Home Articles SPECIAL FEATURE: Public Sector Report

SPECIAL FEATURE: Public Sector Report

In this special report we take a look at challenges and opportunities in the public sector and exploring developments in public finance management in the rest of Africa



A new report from PwC details the potential of 20 African cities they believe to be among the most dynamic and future-focused on the continent. By Kalane Rampai

Africa has become one of the world’s most sought-after investment destinations. Increasingly, more interest is shown in the continent by economic powerhouses such as China and the US, primarily because of the perceived economic prospects that Africa holds. Most major corporations have already set up headquarters in at least one of Africa’s three most populous cities: Lagos, Kinshasa and Johannesburg.

Several years ago, many of Africa’s economies were under significant pressure in the wake of the global financial crisis experienced at the time. Today, Africa has undergone far-reaching transformation. Economic growth in sub-Saharan Africa remains strong, although it is expected to slow in 2015 as a result of declining commodity prices and the Ebola epidemic, according to the International Monetary Fund (IMF).

Global megatrends – rapid urbanisation, demographic changes, technological breakthroughs, climate change, resource scarcity, and shifts in economic power – are also disrupting the African economy, business landscape and society as a whole. In particular, there will be continued urbanisation, leading to the expansion of current cities and the rise of new ones. These global megatrends will have a major impact on Africa’s economic and commercial landscapes. Numerous studies conducted by PwC on Africa’s development and growth have found high growth activities on the continent, driven by these global megatrends, and PwC believe that no organisation will be exempt from their effects.

Urbanisation has been identified by the World Bank’s director of sustainable development for Africa, Jamal Saghir, as the ‘single most important transformation’ that the continent will experience in the 21st century.1 PwC’s research confirms this, projecting that by 2030 half of Africa’s population will live in cities that will act as hubs of economic activity and growth.2

It is in the light of this that PwC has issued a new report, Into Africa: the continent’s cities of opportunity, which details the potential of 20 African cities we believe to be among the most dynamic and future-focused on the continent.

The report is part of PwC’s global Cities of opportunity series and its analysis is structured around those issues that are critical to the business community as well as to the office holders and other public authorities who are responsible for improving the collective life of each city analysed in the study.

PWC ranked the 20 African cities of opportunity according to five essential investment and business criteria: the current state of development and future potential; location; nature of opportunity; ‘must have’ features; and timescale for investments. PwC also studied 29 variables across four indicators to determine the defining scores: the economy, infrastructure, human capital and population/society.

Johannesburg in South Africa was ranked third among the 20 African cities that were selected, with an overall score of 377. Cairo, Tunis, Casablanca and Algiers also ranked among the top ten cities attracting foreign direct investment. The report’s final list of 20 cities was compiled based on a number of factors, with population size being only one of them – Africa has at least 120 cities of over half a million residents and 47 of over a million, spread out among 54 countries.3

Johannesburg was ranked number one in terms of financial services and GDP per capita, second for ease of doing business and acting as headquarters to the top 500 companies, and third as a foreign direct investment destination. However, the city was ranked last out of all the selected African cities in terms of its Gini coefficient. Although South Africa has one of the most progressive tax and financial services systems in Africa, its Gini coefficient is still regarded as the highest when measured against its peers.

The five fundamental factors that constitute a ‘prosperous city’ are considered to be productivity, infrastructure, quality of life, equity and social inclusion, and environmental sustainability, according to the UN.4 But when we look closer at the definition of each element, we find that one significantly outweighs all others – the development of infrastructure. Investors are increasingly more attracted by African cities on the continent that have sufficient infrastructure for them to carry out their business. North African cities like Cairo, Tunis, Casablanca and Algiers have great potential when it comes to yielding positive results for investors.

This is because they have the advantage of having had time to develop an adequate infrastructure network as well as an efficient regulatory and legal framework, and to establish a socio-cultural ecosystem.

Accra, the capital of Ghana, is a good example of a city that has a good reputation throughout Africa and beyond for the quality of its communications infrastructure, low crime rates, and steady democracy. Economically, it ranks second for both its attractiveness as a destination for foreign direct investment and the diversity of its GDP.

Johannesburg receives a high ranking for its infrastructure network. The report considers the city to be an exception to the usual phenomenon of older cities having more extensive infrastructure networks in place because of their having been around longer than younger cities to address their infrastructure needs. Johannesburg, which was founded only in 1886, is a far younger city compared to the older African cities.

