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01 Reporting Environment

Financial Accounting 2A (University of Namibia)

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Solutions to GAAP : Graded Questions Financial reporting environment

Solution 1.1

a) The South African Institute of Chartered Accountants requires that trainees are exposed to
pervasive professional skills and as well as specific skills which cover technical areas.

These aspects are monitored during articles through a rating system.

b) Differences between a discussion paper and an exposure draft

 Both documents are mechanics in the due process in developing accounting
standards.
 A discussion paper is issued in setting out an agenda.
 This is not a mandatory phase, however is common practice.
 An exposure draft involves drafting a proposed standard in the format of a standard.
 An exposure draft is a mandatory step in due process.

c) Benefits of using IFRS for SMEs

 provides disclosure relief (i.e. less detail needs to be provided in the financial
statements);
 simplifies many recognition and measurement criteria;
 removes choices for accounting treatments; and
 eliminates certain topics that are generally not relevant to SMEs.

d) The Conceptual Framework for Financial Reporting.

e) In terms of compliance with IFRS, South Africa fully complies with IFRS.

f) Legality of issuing Plutonic Ltd’s financial statements in French

 The Companies Act requires financial statements to be in any of the eleven official
languages.
 As French is not an official language, the financial statements either have to be
drafted in any of the eleven official languages, and failure to do so will be a
contravention of section 28 of the Companies Act.
 Hence the actions of the directors are illegal.

g) Accounting standards requiring disclosure of directors’ remuneration

 False, disclosure of directors remuneration is not a requirement of IFRS, but is a
requirement of the Companies Act, 2008.

h) IFRS (full) and IFRS for SME’s

i) Main difference between King III and the Companies Act

 The Companies Act No. 71 of 2008 is legislated.
 King 3 is based on principles of good governance.
 King 3 is not legislated, however, listed companies have to comply with requirements
of the JSE which states that compliance is essential.

j) King III only applies to large listed companies

 False, King III should be applied to all entities.
 This requirement applies to entities irrespective of whether or not it they are listed.
 All entities are encouraged to either apply King III or provide justifications for not
applying its principles. This is called the “adopt or explain” approach.

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Solution 1.2

a) The meaning of the term ‘IFRS’

The term 'International Financial Reporting Standards' (IFRS) has both a narrow and a broad
meaning.

Narrowly, IFRS refers to the numbered series of pronouncements that the IASB is issuing,
such as IFRS 15 Revenue or IFRS 16 Leases. This is distinct from the International
Accounting Standards (IASs) series issued by its predecessor, the International Accounting
Standards Committee (IASC).

More broadly, IFRS refers to the entire body of IASB pronouncements, including standards
and interpretations approved by the IASB and IASs and SIC interpretations approved by the
predecessor International Accounting Standards Committee (IASC).

b) The meaning of the term ‘standards’

Standards contain the principles applied by accountants in the preparation of financial

statements.
These standards are developed and issued by the International Accounting Standards Board
(IASB). However, the development process follows strict due process procedures that require
much collaboration with national standard-setters from around the world and other interested
parties.

c) The meaning of the term ‘interpretations’

As standards are applied in practice, issues often arise that need clarification by the IASB.
Where an explanation is required, the IASB issues a document called an interpretation.

Interpretations are given the same authority as the standards. Thus, if a standard comes with
an interpretation, this standard must be read together with its interpretation.

Although interpretations are issued by the IASB, they are actually developed by the IASB’s
Interpretations Committee. As with the development of standards, the development of
interpretations follows strict due process procedures that require much collaboration with
national standard-setters from around the world and other interested parties.

Since the IAS Board adopted all the work done by the previous IAS Committee, some
interpretations are prefixed with SIC and some are prefixed with IFRIC:
 The old IASC prefixed their interpretations with SIC, being the acronym for the
committee responsible for their development: Standing Interpretations Committee.
 The new IASB prefixes interpretations with IFRIC, being the acronym for the committee that
develops them: International Financial Reporting Interpretations Committee.

