Jeanine Poggiolini analyses the results of the ASB’s recent post-implementation of GRAP 16 Investment property and GRAP 17 Property, plant and equipment and finds that there was positive support for the standards – but challenges remain
Both users and preparers of accounting standards who were consulted during the recent review of asset-related standards supported the application of these standards.
However, key challenges remain, relating mostly to the level of skill and capacity required to support both the ongoing application of existing standards and the implementation of new standards.
The users and preparers also highlighted a number of areas in which the requirements of the standards needed to be clarified or enhanced. The most significant of these, and that may impact on the Board’s future work, are discussed in this article. A full report and analysis of comments received is available on the ASB’s website.
DISTINCTION BETWEEN INVESTMENT PROPERTY AND PROPERTY, PLANT AND EQUIPMENT
Preparers noted that practical application issues arose in trying to distinguish between investment property and property, plant and equipment. These arise because the government holds significant property portfolios for rental, development or use in operations. The following key issues were noted:
• The classification of properties is often based on their current use, which is sometimes of a temporary nature. This results in a high number of reclassifications from year to year.
• Land held for an undetermined use is classified as investment property. However, given that the objective of the public sector is to deliver services, land held is likely to be used for fulfilling of future objectives of the government itself rather than for speculative purposes.
• The standards are prescriptive about the treatment of land held for an undetermined future use, but are not prescriptive about buildings held for an undetermined future use.
• Rental charged does not need to be market related to be classified as investment property. However, given that property may be rented as social housing or to other entities to achieve certain policy objectives, it may be difficult to determine whether a property is held for rental to others or to achieve an entity’s objectives.
The Board agreed that it would revisit the principles and guidance in the standards related to the classification of properties.
ACCOUNTING FOR LAND
As entities in the public sector work together to achieve common objectives, they often contribute assets collectively to achieve those outcomes. It could then be unclear which party should account for what assets, and on what basis.
Preparers consistently highlighted issues relating to the recognition and derecognition of land (and to a lesser extent, buildings). There is uncertainty about whether land should be accounted for based on whether an entity has legal title, or whether control should be assessed.
Most of the issues relate to housing developments by municipalities, land owned by the Department of Public Works, or land owned by tribal authorities, as the following examples show:
• Houses are typically constructed by the Department of Human Settlements on land owned by a municipality. The intention is that the land be subdivided and transferred to the home owners. Owing to administrative delays houses have often been transferred to the home owners, but not the legal title of the land. In these cases there is uncertainty as to whether municipalities should derecognise the land when the home owner takes control of the house (as the municipality no longer has control over the land), or only when legal title of the land has passed.
• The Department of Public Works is the custodian of property in terms of the Government Immoveable Asset Management Act 19 of 2007. It is also tasked with providing accommodation to other government entities and, as a result, owns a significant number of properties. As these properties are utilised by other entities, it could be argued that other entity controls the property. Entities may also construct assets on land owned by the department, which raises questions about how to account for the land and the structures erected on it.
• Government entities often construct assets on land owned by tribal authorities. These assets are either for the direct benefit of the community, or are used by the government for administrative functions or to deliver services. Questions similar to those raised in the two bullets above also arise in the case of land owned by such tribal authorities.
Given the significance of these issues, the Board has agreed to develop Interpretation of the Standards of GRAP on the recognition and derecognition of land on the basis of legal title or control.
ACCOUNTING FOR HOUSING SCHEMES
Preparers at municipalities raised concerns about the consistency of the accounting treatment applied to housing schemes.
Two types of housing schemes are undertaken by municipalities, namely accredited and non-accredited housing schemes. The municipalities fulfil different roles and responsibilities in each type, which result in different accounting consequences.
While the details of each agreement are likely to differ, they are also likely to have common features.
On this basis, the Board agreed that, while specific accounting guidance cannot be provided to deal with the two types of schemes because of the individual and unique features of each one, it may be useful to issue a document similar to the PPP Guideline, in which high-level guidance on these transactions can be provided. This could include a discussion of the key features of the schemes and provide guidance on what accounting principles could be considered in certain circumstances.
A project has been added to the Board’s work programme to assess the feasibility of issuing such guidance.
SUBSEQUENT MEASUREMENT OF ASSETS
Preparers at municipalities raised issues about the assessment of the useful lives and residual values of assets at a reporting date. They indicated that the volume of assets held by municipalities means that a detailed assessment cannot be done for all assets at year end, and even where this is possible, significant resources are spent on such an assessment.
Some preparers suggested that an indicator-based approach could alleviate the amount of detailed work done on an annual basis.
The Board will investigate the feasibility of such an approach as part of its review of GRAP 16 and GRAP 17.
Many issues were raised on impairment, in particular the distinction between cash-generating and non-cash-generating assets.
The Board has added a project to its work plan to review the impairment-related standards to assess how this issue can be addressed and whether the requirements could possibly be simplified.
While various users requested a number of additional disclosures, some of the suggestions do not satisfy the needs of a wide range of users, or their nature is inappropriate for reporting in financial statements. However, there were suggestions that would be useful to a range of users and would enhance accountability and decision making.
The Board will consider additional disclosures in the following areas, as well as review the encouraged disclosures in GRAP 16 and GRAP 17:
• Separate disclosure of repairs and maintenance
• Additional disclosures on capital work in progress, including information on the nature of the assets included in capital work in progress, and an age analysis of projects which are included in capital work in progress
SUMMARY OF ACTIONS AND FUTURE PROJECTS
The Board has added three projects to its work plan as a result of the post-implementation review: a review of GRAP 16 and GRAP 17; issuance of an interpretation on the recognition and derecognition of land; and guidance on accounting for housing schemes. Other issues raised during the review have been addressed by the Secretariat by means of revised or new FAQs on its website.
A number of strategic issues were also raised during the review and the Secretariat is liaising with relevant parties on their resolution. ❐
Author: Jeanine Poggiolini CA(SA) is a project manager at the Accounting Standards Board and member of the International Public Sector Accounting Standards Board