In the relatively short time that it has existed, the city has developed a wide-ranging urban infrastructure and municipal organisation that is comparable to more mature and much larger and more affluent cities, states the report.

For example, Johannesburg’s first theatre opened in 1887, a year after the city’s creation; its first library opened in 1890; it got its first electric tram in 1890; the University of the Witwatersrand opened in 1922; the city built its first airport in 1931; and the Botanical Gardens were opened in 1964.

Although Johannesburg was ranked among the top five cities for the quality of its airport connectivity and communications network, it achieved a low ranking (19) for its road safety. Other areas where the city did not perform well include the high cost of housing, its poor healthcare system, and its slow GDP growth rate.

The demands for infrastructure will vary from city to city, based on their various stages of development, priorities, and levels of affordability. The report shows that the basic needs for power, water and sanitation, transport and logistics, and cost of housing top the list for the more developed African cities.

A recent World Bank report estimated that while sub-Saharan Africa needs infrastructure investment of nearly $100 billion annually, it currently gets less than half of that;5 infrastructure development across the African continent therefore needs to expand.

Demographic changes that have already commenced will continue across the African continent throughout the next decade. In this category Johannesburg lags behind because of its social demographics. The factors that tend to pull the city down are the slow growth of the middle class in the city (the high disparity between the rich and the poor), as well as the high levels of crime – the second worst out of all the ranked cities.

On a more positive note, when it comes to human capital, Johannesburg ranks at the top for its high literacy and numeracy levels, second for healthcare expenditure, and third for both physician/hospital bed density and graduates enrolled. The key to future economic growth in Africa’s cities is the ability to attract and retain the required talent.

As UN Secretary-General Ban Ki-moon has put it: ‘It is time to recognise that human capital and natural capital are every bit as important as financial capital. It is time to invest in people.’6

Suffice it to say that African cities are well positioned for exponential growth. Telecommunications, consumer-facing industries, financial services, resources, agribusiness and infrastructure are just some of the sectors that are increasingly driving growth and attracting international trade and investment to the continent. The consistent growth of cities in Africa over the next decade will in all likelihood alter the continent’s socioeconomic landscape.

In the process, the world’s perception of Africa will also change in an historic and transformative way.


1 PwC, Into Africa: the continent’s cities of opportunity, March 2015, http://www.pwc.com/gx/en/issues/strategy/emerging-markets/africa/assets/into-africa-report.pdf.

2 PwC, Global cities of opportunity report.

3 For cities of half a million, see Demographia world urban areas, 11th annual edition, January 2015, pp 132, 133, http://www.demographia.com/db-worldua.pdf; for cities of over a million, see Future of Cape Town, Infographic: fastest growing African cities, http://futurecapetown.com/2013/07/infographic-fastest-growing-african-cities/#.VcDCKMsw91s.

4 UN Habitat, State of the world’s cities 2012/2013: prosperity of cities report, World Urban Forum Edition.

5 See Africa’s infrastructure: a time for transformation, a co-publication of the Agence Française de Développement and the World Bank, edited by Vivien Foster and Cecilia Briceño-Garmendia, pp 7–9.

6 UN Secretary-General Ban Ki-moon, Remarks to high-level thematic debate on ‘The state of the world economy and finance and its impact on development’, UN General Assembly, 17 May 2012.

Author: Kalane Rampai is Leader for Local Government at PwC Southern Africa




Municipalities experience challenges ranging from accounting for different aspects of the grants to managing the cash and the technical aspects of capital projects. Nicolette Anderson CA(SA) looks at possible resolutions

Each year, the 278 municipalities across South Africa are allocated funding from different sources to enable investment in infrastructure and service delivery. South Africans will enjoy an improved quality of life as these funds are employed more efficiently to meet the mandates and objectives of government.

National and provincial government allocate grants to local municipalities annually. Local municipalities can also receive grants from their district municipalities, the Department of Co-operative Governance and Traditional Affairs (CoGTA), or even private donors.

Some grants are provided to municipalities to deliver basic services to their communities as envisaged by the constitution, for example equitable share.1 Other grants have conditions attached to them. These conditional grants must be spent for the designated purpose of the grant only. Grants allocated to municipalities for infrastructure or capital projects are most often conditional. Municipalities are required to invest this grant funding when it is received. The municipality may only withdraw the funds and employ them for the specific conditions of the grants, for example building roads, providing housing, or electrification programmes. At any given time, a municipality must have enough cash invested to ‘cash back’ the unspent conditional grants. The unspent portion of conditional grants is treated as a liability as per GRAP 23, Revenue from Non-exchange Transactions. A municipality should be able to return these funds back to the source if the conditions of the grant cannot be met.

