TECHNICAL

ACCOUNTING

APB APPROVES AMENDMENTS, IMPROVEMENTS, INTERPRETATIONS

At its meeting on 1 August 2008, the Accounting Practices Board (APB) approved the following for issue as amendments, improvements or interpretations of Statements of GAAP:

• Amendments to IFRS 1(AC 138) − First-time Adoption of International Financial Reporting Standards and IAS 27(AC 132) – Consolidated and Separate Financial Statements: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate.
• Improvements to Statements of Generally Accepted Accounting Practice.
• IFRIC 15(AC 448) – Agreements for the Construction of Real Estate.
• IFRIC 16(AC 449) − Hedges of a Net Investment in a Foreign Operation.

You can refer to the pronouncements by going to the SAICA Handbook-on-line.

STANDARDS EFFECTIVE 2009

There are no fewer than 25 standards and 3 interpretations, which are new or have been amended or revised, that need to be applied from 2009.

One of the reasons for the changes in 2009 is as a result of the moratorium that the International Accounting Standards Board (IASB) agreed to in 2006 under which there would be no new or amended standards effective before 1 January 2009. This was done in order to have a stable platform for a four year period. Standards and amendments to standards were issued in this time, but with a delayed effective date. Another reason is the IASB’s annual improvements project. This annual project is intended to be a vehicle for making non-urgent, but necessary, amendments to standards. The amendments are generally meant to be clarifications of expected practice. Arising out of the first project are improvements/changes to 20 standards.

Below is a list of the standards, amendments or improvements to standards and interpretations that have been issued and are effective in 2009. Amendments in italics represent amendments introduced under the Improvements Project. See table 1 opposite.

PROPOSED AMENDMENTS TO EIGHT STANDARDS

The International Accounting Standards Board (IASB) has published an exposure draft of proposed amendments to eight International Financial Reporting Standards (IFRSs) under its annual improvements project. This document has been issued in South Africa as ED 244.

The proposed amendments reflect issues discussed by the IASB in the project cycle that began in 2007 and which ends in 2009. The proposals range from guidance added to the Appendix of IAS 18 Revenue, on how to determine whether an entity is acting as a principal or as an agent, to changes of wording to clarify the meaning and remove unintended inconsistencies between IFRSs.

The IASB adopted an annual process in 2006 to make necessary, but non-urgent, amendments to IFRSs that will not be included in another project. By presenting the proposed amendments in a single document rather than as a series of piecemeal changes, the IASB aims to ease the burden for all concerned.

Unless otherwise specified, the proposed effective date for the amendments is for annual periods beginning on or after 1 January 2010, although entities are permitted to adopt them earlier. The proposed effective date for those amendments arising from the revised IFRS 3 Business Combinations is 1 July 2009 (in line with the effective date for the revised standards on business combinations – IFRS 3 and IAS 27 Consolidated and Separate Financial Statements). This document is available on the SAICA Website.

SIMPLIFYING EARNINGS PER SHARE

The International Accounting Standards Board (IASB) has published for public comment proposals to simplify the calculation of earnings per share (EPS) and to eliminate differences between the methods required by International Financial Reporting Standards (IFRSs) and US accounting standards to calculate EPS, that are capable of being resolved in the short term and can be addressed outside the current and planned major projects. These proposals are part of the short-term convergence project that the IASB is conducting jointly with the US Financial Accounting Standards Board (FASB). This document has been issued in South Africa as ED 245.

In particular, the proposals aim to achieve convergence by:

• providing a clear principle to determine which instruments should be included in the EPS calculation;
• clarifying the EPS calculation for particular instruments, such as contracts to sell or repurchase an entity’s own shares and participating instruments; and
• simplifying the EPS calculation for instruments that are accounted for at fair value through profit or loss.

The IASB believes that the proposals would, if implemented, simplify the calculation of EPS and increase transparency for users of financial statements. This document is available on the SAICA Website.

