ACCOUNTING

Accountancy SA, Sep 2008

CONSULTATIVE DOCUMENTS ON THE CONCEPTUAL FRAMEWORK

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published consultative documents that seek public comment on two of the eight phases of their joint project to develop an improved conceptual framework. The objective of the project is to develop an improved conceptual framework that provides a sound foundation for developing future accounting standards.

Exposure draft of Chapter 1 and Chapter 2 of the Framework

The first document published is an exposure draft of Chapter 1 and Chapter 2 of the framework. This document has been issued in South Africa as ED 240-An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decisionuseful Financial Reporting Information.

It seeks views on an improved objective of financial reporting, the qualitative characteristics of information provided by financial reporting and constraints on the provision of that information. The draft reflects the board's updated proposals in the light of comments received on an initial consultation document published in July 2006. The exposure draft now proposes that the objective of financial reporting is to provide financial information that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers.

It also presents an improved description of 'faithful representation', one of the qualitative characteristics that financial information should possess if it is to provide a useful basis for economic decisions.

Preliminary views on the reporting entity concept

The second document, published as a discussion paper, sets out both boards' preliminary views on the reporting entity concept and related issues. This discussion paper has been issued in South Africa as ED 241-Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity.

Although the reporting entity concept determines some important aspects of financial reporting, the boards' existing frameworks do not address it specifically. The boards' preliminary views are that:

* a reporting entity is a circumscribed area of business activity, of interest to present and potential equity investors, lenders and other capital providers;

* control is the basis for determining the composition of a group reporting entity; and

* consolidated financial statements should be prepared from the perspective of the group reporting entity.

The above EDs can be downloaded from the SAICA Website and their SAICA comment deadline is 1 September 2008.

PREFACE REVISED FOR COMPANIES ACT CHANGES

The process followed for exposure and approval of Statements of Generally Accepted Accounting Practice (GAAP) is currently undergoing change. The Corporate Laws Amendment Act No. 24 of 2006 (CLAA) changed the Companies Act No. 61 of 1973(CA) and came into effect on 14 December 2007. Section 440P(1) of the Companies Act establishes a new accounting standard-setter in South Africa: a body corporate entitled the "Financial Reporting Standards Council" (FRSC) or (Council). The FRSC is not yet operational, and therefore standard setting is still being carried out under the auspices of the Accounting Practices Board (APB).

The Preface to Statements of GAAP has therefore been revised to include the objectives and membership of the APB and the FRSC and explains the process followed for exposure and approval of Statements of GAAP, followed by the APB, and as detailed in the revised Companies Act for the FRSC.

IMPACT OF AMENDMENTS TO IAS 32 (AC125)

Previously we have communicated the amendments to IAS 32(AC 125)-Financial Instruments: Presentation and IAS 1(AC 101)-Presentation of Financial Statements: Puttable Financial Instruments and Obligations Arising on Liquidation. These amendments may be relevant for various industries such as cooperatives, clubs, partnerships and collective investment schemes, private equity funds and hedge funds.

Typically these are entities that report little or no equity in terms of IFRS, but disagree with the treatment of some of their instruments as liabilities under IFRS, because they believe them to be equity in substance. Accordingly, these entities would not have previously shown any profit in terms of IFRS, when the reality is that they are earning profits for their investors. The amendments to IAS 32 (AC 125) may change this.

An example is the collective investment scheme industry where, historically, the financial statements have not been prepared based on South African Statements of Generally Accepted Accounting Practice (SA GAAP) or International Financial Reporting Standards (IFRS), because the Collective Investment Schemes Control Act, 2002 does not currently require one of these frameworks. The basis of preparation has been aligned to the basis on which the funds are priced rather than one of the recognised frameworks. There has, however, been a move by some funds to apply either SA GAAP or IFRS over the past few years, and the debt/ equity debate is particularly relevant in this industry. Under the historical basis the unit holders' interest in the fund has always been accounted for as equity, but under SA GAAP or IFRS there is a strong argument that the unit holders' interest should be accounted for as debt because this interest is akin to a puttable financial instrument. (The investor, through the fund manager, can liquidate his/ her investment in the fund as and when he/ she wishes, provided it is done in terms of the fund's trust deed.)