Municipalities experience several challenges related to grants, for example:

  • Applying the correct accounting treatment for grants and related VAT
  • Accounting for the interest earned on invested funds
  • Spending the full value of the grant during the year due to project delays
  • Project management
  • Applying for a roll-over of grant funding if a portion remains unspent at year end, and
  • Cash management and the use of conditional grant funding for operations

Although this list is not exhaustive, it indicates the broad nature of challenges that the municipalities experience, ranging from accounting for different aspects of the grants to managing the cash and the technical aspects of capital projects.


Poor cash management

Cash is the lifeblood of any business, and municipalities are no exception. Effective cash management is therefore essential in order for a municipality to operate in an efficient and sustainable manner. Cash flow management aims to ensure that:

  • Adequate cash is available to pay liabilities when they are due
  • The return on idle cash is maximised
  • Expenditure is managed within the available cash resources of the municipality, and
  • The use of cash is planned to prevent an overdrawn position

Management should review the past trend of cash flows and project future cash flow movements in order to actively manage the cash position of the municipality. This requires regular preparation of a reliable, accurate cash flow statement. Management should review this and react accordingly by cutting non-critical expenditure, improving collections from debtors, implementing savings initiatives, and improving terms with suppliers.

The reality is that municipalities often do not manage cash effectively. In many cases, cash collections from debtors are poor for services such as water and sanitation, electricity and refuse. This leaves less cash available for expenditure.

The link between budgets and available cash is broken

Municipalities should ‘live within their means’ to be solvent. Often municipalities continue to spend according the budget even though cash collected from operations is lower than budgeted levels. Municipalities do not always establish the link between available cash and available budget. If cash inflows are lower than budgeted, or cash outflows are higher than budgeted in some areas, then a municipality must make expenditure cuts in order to remain in a cash surplus position.

The use of conditional grant funds for operations

Municipalities should operate as a profitable business. The revenue generated from operations should exceed the costs incurred to provide services. Operating revenue of a local municipality includes items like the sale of electricity, refuse-removal services and property rates. Operating expenditure includes employee-related costs, bulk purchases of electricity, utilities and communication, etc.

If a municipality operates at a deficit, conditional grants intended for capital projects may end up being used to fund operations. Government does not condone this practice, but it does happen.

Unspent conditional grants

Municipalities should aim to spend the grant funding that they receive during the year in full for the designated purpose. Sometimes, this is not possible due to project delays, for example, an unspent portion of the conditional grants will remain at year-end. In this case, a municipality must apply for the rollover of the unspent conditional grant to the following year. The transferring entity, which is the source of the grant, may deny the rollover because the expenditure was not in accordance with the conditions or the municipality did not comply with legislation.

One result can be that the unfinished capital projects must be completed using funding from another source. Furthermore, if a municipality does not have sufficient cash invested to pay back the unspent conditional grant to the transferring entity, a deduction will be made from another grant, leaving other operations of the municipality potentially under-funded.


Different spheres of government, including the national and provincial treasuries, as well as CoGTA, invest considerable resources to provide practical and technical support to municipalities.

The challenges described above are addressed through a variety of initiatives including guidance and circulars, skills transfer and training.

Municipalities should focus on the following key areas to protect precious cash resources from all sources:

  • Improve the management of debtors and cash collections
  • Exercise discipline in spending within the available means of the municipality rather than the budget
  • Invest unspent grant funds effectively to earn a return
  • Resist using conditional grant funding for operations, and
  • Spend conditional grants for the designated purpose in full each year

Minister of Finance Nhlanhla Nene reiterated in the 2015 Budget Speech that ‘better value for money in public service delivery depends on rigorous financial management, effective systems and an unrelenting fight against corruption’. Funding future growth requires the consistent application of these methods and practices in order to ensure that rand for rand, cash resources (including grants) end up working hard for a better South Africa. NOTE

1 Local government is entitled to an equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it In terms of section 227 of the constitution.

