ACCOUNTING

Accountancy SA,  Oct 2005  

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OPERATING LEASES

The Accounting Practices Board (APB), as the official standard setter in South Africa, took a decision a number of years ago to issue International Financial Reporting Standards (IFRS), which includes International Accounting Standards, as Statements of GAAP without amendment. This is important in order for South Africa to become a globally recognised market for investors. The importance of International Standards has been further emphasised in the Companies Act Amendment Bill, released on 13 July 2005.

SAICA is fully aware of the effect of applying the requirements of the International Accounting Standard, IAS 17 - Leases, and its South African equivalent AC105 on the property, retail and other sectors of the JSE, as well as the difficulties experienced by members who have to implement this standard.

It has come to SAICA's attention that certain companies are applying the cash flow basis as a systematic basis representative of the time pattern of the users benefit, for operating leases. IAS 17(ACIOB) requires the implementation of the straight-line basis of accounting for such leases. SAICA therefore had a responsibility to alert the market to this anomaly by issuing communication to its members, as well as a press release to the broader market, on 29 July 2005. This press release was also published on SENS. SAICA subsequently distributed Circular 7/2005 on 4 August 2005 to provide members with further guidance in this regard.

Circular 7/2005 merely points out what the correct interpretation of operating leases with fixed escalation clauses in terms of IAS 17(AC105) is. The circular is not an interpretation in itself and therefore has not indicated an effective date. Companies need to gather the relevant information, if they have not been straight-lining lease agreements, and disclose the effects of this to the market as soon as possible. Auditors need to consider the materiality of any change and the effect, if any, on their audit report. The JSE Listing Requirements need to be adhered to for companies listed on the exchange. The JSE has sent a letter to all listed companies in order to reinforce the obligations to comply with these requirements.

SAICA is also fully aware that many lease agreements in South Africa were negotiated in market conditions that may make the requirement more onerous in South Africa than in other countries. The requirements of the standard do not give discretion about the application of the use of the straightline basis, even where this causes significant stress to preparers and advisors.

SAICA is continuously communicating the impact of the application of global practices on the South African market to the IASB.

The IASB has a long-term leasing project underway, which is expected to result in fundamental changes in accounting for leases. The IASB has tentatively agreed that accounting for leases should be based on the analysis of assets and liabilities that arise from contractual rights and obligations of lease agreements, as the lessor has an unconditional right to receive, and the lessee has an unconditional obligation to pay.

However, this project will not result in a change to the current standard in the short or medium term. Therefore SAICA has issued guidance to its members, as noted above. The intention of this guidance (Circular 7/2005) is to proactively outline to members what is required while SAICA seeks to communicate and further clarify the situation with the IASB. Please visit the SAICA website for all related documents.

SUBSTANTIVELY ENACTED TAX RATES AND LAWS

The APC has released ED205 - Substantively Enacted Tax Rates and Tax Laws, for public comment. The exposure draft addresses the issue of when changes in tax rates and tax laws, announced by the Minister of Finance during the annual Budget Statement, should be regarded as substantively enacted, in terms of IAS 12(AC102) - Income Taxes. The exposure draft contains illustrative examples and guidance on disclosure, as well as a basis for conclusions. The comment deadline was 30 September 2005.

FINANCIAL REPORTING GUIDE IN TERMS OF THE REGULATOR'S REQUIREMENTS ON RETIREMENT FUNDS

The financial reporting guide in terms of the Regulator's requirements on retirement funds was published on the SAICA website on 12 July 2005. It will be open for a threemonth comment period after which it will be finalised.

SAICA's Retirement Funds Committee prepared the guide in conjunction with the Financial Services Board (FSB) to provide guidance to members on the financial reporting requirements of the Pension Funds Act of South Africa (the Act), and the regulations made under the Act.

The guide aims to clarify accounting and reporting issues that are specific to retirement funds, focussing on large privately administered funds. The guide assumes compliance with the regulatory disclosure required by the Act and partial compliance with Statements of Generally Accepted Accounting Practice (GAAP). Therefore, compliance with the guide will not result in compliance with International Financial Reporting Standards or with Statements of GAAP.