’re a buyer or a seller, knowing how to accurately assess the value of a practice is crucial for a successful transaction. Let’s delve into the methods and metrics that should be considered to ensure an accurate and unbiased valuation.

Understanding the valuation methods used for small accounting practices

There are several valuation methods commonly used in the industry, such as the discounted cash flow (DCF), market approach, and asset-based approach. Each has merits and drawbacks, often depending on the practice’s specific circumstances. For years, the industry used a simple one rand of turnover equals one rand for price, known as the traditional approach. While still relevant, it’s important to note that the landscape has changed due to technological advancements and shifts in productivity. The traditional valuation methodology has evolved. The most potent method today is the comparative market assessment (CMA). It compares the firm with similar ones, using empirical data and current market conditions to provide an accurate value.

Evaluating financial performance metrics and profitability indicators

Financial performance is a key indicator of a practice’s value. Metrics like revenue, EBITDA, seller’s discretionary earnings (SDE), and net profit margins should be scrutinised. Additionally, profitability indicators such as client revenue concentration and service line profitability can provide deeper insights into the financial health of the practice. You should analyse all the above and in a CMA you get a holistic view of the performance of a practice to underpin the valuation for it.

Assessing the value of client relationships and client retention rates

A practice’s client base is one of its most valuable assets. Assess the quality of client relationships by looking at retention rates, lifetime value, and the diversity of the client base. A high client retention rate often signals strong client relationships, which can add significant value to the practice. A spread across industries and geographical areas spreads the risk. Assessing the clients and determining the risk of them closing down tells you a lot about the practice.

Assessing cash flow, staff productivity, and debtors

Cash flow is the lifeblood of any business. Staff productivity metrics such as billable hours and revenue per employee can also provide valuable insights. Additionally, consider the practice’s debtor situation: a high amount of outstanding receivables could be a red flag. Higher than normal bad debt is another red flag. A firm with low indicators in areas like productivity, low billing and slow payers surely cannot be valued traditionally if compared to someone with great staff productivity, high margins, efficient technology and great payers.

Analysing market comparables and benchmarking against industry standards

Comparing the practice against similar businesses in the market can provide a realistic valuation range. Utilise industry benchmarks for metrics like revenue per client or profit margins to see how the practice stacks up against its peers. Fees charged for services and software used establish not only billing behaviours and competitiveness but also the technological position of the firm. Using empirical data from other firms you get a yardstick position about the firm’s performance.

Considering the impact of industry and market conditions on practice valuation

External factors like economic conditions, regulatory changes, and industry trends can significantly impact a practice’s value. Being aware of these factors and how they affect your specific practice is crucial for an accurate valuation. Deal structures offered by the industry change over time to ensure risk mitigation with specific deposits and warranties and address affordability with specific terms. The valuation should consider all this and also assign a What-If analysis to that.

Considering the Impact of a turnover warranty on the practice valuation

The industry standard is that a turnover warranty will be provided on the revenue. When a seller refuses to offer this, he wipes 70% of the value off the table and will ultimately pay the price for his unwillingness. The reality is that a warranty is essential, coupled with seller finance, to ensure the correct value is unlocked for the seller. This ensures a fair deal, and this significantly impacts the valuation.

Considering the impact of seller financing on practice valuation

Financial institutions focus on asset-based financing like car loans. However, getting a loan to buy clients is challenging: you can’t repossess a client. Seller financing changes the game, making a practice more appealing to buyers and affecting its valuation. If the seller finances part of the sale, it significantly boosts the practice’s value by lowering the entry barrier for potential buyers.

Seeking professional assistance to ensure an accurate and unbiased valuation

Given the complexities involved in valuing a small accounting practice, seeking professional advice, especially from someone with relevant industry data for a CMA like a specialist business broker, is highly recommended. Their expertise can provide an additional layer of accuracy in the valuation process.

Conclusion

Valuing a small accounting practice is a complex but crucial step in the buying or selling process. By understanding and carefully considering the various factors outlined above, you can arrive at a more accurate and fair valuation. Whether you’re a buyer or a seller, being well-informed is key to a successful transaction.

Feel free to reach out for further guidance or clarification on any of these aspects.

