We are all only too aware of the dire state of South Africa’s state-owned power provider – Eskom. We now live in a state of permanent load-shedding, only the stages of load-shedding alternate depending on the time of day, energy consumption and how much or how little power is available on the grid at any one time.
Eskom has long stated that load-shedding is only implemented as a last resort to protect the national grid. This last resort seems to have been implemented for a very long time, with no sign or even speculation of it ending in the near future. So, for just how long can this ‘last resort’ continue to be implemented?
Eskom does not have significant assets on its statement of financial position other than its property, plant and equipment (PPE). The note to its financial statements splits that between its various plants: generating, transmission and distribution, and work in progress. These are by far the largest assets on its balance sheet.
IAS 16 − Property, Plant and Equipment does not require an entity to perform an annual impairment test on its PPE. It would be far too costly to do so, and most likely the costs incurred would far outweigh the benefits thereof. However, the standard does require impairment testing to be carried out if indicators of impairment exist. The standards go on to explain that indicators could be direct as well as indirect. Perhaps the easiest way to explain the difference is as follows. A direct indicator could be physical damage. For example, when a delivery vehicle was involved in an accident and can no longer drive, hence deliver, that is a direct (physical) impairment. Other examples are other forms of damage that limit the amount of production or use the asset could produce, or even theft: in other words, the asset no longer exists.
The standard also explains indirect indicators, which means that there may not be anything directly wrong with the item of PPE itself, but rather that changes in market conditions lead to the PPE being impaired. In the case of Eskom’s power plants, its PPE, that poses several challenges that ought to be interrogated.
At times, up to 30% of its grid is offline due to breakages and faults. That, coupled with units that are offline for maintenance, suggests that potentially 40% of its PPE have direct indicators of impairment. Applying the IFRS analysis, this suggests that a material percentage of Eskom’s PPE seem unable to fully deliver the future economic benefits associated with it – in this case electricity to its customers. Bear in mind, too, that Eskom essentially only produces one product, and the situation from a reporting position, amongst others, appears worse.
With the more obvious impairment indicators explained above, let us consider the market indicators. Eskom is suffering from a material percentage of non-paying customers, whether through frustration, in protest, or simply unaffordability. This questions the consistency and reliability of its future economic benefits.
Many South Africans, largely through having no other option, are choosing to move either partially or fully off the Eskom grid using alternatives such as solar, inverters, and hydro power, to name a few. This means less reliance on Eskom and greatly reduced fees payable to Eskom. Less fees paid means less revenue derived by the state-owned entity, which further depletes the future economic benefits derived from having the PPE on the balance sheet.
The factors above indicate that the PPE itself is failing to deliver its produce, electricity, and the demand in the future is likely not to grow. In fact, if the drive to independent power providers and alternate power suppliers continues, demand will reduce, and most likely its ability to produce future economic benefits.
IFRS 16 initially requires items of PPE to be measured at cost. In simple terms, this means all costs incurred to either manufacture of procure the PPE, including all costs necessarily incurred to bring the PPE to a condition that will initially allow it to produce the PPE, excluding finance or transaction costs, but including qualifying borrowing costs in terms of IAS 23. (The IAS 23 element will not be the focus of this article and will be discussed in a follow-up piece.) The challenge now faced by Eskom is the initial cost. We are well informed by the media of accusations of state capture within Eskom, tenders awarded to non-qualifying persons, or tenders awarded at rates that far exceed the going rate.
The 2022 Eskom financial statements, in note 8 to the statement of financial position, reads as follows:
The ongoing internal and external investigations, including by the SIU, into allegations of contract corruption could result in further write-offs once finalised and after the related accounting impact have been assessed. Refer to note 2.4.
The point is that there are still unresolved accounting issues, one of which could be inflated ‘costs’ of the PPE. It seems that these potential inflated costs and inability to produce the required economic benefit (electricity), coupled with the drop in demand because of people moving to alternative power supplies, do not bode well for Eskom.
The conceptual framework states that the objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
The application of IAS 16, which has been in effect for over 20 years, portrays a technical view of the problems that Eskom faces. We have learnt through the media and through investigations such as the Zondo Commission that Eskom faces significant challenges from multiple angles, and that this is clearly not merely an accounting issue. Yet the application of this relatively straight-forward and robust accounting standard further emphasises, and to an extent simplifies, the challenges faced and how they might need to be dealt with.
In a world of ever-increasing complexity, data and technology, we should not ignore the tried and tested methodologies − IAS 16 being a case in point.
Milton Segal CA(SA), Executive Director – Standards, SAICA.