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Solution 1.3

a) What does compliance with IFRS mean?

To be able to state in the financial report that the financial statements comply with IFRS, the
entity must have complied with both the
 Standards, whether prefixed with IAS or IFRS; and
 Interpretations, whether prefixed with SIC or IFRIC.

When a set of financial statements is prepared in terms of IFRSs, a declaration of this

compliance must be included in the notes to the financial statements (IAS1.16).

b) Why would a company comply with IFRS?

There is no international body forcing compliance with IFRSs. A country’s specific national
legislation may
 require compliance with IFRSs
 neither requires nor disallows compliance with IFRS
 disallow compliance.

If national legislation requires compliance for certain entities (for example, listed companies),
it is because of the legislation that a company would comply with IFRS. However, in
situations where compliance is neither required and nor disallowed, compliance with IFRS
gives credibility to the financial statements and makes them understandable to foreigners, thus
encouraging foreign investment.
For many years, South Africa’s legislation did not require compliance with IFRSs. Despite
this, the increased credibility gained from complying with IFRSs led many South African
companies to adopt IFRSs. However, South Africa’s Companies Act now requires all listed
companies to comply with IFRSs while other companies may choose to comply.

Since compliance with IFRSs lends international credibility to the financial statements, to be
able to make such a statement is desirable to most entities.
c) The extent of compliance with IFRS around the world
The term ‘International Financial Reporting Standards’ can be a bit misleading at present
since not all countries use them. In other words, these standards are technically not
‘international’ until all countries require the use thereof. The situation is currently as follows:
 At least 1381 participating countries (as at 30 March 20171) already either permit or require
the use of IFRSs. Examples include South Africa, United Kingdom and all other member
states of the European Union, Australia, New Zealand, Canada, Saudi Arabia etc.2
 There are some countries that actually do not permit the use of IFRSs. Examples of some of
these include: Cuba, Indonesia, Iran, Mali, Senegal and Vietnam.2
 Some countries permit the use of IFRSs for some companies and disallow for others. For
example, the United States does not permit the use of IFRS by their domestic listed
companies but permits the use of IFRS by their domestic unlisted companies. 2

1. http://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis
2. https://www.iasplus.com/en/resources/ifrs-topics/use-of-ifrs
Some countries have adopted the IFRSs word-for-word as their own national GAAP. Others have
adopted IFRSs but with certain modifications that they consider necessary due to reasons that are
peculiar to that jurisdiction and which they thus believe have not been dealt with in the IFRSs.

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Solution 1.3 continued

There are other countries, however, that are not adopting the IFRSs but are choosing to converge
their national GAAP with the IFRSs instead. Examples include the United States of America, China
and India.
Thus, some countries have adopted IFRS but with modifications and some countries use their own
national GAAP which they argue has been or is being converged with IFRSs. However, research has
found that the difference between using pure IFRSs (i.e. pure adoption) versus using modified IFRSs
or a national GAAP that has been converged with IFRSs can be significant, despite claims to the
contrary.

Full details can be found at

http://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis

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Solution 1.4

a) Meaning of convergence

The purpose of convergence is to try to reduce the differences between International Financial
Reporting Standards and the standards of a specific country (that country’s national GAAP).
It involves discussion and collaboration between that country’s standard-setters and the IASB
in order to assess the differences and reach an agreement on how to minimise them.
The Constitution of the IFRS Foundation clarifies that the ultimate objective is the adoption
of IFRSs, and that convergence is simply a means to achieve adoption.

The terms harmonisation and convergence are often used interchangeably. Whereas
‘harmonisation’ was previously the buzz word, ‘convergence’ is now the new focus. In fact,
the Constitution of the IFRS Foundation refers only to the term ‘convergence’.
b) Convergence versus adoption

Convergence came about as a stepping stone due to resistance from some countries to a full-
scale adoption of the IFRSs. Where a country believes that it is unable to adopt the IFRSs,
convergence is an option.