Author
Louis Bruwer is an experienced and specialist business broker with a demonstrated history of business sales. www.bizxchange.co.za

]]> Manage your Practice: Work–life balance equals self-care https://www.accountancysa.org.za/manage-your-practice-work-life-balance-equals-self-care/ Mon, 06 Nov 2023 12:29:10 +0000 https://www.accountancysa.org.za/?p=26861

We often hear about the importance of finding work–life balance. Why is this important? Perhaps because finding work–life balance is a form of self-care.

We are all familiar with the concept of self-care and modern-day society often highlights the benefits. There are many positive outcomes in implementing self-care. Stress levels are reduced, less anxiety, a positive attitude is fostered, healthier relationships, and an increase in energy levels and focus. For myself as a working mother of two primary school-aged children finding this work–life balance at times seems elusive and unattainable. It is only when you realise that you need to be conscious and intentional about self-care and finding work–life balance that it becomes achievable and translates into a lifestyle.

The bottom line is that self-care is unique to each person and that you need to find the self-care practices that provide you with that feeling of ‘I’ve got this’ and my ‘energy tank is again stabilised’. Often it is a process of trial and error in finding what works for you.

Boundaries

In creating a balance between your personal life and your work life, boundaries are important. A principle that is often helpful and can be implemented in various contexts is ‘If I say yes to this what am I saying no to’ or ‘If I say no to this what am I saying yes to’. Boundaries also extend to working hours and having firm and clear communication around availability, expectations and deadlines. In finding that work–life balance, healthy boundaries are probably the most important form of self-care that you can implement.

Exercise

Exercise is often mentioned as a form of self-care; however, it is hard to find time to exercise between work and family responsibilities. I often advocate finding a form of exercise that you enjoy and even if you can just set a goal of at least twice a week it will have a positive impact. It is helpful to build it into your schedule and routine. You can even combine it with your children as a family activity.

Mindfulness

A lot has been written about mindfulness in popular media and various practices have been associated with mindfulness. Being mindful essentially means being focused on the present moment and just experiencing the moment without evaluation or judgment. Creating moments during your day where you can just be present in the moment and not ‘busy’ with something can assist with stress levels and focus. Again, as with exercise, it might be helpful to build it into your routine and allocate even just 5 or 10 minutes to it before your work day starts, during your lunch break or before an important meeting.

Gratitude

Positive psychology is a school of thought where the focus is on mental well-being and lifestyle practices that can assist with flourishing. One such practice is reflecting on three specific aspects that you are grateful for in your life before you go to sleep each night. Some people also institute the use of a gratitude journal. Research has indicated that in the long term, this very simple but effective practice can have a very positive impact on your stress levels and assist with a positive life focus.

Nature

Spending time in nature is extremely powerful even if it is only a few minutes before and after work in your garden. Green areas and spending some very brief time in the sun daily have a calming effect on your senses and generally assist with feeling less stressed and more focused when you return to your work.

Transition time

Having a ‘transition’ time when you arrive home from work is quite important. In other words, having some practice or habit that constitutes ‘now I am done with my work day’. This is even more important when you are working from home. This in turn again speaks to boundaries and being able to switch off from work and intentionally be present with your family or home environment. As we all know at times we are required to put in extra hours after work. It is important to then communicate this to your home environment and be conscious of this being the exception and not the norm.

The above-mentioned concepts can and ideally should be built into an everyday routine. Overall probably the most important aspect to self-care when you work in a demanding environment is periods of rest and taking a break from work. It is very important to plan periods during a year cycle where you take leave from work to rest, unwind, refocus and gain perspective. How you spend your periods of leave is also a process of trial and error. Ideally, some thought and reflection should be put into how you want to spend your break from work. At times you might need a period of just doing nothing at home and resting. Other times an adventure or visiting a new place might be what is required to reset. Periods of reset can also be built in over weekends.

Self-care and finding that work–life balance is an ongoing process and should be pursued intentionally. Making it a priority is in the end the method that works the best.

Author
Dr Wilmien Human, Clinical Psychologist

]]> Manage your Practice: Imposter syndrome – Can I overcome it? https://www.accountancysa.org.za/manage-your-practice-imposter-syndrome-can-i-overcome-it/ Mon, 06 Nov 2023 12:22:40 +0000 https://www.accountancysa.org.za/?p=26858

Does it ever feel like your family, friends, teams or colleagues are going to discover you are a fraud and that you do not deserve your role and accomplishments?