CLARIFICATION OF THE SCOPE OF SA GAAP FOR SMEs

Paragraph 1.2 (b) of SA GAAP for SMEs states that entities that “hold assets in a fiduciary capacity for a broad group of outsiders” are deemed to have public accountability. In paragraph 1.3, SA GAAP for SMEs explicitly states that an entity may not state compliance with SA GAAP for SMEs if it has public accountability, even if national laws or regulations permit or require the application of the statement for such entities.

Based on the examples of entities that hold assets in a fiduciary capacity for a broad group of outsiders, as noted in 1.2 (b), i.e.; banks, insurance entities, securities brokers/dealers, pension funds, mutual funds or investment banking entities, it is not believed that it is the intention to scope out all entities that hold assets in a fiduciary capacity for a broad group of outsiders, such as schools, charities, religious organisations, home owner associations, and sectional title schemes.

In May 2008, the IASB deliberated comment on the scope of the ED for SMEs and reported in the IASB Update that “an entity whose primary business is holding funds in a fiduciary capacity is publicly accountable and hence should be outside the scope of the standard. However, an entity that holds funds in a fiduciary capacity as a sideline to its principal business, for example a utility company or travel agency that takes deposits, should be permitted to use the standard if it otherwise qualifies”.

It is recommended that the following issues are also taken into consideration when determining if an entity indeed does have public accountability:

Are the assets held on behalf of other parties for later ‘return,’ or are the assets held to operate a particular activity (such as a school)? I.e. a distinction between holding assets in a “custodial” and “fiduciary” capacity may be pertinent.

Is the holding of assets in a fiduciary capacity a main business or only incidental to the main business, and not a significant part of the business?

What mandate does the entity have to apply the funds held in fiduciary or custodial capacity?

Table 1:

Standard	Details of amendment	Annual periods beginning on or after
IFRS 1(AC 138) − First-time Adoption of International Financial Reporting Standards	Measurement of the cost of investments in subsidiaries, jointly controlled entities and associates when adopting IFRSs for the first time.	1 January 2009
IFRS 2(AC 139) − Share Based Payments	Amendments to vesting conditions and cancellations	1 January 2009
IFRS 3(AC 140) − Business Combinations	Comprehensive revision to accounting for business combinations	1 July 2009
IFRS 5(AC 142) − Non-current Assets Held for Sale and Discontinued Operations	Plan to sell the controlling interest in a subsidiary	1 July 2009
IFRS 7(AC 144) − Financial Instruments: Disclosures	Presentation of finance costs	1 January 2009
IFRS 8(AC 145) − Operating Segments	New standard on segment reporting (replaces IAS 14)	1 January 2009
IAS 1(AC 101) − Presentation of Financial Statements	Amendments to structure of Financial Statements Current/non-current classification of derivatives	1 January 2009
IAS 8(AC 103) − Accounting Policies, Changes in Accounting Estimates and Errors	Status of implementation guidance	1 January 2009
IAS 10(AC 107) − Events after the Reporting Period	Dividends declared after the end of the reporting period	1 January 2009
IAS 16(AC 123) − Property, Plant and Equipment	Recoverable amount Sale of assets held for rental	1 January 2009
IAS 18(AC 111) − Revenue	Costs of originating a loan	1 January 2009
IAS 19(AC 116) − Employee Benefits	Curtailments and negative past service cost Plan administration costs Replacement of term ‘fall due’ Guidance on contingent liabilities	1 January 2009
IAS 20(AC 134) − Accounting for Government Grants and Disclosure of Government Assistance	Government loans with a below-market rate of interest Consistency of terminology with other IFRSs	1 January 2009
IAS 23(AC 114) − Borrowing Costs	Amendment requiring capitalisation only model Components of borrowing costs	1 January 2009
IAS 27(AC 132) − Consolidated and Separate Financial Statements	Amendment dealing with measurement of the cost of investments when adopting the IFRS for the first time. Consequential amendments from changes to Business Combinations Measurement of subsidiary held for sale in separate financial statements	1 January 2009
IAS 28(AC 110) − Investments in Associates	Consequential amendments from changes to Business Combinations Required disclosures when investments in associates are accounted for at fair value through profit or loss Impairment of investment in associate	1 January 2009
IAS 29(AC 124) − Financial Reporting in Hyperinflationary Economies	Description of measurement basis in financial statements Consistency of terminology with other IFRSs	1 January 2009
IAS 31(AC 119) − Interests in Joint Ventures	Consequential amendments from changes to Business Combinations Required disclosures when interests in jointly controlled entities are accounted for at fair value through profit or loss	1 January 2009
IAS 32(AC 125) − Financial Instruments: Presentation	Certain financial instruments will be classified as equity whereas, prior to these amendments, they would have been classified as financial liabilities	1 January 2009
IAS 34(AC 127) − Interim Financial Reporting	Earnings per share disclosures in interim financial reports	1 January 2009
IAS 36(AC 128) − Impairment of Assets	Disclosure of estimates used to determine recoverable amount	1 January 2009
IAS 38(AC 129) − Intangible Assets	Advertising and promotional activities Unit of production method of amortisation	1 January 2009
IAS 39(AC 133) − Financial Instruments: Recognition and Measurement	Amendment to eligible hedged item. Reclassification of derivatives into or out of the classification of at fair value through profit or loss Designating and documenting hedges at the segment level Applicable effective interest rate on cessation of fair value hedge accounting	1 January 2009
IAS 40(AC 135) − Investment Property	Property under construction or development for future use as investment property Consistency of terminology with IAS 8 Investment property held under lease	1 January 2009
IAS 41(AC 137) − Agriculture	Discount rate for fair value calculations Additional biological transformation Examples of agricultural produce and product Point-of-sale costs	1 January 2009