AUTHOR: Nicky Anderson CA(SA) is Senior Manager Advisory at Ernst & Young




Operation Clean Audit 2014 can be described as a dream deferred but not deserted, writes Julius Mojapelo

On 3 June 2015 the Auditor-General, Kimi Makwetu, released the report on local government audit outcomes for the year ended 30 June 2014, in which he reported a noticeable improving trend in local government audit results.

The Auditor-General acknowledged the back-to-basics strategy and the medium-term strategy framework as key contributors to the improving trend. He cautioned, however, that even though audit outcomes improved and should be celebrated, some of these improvements had been achieved through over-reliance on consultants and the correction of errors identified by auditors during the audit process. The Auditor-General also indicated his concern for the high level of supply-chain management transgressions being committed by municipalities. The audit outcomes also provide confirmation of the inability to achieve the Operation Clean Audit 2014 dream but the improving trends keep the hope alive that the target is not completely out of reach.

The increase in irregular expenditure and fruitless and wasteful expenditure remains an area of concern in municipalities. Irregular expenditure represents expenditure incurred without complying with applicable legislation. Irregular expenditure does not necessary amount in losses for the entity and is thus different from fruitless and wasteful expenditure, which refers to expenditure made in vain and that could have been avoided had reasonable care been taken. Both types of expenditures reduced in the 2013/14 financial year, indicating that tighter controls have been implemented by municipalities to ensure compliance with legislation and prevention of unnecessary expenditure.

It is also clear that most municipalities still depend heavily on consultants to assist them in either financial reporting or the preparation of performance information, as84% of municipalities used consultants in the 2013/14 financial year compared to 80% in 2012/13.Notably, 55% of the municipalities who used consultants received financially unqualified audit opinions, which represented an improvement from the 46% in 2012/13.

The extensive use of consultants may be directly attributed to the high vacancy rate and lack of appropriate skills in municipalities, which leaves them with no skills internally to prepare quality financial reports. The overall vacancy was 20% with 18% at senior management level. The resourcing of the finance units of 43% (120) of the municipalities requires attention to improve and maintain good financial management. At 37% (120) of the municipalities, by 30 June 2014 all of the senior managers had not yet met the minimum competency requirements that are prescribed by the municipal regulations on minimum competency levels. With this situation in place the use of consultants will continue to increase in the future.

Immediate attention should be directed at resolving the capacity issues in municipalities if an improvement in the current situation is to be achieved in the near future. Both a short- and long-term approach is required to address this situation. In the short term a competency-based training model needs to be adopted to improve skills for individuals who are already employed in the municipalities and in the long term efforts should be made to build a pipeline that will be able to produce qualified individual to work in the municipalities. SAICA’s Thuthuka programme is one good example of a pipeline programme that develops chartered accountants though financial and academic support from school level to postgraduate level to prepare them to take on key position in financial management and business leadership.


A commendable improvement is in the number of clean audits achieved, which increased from 30 in 2012/13 to 58 in the 2013/14 financial year. A clean audit opinion – as defined by the Auditor-General – indicates that the entity produced financial statements that are free from material misstatements, that there were no material findings identified in the usefulness and reliability of the performance information reported, and that the entity also complied with all key laws and regulations.

It is important to note that a clean audit opinion does not mean that the municipality has discharged all of its service delivery mandates. Good financial administration is considered a key contributor to good service delivery, however. KwaZulu-Natal led the pack with 20 clean audits followed by the Western Cape and Gauteng with 18 and 13 clean audits respectively. The worst performers in this category were the Free State, Limpopo and North West, as they had no clean audits for the 2013/14 financial year. This is an indication that the rural-based provinces are the most affected by the skills shortage in public finance as they are struggling to attract qualified individual to work in their municipalities.

Municipalities that achieved clean audits will have to work harder to keep their status by ensuring that the effectiveness of the controls implemented are monitored continuously to identify any areas of non-compliance and address them in a timely manner.


In total 58% of the municipalities attained clean audits. This falls short of the goal set for 2013/14 of 100% of municipalities achieving unqualified audit opinions. SAICA believes that the key to achieving the clean audit target lies in building capacity in municipalities to ensure that they are capable of producing financial statements that are free from material misstatements. An unqualified opinion with findings means that the entity produced financial statements that are free from material misstatements but failed to produce useful and/or reliable performance information and/or comply with all key laws and regulations.


