2017 was a year of major changes in South Africa with allegations of state capture and cabinet reshuffles, our downgrade to junk status by three credit rating agencies and ending the year with our president no longer being the head of the leading political party. It all made for lots of uncertainty and plenty of movement in the rand, the economy and the level of trust in the country
When we consider the turmoil our country has been through and the extreme levels of mistrust, the King IV Code of Corporate Governance could not have come at a better time. A different way of looking at, and reporting, good corporate governance at a time when it feels as if corruption is everywhere, King IV became effective 1 April 2017 and is applicable to entities listed on the JSE from 1 October 2017 on an ‘apply and explain basis’, with the focus on the four outcomes identified by the code:
- Ethical culture
- Good performance
- Effective control, and
Directors are no longer able to use the tickbox approach in checking their application of the code corporate governance and they cannot simply leave it to the last minute. It must be a constant consideration to be attended to and reported on by the board as a whole. I look forward to reading the reports that companies will now be issuing.
New standards applicable
The meme that was doing the rounds for New Year this year was. ’Everyone else: Happy New Year, Accountants: IFRS 15 and 9 have just become effective!’
This is a big year for accountants worldwide, as these are two very big standards applicable for years beginning 1 January 2018. They will impact every company in one way or another, and yet many companies are still not prepared! If your company applies International Financial Reporting Standards (IFRS), then a thorough assessment must be done as to how the new revenue and financial instruments standards will impact you. This information is critical to ensure you understand the impacts not only to the coming years, but also of the various transition options available.
For revenue, if you have contracts that span more than a year and you currently use the milestone method to account for it, you’re going to have huge recognition changes. The requirements for identifying whether the entity is an agent or principal have changed too. For debtors accounting the impairment recognition has changed dramatically. We therefore expect some interesting adjustments in the 2018 reports. That is before we even start looking at the disclosure requirements.
IFRS 16 becomes effective from 1 January 2019. While we expected many to adopt this together with IFRS 15 and IFRS 9 so they would only have one year of major changes, most entities have not elected to do so, opting instead to adopt it from its effective date. The New Leases Standard is expected to impact almost all entities that lease assets from others. It requires all leases that are not insignificant, extending more than one year, to now be recognised as a lease asset in the form of a ’Right of Use asset’ in the Statement of Financial Position, together with a lease liability. The measurement of each is quite different from the current leases standard. An entity will need to assess every one of their leases, which is likely to be a huge assessment, so make sure you have the right tools for the job.
The new Insurance Standard that has been in the making for 13 years was finally issued in May 2017. The standard is effective for entities with financial years beginning on or after 1 January 2021. There are many changes that insurance entities will need to undergo to be able to apply this, but the standard was written with plenty of consultation and outreaches. The insurance companies have been very involved from the very start, so we are not expecting too many amendments or interpretations at this time … although … who knows?
Johannesburg Stock Exchange
The JSE’s proactive monitoring is still going strong. To summarise the 2017 report, it is a case of ’Too much, too little or not enough’.
Too much: Companies are not assessing the relevance of disclosures and particularly still including way too much irrelevant or not applicable information in their accounting policies in particular.
Too little: The effect of statements and interpretations issued and not yet effective is not adequately detailed in their annual financial statements.
Not enough: Not enough attention and focus is given to the important entity specific items. The JSE has been very focused on entities detailing the expected impact of the new standards and for those who will only be applying IFRS 15 and IFRS 9 to their annual financial statements in 2019. You can be sure to be questioned through the proactive monitoring process if you do not present enough detail in this year’s financial statements.
Audit committees are now required to work through the annual proactive monitoring reports issued by the JSE and take appropriate action where necessary to ensure application. The JSE is likely to be challenging audit committees a lot more.
On that note, the Listing Requirements have been amended again, with a lot more focus on the role of audit committees and their responsibilities, right down to responsibilities in electing the external auditors. The JSE Listings Requirements also now focus more on holding entities responsible for transformation requiring formal responding regarding gender and race diversity at board level. The JSE issues its report in February each year of their proactive monitoring findings for the previous year, which includes focus areas for the next year. Please take time to read through this and understand what could come your way.
The Financial Reporting Standards Council
The Financial Reporting Standards Council has been very busy trying to ease the burden on South African groups in preparing their annual financial statements by issuing the Reduced Disclosure Framework. This framework allows for reduced disclosure within a group situation where the additional IFRS disclosures do not add value as the information is already produced at a group level. There seems to be a lot of support for this framework, but the Financial Reporting Standards Committee is yet to publish anything effective, as it all has to go through Parliament, and we all know how busy they have been. While South Africa is still applying the Financial Reporting Guides as issued by SAICA’s Accounting Practices Committee. The Financial Reporting Standards Council is our official standard setter … maybe this year we will see some movement in the sphere.
As usual there is a lot to watch. May 2018 be a much better year for all!
AUTHOR l Justine Combrink CA(SA) is Partner and Head of Financial Reporting at Mazars