 

Interpretations	Annual periods beginning on or after
IFRIC 14(AC 447) − IAS 19(AC 116) − The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction	1 January 2008
IFRIC 15(AC 448) −Agreements for the Construction of Real Estate	1 January 2009
IFRIC 16(AC 449) − Hedges of a Net Investment in a Foreign Operation	1 October 2008

AUDITING

Amendments to the Listings Requirements of the JSE Limited for Auditors and Reporting Accountants

On 18 April 2008 the JSE exposed for comment proposed draft Listings Requirements, which envisage the establishment of a JSE Register for Auditors.

The JSE announced that it has completed the consultation process and that the new requirements, which are effective from 1 September 2008, have been issued as Bulletin 3/2008. A copy of Bulletin 3/2008 is available on the JSE website under the “How to list”, “Listings Requirements” link. The Listing and Other fees section has also been updated to reflect the fees applicable to these new requirements.

Issuers are further advised that, as part of these amendments, a new requirement has been introduced making it compulsory to appoint a financial director. Existing issuers have until 30 June 2009 to comply with this requirement. This can be viewed on the SAICA Website.

REGULATED INDUSTRIES

EXCHANGE CONTROL CIRCULARS

No. 14/2008 – Nominated Branches to Transact Insurance Business

Section B.10 (K) of the Rulings has been amended. “The name “Towers North, Johannesburg” has been added under the heading of ABSA Bank Limited”.

No. 15/2008 – Amendments to the Exchange Control Rulings

Section H.(C) of the Exchange Control Rulings has been amended. Since Exchange Control considers all types of derivative instruments to be inward listed, it has been decided to no longer list the instruments under sub-section H.C(i)(a) of the Exchange Control Rulings.

Authorised Dealers are also referred to Section H.(D) of the Exchange Control Rulings. Following representations by the Bond Exchange of South Africa, it has been decided henceforth to allow them also to facilitate the inward listing of derivative instruments with foreign reference assets.

Please direct any specific queries regarding the Exchange Control Circulars or Rulings to standards@saica.co.za.