The financial statements of municipalities that received a qualified opinion with findings were materially misstated and material findings have been identified by the Auditor-General in their reported performance information and compliance with applicable laws and regulations. A total of 22% of municipalities find themselves in this category, which is an improvement from the 28% in the 2012/13 financial year. This is not good enough, and the implementation of the back-to-basics strategy should assist with improving this situation.


This is the worst category of an audit opinion that a municipality can receive, and it is alarming that 17% of municipalities received adverse and/or disclaimer opinions with findings in the 2013/14 local government audit outcomes. This is despite the reduction in this type of opinions from 23% in the 2012/13 audit outcomes. This number is still too high and indicates an urgent need to address the issues of financial management in the public sector.

A municipality is given an adverse opinion when its financial statements contain misstatements that are so material and pervasive that the Auditor-General disagrees with virtually all the amounts and disclosures therein. A disclaimer is given when the municipality could not provide evidence for most of the amounts and disclosures in the financial statements and the Auditor-General was unable to conclude or express an opinion on the credibility of the financial statements. Municipal councils of municipalities with adverse of disclaimer opinion should play a more active role in addressing the findings raised by the Auditor-General by identifying the root causes, developing action plans and holding management accountable to those plans.


SAICA understands that the achievement of improved local government audit outcomes requires collaboration between the private and public sectors and has several initiatives that are directed at supporting the creation of capacity in public sector finance management. Projects such as the Local Government Accounting Certificate offered by the Association of Accounting Technicians of South Africa (AATSA) and the support provided to TVET colleges through the placement of acting CEOs in their transition to generally accepted accounting practices and improving internal controls and risk management processes are only a few of the projects that SAICA is using to make a positive difference in public sector finance management. With increased interventions from government in capacity-building and collaborations from the public and private sector to improve governance and accountability in the public sector, the Operation Clean Audit 2014 may have not been achieved, but the dream will certainly not be deserted.

AUTHOR : Julius Mojapelo is Project Director: Public Sector and Assurance at SAICA




In spite of numerous challenges, economic growth in Africa is generally regarded with optimism – but is this optimist justifiable? Amon Dhliwayo CA(SA) investigates

There is an aura of optimism as regards Africa. Seven out of the ten fastest-growing economies are in Africa and 500 million new consumers are expected within the next 15 years. An increase in middle-class income is also envisaged.

However, Africa still faces challenges such as the ever-widening gap between the affluent and deprived, poor infrastructure, inflation, the high cost of doing business, corruption, poor standards of education, underdeveloped healthcare systems, and poor service delivery, to mention a few.


A KPMG survey conducted across 21 countries in Africa discovered that 23% of national government departments utilised accrual basis, 23% modified cash, and the remaining 54% reported in terms of cash basis of accounting. In the surveyed countries, Tanzania, Sierra Leone and Ghana were said to be on the accrual basis of accounting.

Currently, the financial statements of most governments do not comply with internationally recognised accounting frameworks, as they follow a mix or hybrid of accounting bases. Some revenue and expenditure items are reported in terms of accrual basis and some on a cash basis. Property, plant and equipment, investments, infrastructure assets and employee pension liabilities – which make up the bulk of government transactions – are not reported in the financial statements. Accounting policy notes are usually absent from the financial statements. Trial balances, general ledger reports and other irrelevant disclosures are sometimes incorrectly presented in the financial statements.


Expectations on governments have increased as a consequence of the growth prospects in Africa. Investors are beginning to question the veracity of the financial statements produced by governments before they decide whether or not to acquire financial instruments such as bonds issued by national departments. Politicians have become more accountable to the public on how they utilise taxpayers’ money to expend budgets appropriated by their respective national treasuries.

As a consequence of the added scrutiny, most governments in Africa have embarked on public financial management (PFM) reforms to sustain the economic growth of their countries. Financial reporting is one of the PFM reforms that governments have started to address. Governments and experts have endorsed the preparation of financial statements on an accrual basis in terms of International Public Sector Accounting Standards ((IPSASs), or International Financial Reporting Standards (IFRSs)).


IPSASs are a more preferable reporting framework for public sector entities as they are not profit oriented, while IFRSs are suitable for private sector entities that operate with an intention to earn profit.

IPSASs allow governments to make better decisions since governments can quantify the wealth that they own as they can account for all assets and liabilities. Governments can also be more accountable to taxpayers. IPSASs also allow for improved uniformity and comparability since a uniform acceptable international framework will be adopted.

