South Africa’s top 40 companies listed on the JSE have made good progress in their corporate reporting initiatives. Yet, despite progress being made, companies still have the potential to develop their reporting further.
PwC’s “Value creation: the journey continues” survey involved an analysis of the integrated reports of the top 40 companies listed on the JSE during the review period covering the 2013 calendar year. The assessment was based on PwC’s integrated reporting model and linked to the Content Elements of the International Integrated Reporting Committee’s (IIRC) International <IR> Framework.
According to Zubair Wadee, PwC Assurance Partner, building and maintaining trust has never been more important and challenging for the corporate world. What customers, suppliers, employees, governments and society in general expect from business is changing focus with the integrated report the most prominent channels of communicating with stakeholders.
The integrated report seeks to align relevant information about an organisation’s strategy, governance systems, performance and future prospects in a way that reflects the economic, environmental and social impact it has on the environment in which it operates. Integrated reporting is gaining traction globally as evidenced by the positive comments on <IR> by UNCTAD and the B20 of the G20 countries. Notwithstanding this, preparers are striving for quality integrated reports.
This year companies have attempted to “cut the clutter” in their integrated reports by removing information or moving it to other reports that provide more detail, or making it available on the company’s’ website. Most companies have opted for a “suite” of reports (85%) rather than issuing a single integrated report (15%). As was the case in last year’s findings, companies still tend to focus on historical reporting, with limited insight being provided about prospects for the future.
Findings were grouped by content element and then evaluated according to three broad categories: clear opportunities to develop reporting; potential to develop reporting; and effective communication.
- Governance: Reporting on governance was the area which appeared to require the greatest improvement. Some description of the actual activities undertaken by the board was provided by 41% of the reports, while 33% of reports were assessed as having accomplished good reporting practice and having reported on the actual activities of the board. None of the companies surveyed provided effective disclosure about succession planning.
- Business model: Reporting on the business model has consistently proven to be one of the areas where the most effective communication has been achieved, with 71% of organisations making reference to their business model.
- Risks and opportunities: The vast majority of companies surveyed (95%) showed the potential to develop risk reporting and to integrated their assessment of risk into other aspects of the report (54%).
- Strategy and resource allocation: More than three-quarters (82%) of companies explain their key strategic priorities, but only 8% make a clear distinction between short, medium and longer-term strategic priorities.
- Performance: The overall results of the survey show that there is significant potential to develop reporting on performance, with only 10% of reporters effectively communicating their holistic performance to users.
- Outlook for the future: According to the survey, much of what companies currently report tends to be backward-looking and fails to provide stakeholders with sufficient information to make a meaningful assessment regarding the organisation’s ability to create and sustain value over the short, medium and long term.
Global economies must lower carbon emissions
Climate change analysts estimate that the global economies need to cut their energy-related carbon emissions for every $ of GDP by 6,2% every year from now to 2100. That is more than five times the rate currently achieved.
Australia tops PwC’s Low Carbon Economy Index for the second year in a row, recording a decarbonisation rate of 7,2% over 2013. The index finds the UK was the most improved nation in terms of reducing carbon emissions per unit of GDP, after rising from almost the bottom of the table last year. China, South Africa and Italy also performed well – achieving a decarbonisation rate of between 3% and 5%. South Africa is recorded as one of the top performers in fifth place on the index for a developing country – the country recorded a decarbonisation rate of 3% over 2013.
Although as yet there is no legislation in South Africa that governs the reduction of carbon emissions, taxation that supports the country’s reduction of emissions is on the horizon and will be implemented in 2016.
South Africa is regarded as one of the “dirtiest” energy producers owing to its heavy reliance on coal. The country is responsible for 1,3% of global energy emissions and is the 12th largest emitter of CO2 emissions in the world and nearly half of the CO2 emissions for the entire continent of Africa. The government has pledged to the UN an emission reduction target of 34% by 2020 and a further 42% by 2025 from a “business as usual” trajectory.
Growth in renewable energy is emerging as a core part of the national energy mix. Across the world the use of renewable energy, excluding hydroelectricity, grew by 16%. The largest rates of renewables growth are observed in air and wind energy. Wind energy witnesses strong growth, particularly in Africa, Latin America and Asia. These regions account for one third of global wind energy generation.