The main reason why most companies want to use IFRSs in their financial statements is the
ability to demonstrate to the investor community that their financial statements are IFRS-
compliant. For that purpose, it is not sufficient that the standards have converged. The only
claim compliance with IFRS is to apply all the standards as issued by the IASB and make the
compliance representation required by IAS 1.

While convergence may be the necessary preparation for some countries to adopt IFRSs, the
simplest, least costly and most straightforward approach is to adopt the complete body of IFRSs
in a single step rather than opting for long-term convergence.

c) Reasons for resisting adoption

 Differences between a country’s national GAAP and the IFRSs are so vast that the
complications and related cost of converting to IFRSs are expected to outweigh the
benefits.
 Countries that believe that their national standards are superior to that of the IFRSs.
 The IFRSs are principles-based (in fact, one of the objectives in the development of an IFRS is
to ensure that it is ‘based upon clearly articulated principles’) whereas the United States, for
example, uses US GAAP which, although is intended to be principles-based, tends to be highly
rules-based due to their litigious society The US argues that the pure principles-based approach
is unsuitable since it opens the door to potential litigation, which is less defensible than their
relatively rules-based approach.

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Solution 1.4 continued . . .

d) Position of the USA

There is a plethora of information on this topic available online. Examples include:

IAS Plus (2018), IASB-FASB convergence. Available at

https://www.iasplus.com/en/projects/completed/other/iasb-fasb-convergence (Accessed on 10
January 2018)

Cohn, M (2016), FASB continues Engagement with IASB on IFRS, Accounting Today.
Available at https://www.accountingtoday.com/news/fasb-continues-engagement-with-iasb-
on-ifrs (Accessed on 10 January 2018)

Pacter, P (2013), What have IASB and FASB convergence efforts achieved?, Journal of
Accountancy. Available at
https://www.journalofaccountancy.com/issues/2013/feb/20126984.html (Accessed on 10
January 2018)

A summary follows . . .

The USA was initially completely opposed to the international standard-setting process.
However, after numerous US corporate collapses, the US Financial Accounting Standards
Board (FASB) and the International Accounting Standards Board (IASB) agreed to a process
of convergence.

The process of convergence between the IASB and the FASB started in September 2002
when, after a joint meeting by the two bodies, the ‘Norwalk Agreement’ was issued in which
both parties acknowledged their commitment to the development of high-quality, compatible
accounting standards that could be used for both domestic and cross-border financial
reporting.

In February 2006, a Memorandum of Understanding (MoU) between the FASB and the IASB
was issued. The title of the MoU was ‘A Roadmap for Convergence between IFRSs and US
GAAP: 2006–2008’.

In 2009, in the wake of the financial crisis, the Group of 20 Leaders (G20) called for standard
setters to redouble their efforts to complete convergence in global accounting standards by
June 2011. Following this request, in November 2009 the IASB and the FASB published a
progress report describing an intensification of their work programme, including the hosting
of monthly joint board meetings and providing quarterly updates on their progress on
convergence projects. In their joint statement, they explicitly underlined ‘we aim to complete
each major project by the end of June 2011, consistent with the milestones established by the
2008 update of theMoU’. However the positive momentum towards IFRS did not continue,
the decision to be taken in 2011 was postponed.

The US Securities Exchange Commission (SEC) was to decide in 2011 whether it would allow
its domestic companies listed in the US to use IFRSs, but subsequently postponed this to 2012.
But in October 2012, the SEC announced that, due to ‘the US Presidential Elections and other
priorities in Washington, it was unlikely that the SEC would return to the topic of domestic use
of IFRSs until early 2013’.2 However, the last ‘joint IASB and FASB progress report’ was
released in 2012, suggesting that although further work is continuing (evidenced by monthly
joint meetings between the FASB and IASB), the issue of domestic use of IFRSs is not high on
the agenda.