IPSASs are derived from the IFRSs and are prepared by the International Public Sector Board (IPSASB). The IPSASs comprise one cash-basis standard and 38 accrual basis IPSAS standards. Most governments, for example Nigeria, Ghana and Swaziland, have chosen to adopt the cash-basis IPSASs as a stepping stone towards the ultimate adoption of the accrual basis of accounting and financial reporting. Countries such as Botswana have chosen to adopt accrual IPSASs. The comprehensive financial statements for cash-basis IPSASs comprise statement of cash receipts and payments and statement of comparison of budget and actual amounts. The International Organisation of Supreme Audit Institutions (INTOSAI) has also endorsed the cash-basis IPSAS standards as an acceptable reporting framework.

However, most governments have lamented the feasibility of adopting the cash-basis IPSASs because the standard requires governments to consolidate national and provincial departments, account for foreign exchange transactions and changes in accounting policies and errors. These concepts are usually complex and foreign to many governments. In addition, there is no guidance for adopting cash-basis IPSASs and there is no transitional provisions or exemptions for adopting this standard. On the other hand, accrual basis IPSASs provide guidance for first-time adoption of IPSASs and a three-year exemption relief for measuring certain assets and liabilities.


Cash-basis IPSASs are internationally recognised as a stepping stone to the full implementation of accrual IPSASs. Most governments have attempted to initially adopt cash-basis IPSASs, the end result being full accrual accounting. The adoption has not been without its challenges. Most governments have set their own frameworks that replicate the cash-basis IPSASs but have not claimed full compliance as mandatory requirements on accounting for consolidations, errors and foreign currency transactions have not been adhered to.

The IPSASB has acknowledged the implementation challenges of adopting the cash-basis IPSASs and is in the process of reviewing the standard with the aim of modifying some of the mandatory requirements.

AUTHOR |Amon Dhliwayo CA(SA) is a manager at KPMG South Africa




The Accounting Standards Board has approved various amendments to GRAP 16 and GRAP 17 to simplify and improve reporting. By Abdur R Badat CA(SA)

The Accounting Standards Board, as part of its objective to simplify and improve reporting, has amended selected requirements of the standards of GRAP on Investment Property (GRAP 16) and Property, Plant and Equipment (GRAP 17).

The board believes that the standards should be simplified, where possible, without compromising their core principles of providing information that enables users to hold entities accountable and to facilitate decision-making.

This resulted in Amendments to the Standards of GRAP on Investment Property and Property, Plant and Equipment (ED 126) being issued for public comment in October 2014 based on the feedback received from preparers and users during the board’s first post-implementation review. The board approved the following amendments to GRAP 16 and GRAP 17.


A challenge identified by preparers in applying the principles in GRAP 16 is the inability to distinguish between properties classified as investment property and those classified as property, plant and equipment (PPE). Many properties are used to fulfil service delivery objectives but also generate revenue from their use, for example sports stadiums and golf courses.

The board determined that this was an application issue rather than an issue with the principles in the standards and as a result additional guidance was included in GRAP 16 to clarify the existing principles.

This guidance assists preparers to distinguish investment property from PPE by clarifying that when a property is used to provide goods or services in accordance with an entity’s mandated functions, GRAP 17 should be applied to account for that property. An entity’s mandated function is based on legislation or equivalent governing the entity. To illustrate, a municipality owns a sporting complex which is available for use by the community and receives revenue from use of the facilities. The revenue received is for the service the municipality is mandated to deliver, resulting in the asset being accounted for in accordance with GRAP 17.

Preparers questioned whether the amount of the revenue received should be used as a determining factor in distinguishing investment property and PPE. The board considered examples where rentals received from a property are below the market rate to achieve specific objectives, such as to develop or promote growth within a particular suburb, but the property otherwise meets the definition of investment property. As such, the board concluded that the amount of revenue received, and whether it is market related or not, is not a distinguishing factor.

GRAP 16 requires land held for an undetermined future use to be classified as investment property. Preparers indicated that entities usually have a service delivery objective and as a result, any land held would be used to fulfil these objectives and should be classified as PPE rather than investment property.

GRAP 16 does however allow land and/or buildings held for strategic purposes to be classified as PPE. A description of ‘properties held for strategic purposes’ has now been included in the standard to clarify in what instances properties may be classified as such to allow greater flexibility in the classification of certain properties as PPE. This description outlines that land and/or buildings, although not currently used as property, plant and equipment, are likely to be used in the production or supply of goods or services or for administrative purposes in future because of certain legislation, policies, decisions or plans adopted by an entity. A description of the nature and type of these properties requires disclosure in the financial statements.