Don’t feel alone! According to an article published in the International Journal of Behavioral Science, about 70% of people experience impostor feelings at some point in their lives. And many professionals and entrepreneurs suffer from impostor syndrome.

Impostor syndrome is the direct result of underlying beliefs like I am not good enough; emotions like fear, anxiety or doubt; negative self-talk; constantly comparing yourself to others, or constantly dwelling on your mistakes of the past.

The big question is: How can you overcome impostor syndrome?

Become aware of your feelings and thoughts

According to research, the average person has approximately 60 000 − 70 000 thoughts per day. And 75% of these thoughts are negative!

We are so often caught up in all kinds of actions that we do not pause to observe our feelings and thoughts. Make a habit of pausing every few hours to identify what you have kept your mind busy with and how it makes you feel.

Positive self-talk

As you become more and more aware of the conversation going on in your head when you are in a situation that triggers your impostor feelings, you can consciously change the internal messaging by telling yourself things like: Everyone who starts something new feels a bit uncertain in the beginning. I may not know all the answers but I am smart enough to find them. Everyone here is brilliant and I am going to learn a lot from all of them.

And say these positive messages out loud! You will be surprised how good it feels.

Share your feelings

Perhaps share your feelings with a close friend or colleague. If 70% of people experience impostor feelings at some point in their lives, it means that more than two out of three people around you have similar feelings. Just saying it out loud will already make you feel better.

Comparison

It is a good idea to compare your expectations of yourself with someone you trust. This will assist you in making sure that your personal expectations are realistic and achievable.

Recognise that you have just as much right as the next person to be wrong or have an off day.

Ask when you need help

Many of us feel that asking for help is a sign of being less perfect. It is important to ask for help when needed. It is not a sign of weakness, but rather a sign of maturity. When you have your own practice, it often feels like you should know all the answers. You don’t! Your teams would appreciate it to know that you are only human and sometimes need to find the answer.

Make sure that you build a network that you can lean on.

Visualise the successful you

Visualise success. See yourself being calm and collected and on top of your game. Before an important meeting, task, etc. you can visualise how it will play out in a positive way. The more you do this, the better you will become.

You can even spend a few seconds each morning and evening to visualise this successful you and before you know it you will become successful in your mind and in reality. Whatever your mind can conceive, you can achieve!

In conclusion

Imposter syndrome is real however, it does not have to impact your success.

No one can make you feel inferior without your consent − Eleanor Roosevelt

Author
Zuleka Jasper CA(SA), Leadership & Certified Master Life Transformation Coach, Hypnotherapist
(www.ZulekaCoaching.co.za)

]]> Manage your Practice: The Implementation of the Quality Management Standards: Recap https://www.accountancysa.org.za/manage-your-practice-the-implementation-of-the-quality-management-standards-recap/ Wed, 01 Mar 2023 04:00:25 +0000 https://www.accountancysa.org.za/?p=25625

ISQM 11, ISQM2 2 and ISA 220 (Revised)3 come into effect on 15 December 2022. These standards are expected to have a significant impact on all firms that perform engagements in accordance with the IAASB standards.

The South African Institute of Chartered Accountants (SAICA), in collaboration with the Pan African Federation of Accountants (PAFA) and the Independent Regulatory Board for Auditors (IRBA), has introduced a series of monthly virtual workshops where different aspects of the international quality management standards are addressed and participants have an opportunity to clarify their understanding of the implementation of the standards.

The ninth workshop took place on 7 December 2022 and provided a recap of the content covered during the previous eight workshops. During the ninth workshop, panel members answered the following two important questions per component/standard:

View table here.

NOTES
1 International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements.
2 International Standard on Quality Management (ISQM) 2, Engagement Quality Reviews.
3 International Standard on Auditing (ISA) 220 (Revised), Quality Management for an Audit of Financial Statements.

AUTHORS
Mari Baragwanath CA(SA), Head of Quality Control at SNG Grant Thornton; Henk Heymans CA(SA), Director at RSM SA Inc; Christel Pretorius CA(SA), Partner at BDO; Tarina Els CA(SA), Technical and Training Director at LEAF; Yvonne Rossouw CA(SA), public speaker and consultant at ProBeta; Juané Schreuder CA(SA) independent consultant ; Michelle Vermeulen CA(SA), Project Manager: Assurance at SAICA

]]> Manage your Practice: Lay-by agreements and tax https://www.accountancysa.org.za/manage-your-practice-lay-by-agreements-and-tax/ Wed, 01 Mar 2023 04:00:03 +0000 https://www.accountancysa.org.za/?p=25623

National Treasury expects that more consumers will choose to enter into lay-by arrangements to acquire household goods. A recent amendment to the Income Tax Act will address the adverse tax consequences of lay-by agreements for the supplier of the goods.