TAX

WHAT’S NEW AT SARS?

The latest updates can be viewed on the SARS website (www.sars.gov.za).

Revenue Laws Amendment Bills, 2008

The draft Revenue Laws Amendment Bills and Explanatory Memoranda, 2008 became available on 31 July 2008 for public comment.

These Bills were accessible from either the National Treasury
(www.treasury.gov.za) or SARS (www.sars.gov.za) websites.

This legislation, together with earlier Taxation Laws Amendment Acts (introduced on 19 March 2008), gives effect to the tax proposals presented by the Minister of Finance in the 2008 National Budget as tabled in Parliament on 20 February 2008.

As indicated in a Media Statement dated 1 August 2008 issued by National Treasury, the draft Revenue Laws Amendment Bills and Explanatory Memorandum, 2008 deal with the following key matters:

1. Conversion of the Secondary Tax on Companies to the New Dividends Tax: The Secondary Tax on Companies (STC) will be converted into a Dividends Tax at the shareholder-level in line with international practice. The new Dividends Tax will contain a withholding mechanism so that the company declaring the dividend is the party mainly responsible for collection. Responsibility for collection may be shifted to intermediaries in several circumstances as a matter of practicality.

One notable point relates to the continued existence of what are popularly known as STC credits. In the 20 February 2008 media statement on the conversion, it was announced that all STC credits would be completely eliminated upon conversion to the new Dividends Tax, due to concerns of administrative feasibility. However, after further analysis and consideration, it was decided that STC credits be maintained within the new Dividends Tax system for a limited period. Hence, STC credits will be available as an offset against the new Dividends Tax for a three-year transition period, after which all remaining STC credits will fall away.

It is reiterated that the new Dividends Tax will come into effect only once a number of tax treaties, which have already been renegotiated, have been ratified by the respective governments. Once these ratifications have been confirmed, the Minister of Finance will make an announcement via notice in the Government Gazette with the new Dividends Tax taking effect three months later. The target date set for the new Dividends Tax is late 2009. The proposed legislation is being enacted as part of the Revenue Laws Amendment Bills, 2008, in order to provide all stakeholders with sufficient time to adjust their systems by the target date.

As a final point, it is noted that the Revenue Laws Amendment Bills, 2008, only cover the core elements of the new Dividends Tax. A number of collateral issues must still be considered, including the taxation of foreign dividends, the taxation of deemed dividends, anti-avoidance rules (e.g. rules to prevent companies from disguising sales proceeds through pre-sale dividends). These issues will require separate policy announcements and will be addressed in 2009.

2. Pre-retirement withdrawals from retirement funds: In 2007, Government has simplified the taxation of retirement lump sums and eliminated tax avoidance schemes at the upper-end of the market. These draft Bills close this circle by simplifying the taxation of pre-retirement lump sum withdrawals. Pre-retirement lump sum withdrawals will henceforth be taxed as stand-alone income under the standard personal income tax structure applicable in the year of withdrawal. The current R1 800 exemption will be adjusted upward and be set at taxable income equivalent to 50 per cent of the primary rebate. This translates into a tax free amount of R23 000 in the current fiscal year, although the effective date will only be 1 March 2009. It should be noted that additional pre-retirement withdrawals from retirement funds will be taxed on a cumulative basis.

The Revenue Laws Amendment Bills, 2008, also cover a number of collateral adjustments relating to withdrawals. The tax rules will be adjusted so that the defaults operate in favour of retaining funds within retirement saving vehicles. For instance, parties leaving their employment will be taxed only upon actual cash withdrawals from retirement savings as opposed to the current “accrual” trigger. Other proposals relate to the division of retirement savings upon divorce with the non-member spouse being taxed should the non-member spouse decide to withdraw the funds from retirement savings.