GRAP 17 requires entities to review the useful lives and residual values of assets at each reporting date. Preparers indicated that this is onerous, due to the time, the costs and the volume of assets involved. Furthermore, conditional assessments on infrastructure assets were being performed annually even though management had no expectation that there was a change in the assets’ useful life or residual values.

To alleviate this burden, the board introduced an indicator-based approach, similar to one used in the standards of GRAP on impairment, to assess the useful lives and residual values of assets.

This approach requires an entity to assess at each reporting date, whether there is any indication that its expectations about the useful life and residual value of an asset has changed since the preceding reporting date. Only when such indication exists, is an entity required to revise the expected useful life and/or residual value accordingly.

A list of indicators is provided in the standard and was developed after consultation with preparers and engineers.

While this approach still requires entities to review the useful lives and residual values, detailed assessments are only undertaken when specific circumstances exist or have changed since the preceding reporting date.


Preparers were uncertain about whether an external, professional valuer is required to value properties when the fair value or revaluation model is applied to assets. The appointment of external valuers to determine the fair values or a revaluation of assets may impose significant adverse financial implications for entities. Entities often use experts employed within an entity to perform valuations because they are knowledgeable about their respective entities and it is more cost effective than appointing consultants.

In light of this, preparers highlighted that the standards were ambiguous and could be clarified.

GRAP 17 now clarifies that, in addition to valuations being performed by a member of the valuation profession who holds a recognised and relevant professional qualification, valuations may also be performed by another expert. This expert should have the requisite competence to undertake such appraisals in accordance with the requirements of the applicable standards of GRAP. The valuer or expert may be employed by the entity.

Disclosure on the independence of the valuer or expert is not required as this would not have any informational value for users since valuations have to be performed in accordance with the principles in the relevant standard.

Similar amendments have been made to the standards of GRAP on Investment Property, Heritage Assets and Intangible Assets.


The board eliminated the encouraged disclosure requirements in GRAP 17 to streamline and simplify the requirements of the standards.

Similar amendments were made to GRAP 16 and GRAP 31, Intangible Assets.


Users expressed a strong need for more information about assets that are being constructed or developed, so as to promote greater accountability by entities.

Based on feedback from users, the board concluded that the following information on capital work-in-progress should be disclosed for assets accounted for in accordance with GRAP 17:

  • The cumulative expenditure recognised in the carrying value of assets in aggregate per asset class
  • The carrying value of assets that are taking a significantly longer period of time to complete than expected, including reasons for any delays
  • The carrying value of assets where construction or development has been halted either during the current or previous reporting period(s), including the reasons for halting and whether any impairment losses have been recognised in relation to these assets

An entity can decide how to present the information in (b) and (c) above as the information available at entities is likely to differ. Materiality should be considered when determining the relevance of this disclosure in the financial statements.

Similar amendments were made to standards of GRAP on Investment Property, Heritage Assets and Intangible Assets.


Users indicated that they measure the adequacy of repairs and maintenance by comparing this expenditure to the value of assets recognised in the statement of financial position.

The board concluded that given the importance of this information to users, a requirement to disclose this information in the notes to the financial statements has been added to the standard of GRAP on Presentation of Financial Statements.

A requirement has been added to GRAP 17 and Heritage Assets for entities to disclose repairs and maintenance. GRAP 16 has been modified to require the separate disclosure of repairs and maintenance from operating expenses on investment properties that generated/did not generate rental revenue during the period.

Information about the basis used to determine repairs and maintenance relating to PPE and heritage assets is required. This enhances comparability amongst entities as some entities may include a portion of internal costs, for example, employee costs in their determination of repairs and maintenance, whilst other entities do not.

The board believes that although this disclosure may not entirely satisfy the needs of users, it enables users to raise questions as to what other information should be provided along with the current disclosures on repairs and maintenance.

Similar amendments have been made to the standards of GRAP on Property, Plant and Equipment, Heritage Assets and Investment Property.


The amendments are effective from 1 April 2016. Transitional provisions are prospective, except for the amendments relating to the encouraged disclosures and those clarifying the existing principles in GRAP 16. These amendments are applied retrospectively.

AUTHOR : Abdur R Badat CA(SA) is a project manager at the Accounting Standards Board