South African consumers have long been using lay-by agreements as a means of purchasing household goods, school uniforms and stationery for their dependants. According to National Treasury, ‘it has come to Government’s attention that, following the effects of the COVID-19 pandemic on household incomes and the current economic climate, most consumers are purchasing school uniforms and stationery by way of lay-by arrangements.’1 According to National Treasury, the provisions of section 24 of the Income Tax Act did not extend to cover the scenario of a lay-by agreement. According to National Treasury, this issue ‘is expected to increase as more consumers are choosing to enter into lay-by arrangements due to financial constraints’.

A seller under a lay-by arrangement is required to recognise an upfront inclusion (in gross income) of the full sale price. However, because lay-by arrangements generally last for periods much shorter than 12 months, the seller will not benefit from the debtors’ allowance contained in section 24(2) of the Act. This upfront inclusion of lay-by proceeds without any allowable deduction obviously creates an adverse tax result, and an amendment to section 24 was proposed and made in the Taxation Laws Amendment Act 2022.

In terms of this amendment, section 24 will now allow the supplier to make a deduction, and this will apply in respect of years of assessment commencing on or after 1 January 2023.

WHAT IS A LAY-BY OR A LAY-BY AGREEMENT?
A lay-by
National Treasury, in the Explanatory Memorandum to the relevant Taxation Laws Amendment Bill, explains it as follows:

‘Lay-by arrangements are sale arrangements that enable the consumer to purchase goods and pay for such goods over a period of time, generally between three to six months, without incurring interest. Lay-by arrangements are a form of a saving as they enable the larger population to purchase goods outside instalment sale credit arrangements, thereby reducing the level of indebtedness.’

Judge Cameron in a case before the Constitutional Court,2 in footnote 25, said the following:

‘Lay-by agreements, where a supplier agrees to sell goods, and accepts payment in instalments, while holding the goods until the consumer has paid the full price, are now covered by section 62 of the Consumer Protection Act.’

Section 62(1) of the Consumer Protection Act reads as follows:

‘If a supplier agrees to sell particular goods to a consumer, to accept payment for those goods in periodic instalments, and to hold those goods until the consumer has paid the full price for the goods −
(a) each amount paid by the consumer to the supplier remains the property of the consumer, and is subject to section 65, until the goods have been delivered to the consumer; and
(b) the particular goods remain at the risk of the supplier until the goods have been delivered to the consumer.’

It follows from the above that the supplier does not receive the amount for the supplier’s (or taxpayer’s) own benefit and consequently does not have to include it in its gross income. In this respect, it is irrelevant that business owner keeps the goods separate for the duration of the lay-by agreement as it remains the property of the supplier until the goods are delivered to the customer (after receipt of full payment).

If the lay-by agreement contains a suspensive condition, there will also be no accrual and consequently no inclusion in the gross income of the supplier of the amount of the ‘sale’. In practice, a lay-by agreement may well not have a suspensive condition and may only contain a resolutive condition. Jacobs, Stoop and Van Niekerk3 explain the position of cancelling the agreement as follows:

‘Should the consumer cancel the lay-by agreement before full payment of the purchase price, or default by not paying the full purchase price within sixty business days after the anticipated date of completion:

the supplier may charge a termination penalty, provided that the supplier informed the consumer of the fact and the extent of the penalty before the consumer entered into the lay-by agreement;4
the supplier may deduct the cancellation penalty from the monies already paid by the consumer and must then refund the consumer the remainder of the money.

The supplier must allow the consumer who defaults by not paying the full purchase price sixty days after the anticipated date of completion before he, she or it imposes a cancellation fee.´

However, whether the lay-by agreement contains a suspensive (or resolutive) condition is immaterial for purposes of income tax. Judge Wallis5 said the following:

‘… in the light of my conclusion that the previous judgment of this Court in Silverglen Investments on the effect of s 24(1) is binding authority on the point, it is unnecessary to canvas the potentially complicated question of whether there was an accrual in accordance with ordinary principles.’