3. Very Small Business Presumptive Tax: The Revenue Laws Amendment Bills, 2008, enact a new tax regime in order to simplify the compliance burden for very small businesses (i.e. businesses with an annual turnover up to R1.0 million). The new regime allows these very small businesses to opt out of the income tax, STC and value-added tax in favour of a simplified turnover tax. Qualifying very small businesses can be either sole proprietors or companies. The rate schedule for this new tax regime, which represents a reduction from that proposed in the 2008 Budget Review, is as follows:

Turnover Tax Liability and Marginal Rates

R0 – R100 000, 0%
R100 001 – R300 000, 1% of each R1 above R100 000
R300 001 – R500 000, R2 000 + 3% of the amount above R300 000
R500 001 – R750 000, R8 000 + 5% of the amount above R500 000
R750 000 and above, R20 500 + 7% of the amount above R750 000

4. Venture Capital: Access to equity finance by small and medium sized businesses is a key challenge, especially for high risk start-ups. In an attempt to overcome this difficulty, an incentive is proposed to pool investment funds for small businesses into a vehicle to be known as a Venture Capital Company. Parties making investments into a Venture Capital Company will be eligible for a 100 per cent deduction for the initial investment subject to certain limitations. The ordinary rules for recoupments and determination of the capital or revenue nature of disposals will apply. In order to qualify for this deductible investment status, a Venture Capital Company must invest in a portfolio of small business company shares. Special rules will apply so as to accommodate junior mining exploration companies.
5. Industrial Policy Projects: The 2008 Budget Review provides for R5.0 billion of foregone tax revenue (over three years) in support of Government’s Industrial Policy Action Plan to attract new investments and to upgrade/expand existing plant and equipment. The tax incentive will comprise an additional deduction for fixed capital investments and an additional deduction for employee training. This dual tax incentive will require pre-approval from an inter-departmental committee with different criteria applying for greenfields projects and brownfields/upgrade projects. The level of the deductions offered under the incentive will depend on whether the project obtains ordinary or preferred status against a set of criteria that, inter alia, take into account energy efficiency, cleaner production technology, business linkages, employment creation and skills training.
6. Low-Cost Housing: While Government has made significant progress towards providing low-cost housing, a large gap continues to exist beyond entry level housing for low-income earners. This gap mainly appears to be a supply-side problem. In order to provide a supply-side stimulus, an accelerated depreciation regime is proposed at a rate of 10 per cent per annum, thereby increasing after-tax returns for the providers of low-cost housing, defined as houses to the value of R200 000, excluding land, and apartments to the value of R250 000. This higher rate of depreciation should assist landlords and employers to increase the supply of low-cost housing for rental. To ensure that such low-cost rental houses (social housing) are made available at reasonable rentals, the providers of such low-cost houses for rental will be expected to rent such houses at affordable rentals. A 10 per cent write-off is also proposed for employers that sell employer provided low-cost housing to employees on loan account.
7. Urban Development Zones: The draft Bills also revisit the accelerated depreciation regime for buildings within Urban Development Zones. Firstly, the accelerated depreciation regime will be extended for another five years until 31 March 2014. Secondly, municipalities with approved Urban Development Zones may seek extension of existing areas if properly motivated. Thirdly, the rate of depreciation for new buildings will be increased to a rate of 20 per cent for the first year, followed by 8 per cent for each of the remaining 10 years (as opposed to the current 20 per cent for the first year followed by a 5 per cent rate over 16 years). Low-income housing (and improvements), defined as houses to the value of R200 000, excluding land, and apartments to the value of R250 000, within an urban development zone will receive a 5 per cent depreciation uplift.

SAICA submitted written comment on the draft Bills, 2008. A copy of the submission can be obtained on our website (www.saica.co.za).

SAICA also made oral presentations to the Parliament’s Portfolio Committee on Finance.

Edited by: Ewald Muller

Technical queries: standards@saica.co.za

Ethics and Discipline queries: standards@saica.co.za

Information Centre: pelmag@saica.co.za

Telephone: 011 621 6641 | Telefax: 011 621 6819

Website: http://www.saica.co.za