Although there is a genuine attempt on the part of businesses to reduce their carbon emissions, and an overall awareness of climate change and interest in renewable energy, more needs to be done by business to reduce carbon emissions.
Custom-built business centre for entrepreneurs
Mercantile Bank has opened South Africa’s first purpose-built business centre for entrepreneurs. The flagship centre in Sandton, Johannesburg, is the first of its kind to improve the ease of banking by speeding up transacting and reducing the time a business owner has to spend attending to financial administration.
The centre was opened by Karl Kumbier, CEO of Mercantile Bank, together with Portugal’s Deputy Minister of Economy, Investment and Innovation, Pedro Gonçalves, and Gauteng Premier David Makhura.
Speaking at the opening, Kumbier said Mercantile Bank’s ties with entrepreneurs extend back several decades. “We have a deep understanding of the needs of the South African entrepreneur and this is why we wanted our business centres to cater exclusively for business owners,” he said. “Established businesses deserve more attention as they fuel South Africa’s economic growth and create employment.”
Gonçalves said that Portugal values its economic, historical and cultural relationship with South Africa. Mercantile Bank has got strong ties with Portugal through its parent company Caixa Geral de Depósitos, a Portuguese government-owned international banking group. “We are honoured to participate in the opening of this business centre. While Mercantile Bank operates exclusively in South Africa, it has reach into other key African markets through its parent company and their subsidiaries in Angola and Mozambique. There is an ongoing focus on capturing trade flows between these fast-growing economies,” Gonçalves said.
The new centres in Sandton, Menlyn and Horizon in Gauteng are equipped with facilities to improve the ease of banking for entrepreneurs. The centres have on-site bulk cash recycling machines that enable safe withdrawal, deposit and counting of large amounts of cash. Business owners who do not have access to facilities such as meeting rooms can also book a boardroom at the bank where they can meet with clients.
Kumbier says the financial services market is dominated by larger banks operating in a very competitive space. Mercantile is a niche bank that specialises in providing financial products and services to entrepreneurs and wanted its brand to better represent what its clients need from a business bank.
“Our business centres form part of our strategy to streamline banking for our clients in a functional and modern banking environment,” said Kumbier. “Our new brand is built around our vision to be the bank of choice for business owners and to double its size in the next five years.”
The bank has a national footprint of 15 fully transactional business centres in four provinces – Gauteng, the Western Cape, KwaZulu-Natal and the Free State.
Technical Updates
ACCOUNTING
Circular 3/2004 withdrawn
Circular 3/2004 Guidance for the inclusion of items in the results of operating activities has been withdrawn as it is outdated. This circular provided guidance for the inclusion of items in the results of operating activities and similar items in terms of the previous version of IAS 1 Presentation of Financial Statements (2003).
Guide revised
The SAICA Guide on Pro Forma Financial Information has been revised in order to update it for the amendments to the JSE Listings Requirements issued in August 2014, which remove the obligation to produce pro forma financial information in certain instances. The revised guide is effective from 30 September 2014 and can be downloaded from the SAICA website.
Option to use the equity method
New amendments that will give entities the option to use the equity method to account for investments in subsidiaries, joint ventures and associates in the separate financial statements have been published. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.
Equity Method in Separate Financial Statements: Amendments to IAS 27 can be downloaded from eIFRS and the IASB press release can be downloaded from the IASB website.
TAX
Tax court case
A case heard by the tax court in September 2014 makes for interesting reading. A dispute arose because SARS assessed the employer for the period 1 March 2003 to 29 February 2008 to the amount of R11 million on the premise that the amounts allocated to the company motor vehicle scheme or “sacrificed portion” of the total package constituted remuneration which accrued to the employees and are, as such, taxable in terms of the provisions of paragraph (c) of “gross income” as defined in section 1(1) of the Income Tax Act 58 of 1962.
What was interesting is not so much the issue at hand, but the court’s response to the request by the employer that the interest and penalties imposed should be remitted. In dealing with this issue Judge Mavundla stated that: “In the matter of Ruyobeza v Minister of Home Affairs the court held that: ‘Normally, where the legislature has entrusted a particular function to a statutory body a court will not, in the exercise of its review powers, usurp that function unless there are exceptional circumstances justifying such action.’ In the matter of Minister of Environmental Affairs & Tourism v Smith it was held that the word ‘you must’ in a statute do not afford discretion but are peremptory.”