What then are the income tax consequences of a lay-by agreement for the supplier?

THE INCOME TAX CONSEQUENCES OF A LAY-BY AGREEMENT
This is, and actually was always (as explained by National Treasury), governed by section 24(1) of the Income Tax Act. Whilst section 24(1) includes an agreement relating to the transfer of immovable property, for purposes of this article, we accept that the goods that are the subject of a lay-by agreement are ‘movable property’ and that the agreement does not include interest. Section 24(1) then provides as follows:

‘If a taxpayer, the supplier, has entered into any agreement with any other person, the consumer,

in respect of any movable property
the effect of which is that the ownership shall pass upon or after the receipt by the taxpayer of the whole or a certain portion of the amount payable to the taxpayer under the agreement,

then the whole of that amount shall for the purposes of the Income Tax Act be deemed to have accrued to the taxpayer on the day on which the agreement was entered into.’

Because of section 24(1), it is not necessary to consider whether there was an accrual to the taxpayer under the lay-by agreement. As Judge Wallis said, because ‘the agreements … provided for Milnerton Estates to pass ownership to the purchasers upon or after receipt of the whole of the purchase price … the purchase price was … deemed to be received in its entirety in the 2013 tax year, not the 2014 year, when payment was in fact made‘.

Applied to a lay-by agreement, section 24(1) results in this fiction that the full amount payable by the purchaser is treated as having accrued to the supplier (not received as stated by the judge above), on the day the supplier entered into the agreement. Where this date and the date of receipt of the final payment fall within the same year of assessment that, is the end of the matter (from an income tax point of view). There is no adverse tax consequences due to the earlier inclusion.

The position however is different when the agreement was only finalised in a year of assessment subsequent to the year of assessment during which the supplier and customer entered into the agreement.

WHAT DEDUCTIONS ARE THEN AVAILABLE TO THE SUPPLIER (TAXPAYER)?
Deductions for purposes of determining taxable income
The new section 24(2A), the amendment to the Act, provides for a deduction of a portion of the amount deemed to have accrued and reads as follows:

‘In the case of a lay-by agreement as contemplated in section 62 of the Consumer Protection Act,6 2008 …, the Commissioner may make an allowance in respect of all amounts which are deemed to have accrued under such agreement but which have not been received by the end of the taxpayer’s year of assessment.’

Simply put, if the consumer purchased goods to the value of R600 from the supplier, and by the end of the supplier’s year of assessment has only made two of the required six payments, the supplier will be entitled to make a deduction of R400 under section 24(2A).

As can be expected, any allowance deducted under section 24(2A) shall be included in the income of that taxpayer in the immediately following year of assessment – see section 24(2B).

As the supplier agreed to hold the goods, and because the goods remain at the risk of the supplier until the supplier delivered the goods to the purchaser, the goods remain trading stock and consequently must be included in the taxpayer’s income (under section 22(1) of the Act). The taxpayer can make a deduction of the cost of the trading stock in the year of assessment that delivery takes place (under section 22(2)).

This means that the cost of the trading stock is future expenditure − see the definition in section 24C(1) of the Act. Section 24(1), deems the full amount (the R600 in the example) to have accrued to the taxpayer for purposes of this Act. It follows then that, for purposes of section 24C, the income of the taxpayer includes an amount that accrued in terms of any contract, the lay-by agreement. The question is whether that amount in part will be used by the supplier to finance future expenditure, which expenditure will be incurred by the taxpayer in the performance of the taxpayer’s obligations under that contract.

However, herein lies the problem: it must finance expenditure which will be incurred by the taxpayer after the end of the year of assessment during which the agreement was entered into. That may well not apply to a lay-by agreement. SARS practice generally prevailing7 is clear about this:

‘A similar issue arises with trading stock when a taxpayer has incurred expenditure in acquiring items of trading stock. Once the expenditure has been incurred it does not constitute future expenditure even if the trading stock is included in the taxpayer’s closing stock.’

It follows that no deduction of the cost of the trading stock is available to the supplier who is a party to a lay-by agreement if the trading stock was on hand or acquired by the taxpayer during the year of assessment the taxpayer entered into the agreement.

This is no different for other taxpayers in agreements other than a lay-by agreement. The section 24 allowance in those instances is determined by using the gross profit percentage, determined according to a method selected by the taxpayer.8

It follows that the amendment to section 24 does not address all the adverse tax consequences of the deemed earlier accrual of an amount to a taxpayer under a lay-by agreement. The other adverse tax consequences were always inherent in section 24, as ‘the object of which in essence is to subject the profit under the instalment credit agreement to tax on a cash-flow basis’.

The author submits if the intention was to address all the adverse tax consequences of section 24 in respect of lay-by agreements, the amendment should have removed lay-by agreements from the ambit of section 24 completely. One must remember the intention of the legislator when the allowance was restricted ‘to amounts owing in respect of agreements having a minimum term of 12 months’. It was because it ‘has been found that many short-term credit transactions are being entered into in such a way that the seller is being enabled to postpone his tax liability to an unnecessary extent’.

Where consumers are choosing to enter into lay-by arrangements due to financial constraints, one would not expect that the intention of the supplier is to postpone its tax liability.

CONCLUSION
It is not disputed that section 24 of the Income Tax Act applies to lay-by agreements and that the supplier (taxpayer), before the amendment of the section, was not entitled to make a deduction where the term of these agreements were for a period of less than 12 months. Following the amendment made to section 24 of the Act, the allowance is now available, but it does not address all the adverse tax consequences of the earlier inclusion of the full amount of that transaction in the gross income of the taxpayer.

NOTES
1 See the Explanatory Memorandum on the Taxation Laws Amendment Bill 2022, 16 January 2023.
2 Sebola and Another v Standard Bank of South Africa and Another (Socio-Economic Rights Institute of South Africa, National Credit Regulator and Banking Association South Africa as Amici Curiae).
3 Fundamental Consumer Rights Under the Consumer Protection Act 68 of 2008: A Critical Overview and Analysis [2010] per 24.
4 The penalty may not be charged should the consumer’s failure have been due to death or hospitalisation of the consumer. The Minister may prescribe a formula for calculating the maximum amount of the penalty.
5 In Milnerton Estates Ltd v CSARS (1159/2017) [2018] ZASCA 155, 20 November 2018.
6 Act 68 of 2008.
7 Interpretation Note 78: Allowance for Future Expenditure on Contracts.
8 See the practice generally prevailing: Interpretation Note 48 (Issue 3): Instalment credit agreements and debtors’ allowance.

AUTHOR
PJ Nel CA (SA), Project Director: Tax at SAICA

]]> Manage your Practice: International Standard on Auditing 600 (Revised) https://www.accountancysa.org.za/manage-your-practice-international-standard-on-auditing-600-revised/ Mon, 06 Feb 2023 06:19:52 +0000 https://www.accountancysa.org.za/?p=25562

Special Considerations − Audits of Group Financial Statements (Including the Work of Component Auditors)
The International Standard on Auditing 600 (Revised) (ISA 600 (Revised)) is a special considerations standard that applies to a group audit, including when component auditors are involved.

The International Auditing and Assurance Standards Board (IAASB) wanted to ensure that ISA 600 (Revised) better aligns with recently revised standards such as International Standard on Quality Management 1 (ISQM 1), International Standard on Auditing 220 (Revised), Quality Management for an Audit of Financial Statements (ISA 220 (Revised)), and International Standard on Auditing 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement (ISA 315 (Revised 2019)).

The requirements of this standard also strengthen the auditor’s responsibilities related to professional scepticism; the planning and performing of a group audit; two-way communications between the group auditor and component auditors; and documentation.

OBJECTIVES
ISA 600 (Revised) is a supplementary standard to the other ISAs; it contains special consideration requirements which need to be kept in mind when planning and performing an audit of group financial statements.

The IAASB’s objectives in revising the standard include (among others) the following:

Strengthening the auditor’s approach to the planning and performance of a group audit by closer aligning the standard to the principles in ISA 315 (Revised 2019)
Enhancing the documentation requirements by clarifying what the group auditor may need to document in different situations
Reinforcing the need for robust communication and interactions during the audit
Clarifying how to address restrictions on access to people and information in a group audit, including restrictions on access to component management, those charged with governance of the component, component auditors, or information at the components
Clarifying how the concepts of materiality and aggregation risk apply in a group audit
Encouraging proactive quality at engagement level and the involvement of the group engagement team (GET) in the work of component auditors

EFFECTIVE DATE
The revised standard will be effective for audits of group financial statements for periods beginning on or after 15 December 2023.