In the judge’s view paragraph 6(1) of the Fourth Schedule is peremptory and therefore there is no room for SARS not to levy interest and penalties where there has been no compliance. The judge was further of the view that the reasons advanced on behalf of the employer why this court should order remittance of the penalties and interest levied do not amount to exceptional circumstances. He was of the same view with regard to interest.
INTERESTING FACTS
$430 million
The amount needed to fight the current Ebola outbreak, according to a draft World Health Organisation document.
$38,1 million
A Ferrari set a new record for the most expensive car ever auctioned. The red 250 GTO Berlinetta was one of just 36 built from 1961 to 1964.
Energy-efficient buildings a winner
Energy-efficient commercial building in South Africa deliver better returns for their owners and as a result are better investments, according to a new study conducted by Investment Property Databank (IPD) and the Green Building Council of South Africa (GBCSA).
The research results for last year show that energy-efficient buildings had greater occupancy levels, generated higher net incomes a square metre, and delivered higher net income growth compared with less efficient buildings.
In addition, these buildings consumed about a third less electricity and half the amount of water, which meant lower utility bills for occupiers, enabling businesses to reduce operating costs.
The investigation considered 461 commercial buildings owned by nine funds: Growth-point Properties, Hyprop Investments, Investec Property Fund, Liberty Properties, Old Mutual Property, Pareto Limited, SA Corporate Real Estate Fund, Delta Property Fund and Vukile Property Fund. It compared the performance of properties with top-quartile energy efficiency to the rest of the sample, which represented a large portion of the South African commercial property sector.
The results revealed that in the year to December last year, properties with top-quartile energy efficiency delivered a total return of 15,9%, which was 170 basis points higher than the balance of the sample buildings, which delivered a 14,2% total return.
The income returns achieved by the two sets of properties were identical at 7,8% but the energy-efficient properties recorded a higher capital growth of 8,1%. The findings were in line with similar studies done internationally.
Source: Business Report, 15 September 2014
Challenge defining the middle class
There has been a dramatic expansion in the middle class since 1994, and the largest share in this growth is among black South Africans who changed consumption patterns as they entered the residential property market and spent on durable goods.
But economists and analysts are still debating how exactly to define the “middle class” and how large it is, despite much research into this surge in relative affluence.
According to researchers from Stellenbosch University’s Research on Socio-Economic Policy Unit, “middle class” is a term borrowed from developed-country literature to represent the substantial middle layer of society where people are well educated, skilled, and earning a good salary. “However, when applying this concept to highly unequal developing countries such as South Africa, there is tension between the attributes associated with a middle class in developed-country literature and the middle segment of income distribution in South Africa,” the Stellenbosch researchers say.
In South Africa, particularly among the black middle class, this group has low levels of tertiary education, does not earn much, and is in semi-skilled and unskilled occupations. The researchers define the middle class as people with an income threshold of R4 100 a month (in 2012 prices) and found the group had grown from 3,6 million people in 1993 to 7,2 million in 2012.
The Organisation for Economic Co-operation and Development (OECD) defines the global middle class as all people living in households with daily incomes of between $10 and $100 in purchasing power parity terms. It estimates that the middle class will increase from 1,8 billion people across the globe in 2009 to 3,2 billion by 2020. The OECD says that while the middle class is rapidly expanding in emerging and developing countries, it is shrinking in rich countries, particularly since the 2009 global financial crash.
The African Development Bank regards people with daily per capita consumption of between $4 and $20 as middle class and says there are 300 million middle-class citizens in Africa.
A recent report by Standard Bank estimates that the number of middle-class households in 11 sub-Saharan African countries will increase by an additional 14 million people between 204 and 2030, from the current 15 million.
Standard Bank senior political economist Simon Freemantle says the African Development Bank’s definition of middle-class spending is nowhere near what should be regarded as middle class, although he concedes that effectively measuring the size of this class is “challenging”.
Source: Business Day, 3 September 2014