MAIN CHANGES
One of the key foundational principles of the standard, which is closely aligned with the principles in ISA 315 (Revised 2019), is the risk-based approach. Under this approach, the GET takes responsibility for the identification and assessment of the risks of material misstatement.

The risk-based approach better focuses the GET on determining the significant classes of transactions, account balances and disclosures in the group financial statements, and on identifying and assessing the related risks of material misstatement of the group financial statements, compared to a focus on significant components in extant ISA 600.

The emphasis of the risk assessment process is on the group financial statements. There is a greater focus on planning the most appropriate approach to obtain audit evidence which will be used to support the group financial statements. The GET is required to take responsibility for identifying and assessing the risks of material misstatement for the group financial statements.

OTHER KEY CHANGES

The entry point to the standard is clarified with an updated definition of group financial statements that defines the process of consolidation and a component. The definition of a component is an entity, business unit, function or business activity, or some combination thereof, determined by the group auditor for purposes of planning and performing audit procedures in a group audit.
Included as part of definitions are aggregated risk (the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole), component performance materiality, and component auditor (an auditor who performs audit work related to a component for purposes of the group audit). A component auditor is part of the engagement team for a group audit.
Special requirements drawn from ISA 220 (Revised) provide clarity on what it means to be involved in the work of other auditors, which entails taking responsibility for the direction, supervision and review of the work of the auditor. In a group audit context, ISA 600 (Revised) includes special considerations for the involvement of the GET in the work of component auditors.
In applying ISA 220 (Revised), the group engagement partner is required to take overall responsibility for managing and achieving quality in the group audit engagement. In doing so, the group engagement partner shall:
o Take responsibility for creating an environment for the group audit engagement that emphasises the expected behaviour of engagement team members and be sufficiently and appropriately involved throughout the group audit engagement, including in the work of component auditors, such that the group engagement partner has the basis for determining whether the significant judgements made, and the conclusions reached, are appropriate given the nature and circumstances of the group audit engagement.
The foundation of the risk-based approach in the audit of group financial statements is based on obtaining an understanding of the group and its environment, the financial reporting framework and the internal control environment of the group.
It is important for the GET to exercise professional judgement and professional scepticism, which includes the stand-back requirement to ensure that sufficient and appropriate audit evidence has been obtained.
With regard to acceptance and continuance, the GET must perform a preliminary assessment to ensure that the GET will be able to obtain sufficient and appropriate audit evidence and management acknowledge that they will provide unrestricted access to information and relevant persons.
Included under risk assessment, are additional requirements relating to going concerns and related parties.

Take note: ISA 600 (Revised) includes special considerations that auditors must take into account when auditing group financial statements; however, when the auditors need guidance for example on documentation or fraud, International Standard on Auditing 230, Audit Documentation, and International Standard on Auditing 240, The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements, will apply respectively.

The overarching principle of ISA 600 (Revised) is the responsibility of the GET in assessing risk of the group financial statements and then designing appropriate procedures to respond to the risk.

CONCLUSION
The changes to ISA 600 (Revised) are aimed at ensuring proactive management of quality at engagement level and ensuring that the GET takes responsibility for the direction, supervision and review of component auditors.

Author
Angel Sithole CA(SA), SAICA Project Director: Assurance

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ISQM 11, ISQM2 2 and ISA 220 (Revised)3 come into effect on 15 December 2022. These standards are expected to have a significant impact on all firms that perform engagements in accordance with the IAASB standards.

National Treasury expects that more consumers will choose to enter into lay-by arrangements to acquire household goods. A recent amendment to the Income Tax Act will address the adverse tax consequences of lay-by agreements for the supplier of the goods.

Special Considerations − Audits of Group Financial Statements (Including the Work of Component Auditors) The International Standard on Auditing 600 (Revised) (ISA 600 (Revised)) is a special considerations standard that applies to a group audit, including when component auditors are involved.

Special Considerations − Audits of Group Financial Statements (Including the Work of Component Auditors)
The International Standard on Auditing 600 (Revised) (ISA 600 (Revised)) is a special considerations standard that applies to a group audit, including when component auditors are involved.