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Solution 1.4 continued . . .

Although Christopher Cox, the previous Chairman of the SEC, vowed that the process would be
complete by 2016, this clearly became impossible. The reason may be found in an illuminating
speech by the SEC's previous chief accountant, James Schnurr, in which he explained that,
although the SEC is still committed to the objective of setting a single set of high-quality
globally accepted standards, ‘there is virtually no support to have the SEC mandate IFRS for all
registrants’ and ‘there is little support for the SEC to provide an option allowing [U.S. public]
companies to prepare their financial statements under IFRS’. As a result, he said it was unlikely
that he would promote IFRS-based financial statements as a legislative requirement.3

Although the convergence project between the IASB and the FASB has a long way to go, the effects of
having successfully reduced many differences between the IASB’s IFRSs and FASB’s US GAAP
have already been felt by foreign companies listed in the US since they are no longer required to
prepare the complex and time-consuming reconciliation between their IFRS-based financial statements
and the results that would have been achieved using US GAAP.

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Solution 1.5

Agenda consultation

 Every five years, the IASB conducts a comprehensive review to set its priorities and
develop its project work plan
 Other topics can also be added to its work plan between agenda consultations arising
from, for example, a post-implementation reviews of a standard.

Research programme

 Most projects begin with research that explore the issues, identify possible solutions and
decide whether standard-setting is required. Before proposing the development of a new
standard, the IASB normally issues a discussion paper to seek public comment.
 If feedback provides evidence that an accounting problem exists and the problem is
sufficiently important to warrant changing an existing Standard or issuing a new one
(and a practical solution can be found), work begins on

Standard-setting programme

 If the IASB decides to amend an existing standard or issue a new one, the proposals are
published in an exposure draft for public consultation. To gather additional evidence,
members of the Board and IFRS Foundation technical staff consult with a range
of stakeholders from all over the world.
 All feedback is analysed and the exposure draft is refined before a new standard, or an
amendment to an existing standard, is issued.

Maintenance programme

 The IASB supports implementation of the standards and also maintains them.
 This includes consulting on the implementation of a new or amended standard to identify
any implementation problems that may need to be addressed.
 If issues arise, the IFRS Interpretations Committee may decide to create an IFRIC
Interpretation of the Standard or recommend a narrow-scope amendment. Such
amendments follow the Board's normal due process.

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Solution 1.6

a) Objectives of IFRS Foundation

 to develop, in the public interest, a single set of high quality, understandable,

enforceable and globally accepted financial reporting standards based upon clearly
articulated principles. These standards should require high quality, transparent
and comparable information in financial statements and other financial reporting
to help investors, other participants in the world’s capital markets and other users
of financial information make economic decisions.
 to promote the use and rigorous application of those standards.
 to promote and facilitate adoption of International Financial Reporting Standards
(IFRSs), being the standards and interpretations issued by the IASB, through the
convergence of national accounting standards and IFRSs

The IFRS Foundation takes account, as appropriate, the needs of a range of sizes and types of
entities in diverse economic settings.

b) Role in standard setting process

 IFRS Foundation

The IFRS Foundation exists as the legal entity under which the IASB operates. It is described
as ‘an independent, not-for-profit private organisation working in the public interest’.

 The IFRS Foundation Trustees

 The trustees are responsible for the governance and oversight of the International
Accounting Standards Board
 The trustees are not involved in any technical matters relating to IFRS Standards.
This responsibility rests solely with the Board.
 The Trustees are accountable to the Monitoring Board, a body of publicly
accountable market authorities.

 The IASB

 The International Accounting Standards Board (IASB) is an independent group of

experts with an appropriate mix of recent practical experience in setting accounting
standards, in preparing, auditing, or using financial reports, and in accounting
education. Broad geographical diversity is also required.
 Board members are responsible for the development and publication of IFRS
Standards, including the IFRS for SMEs Standard.
 The IASB is also responsible for approving Interpretations of IFRS Standards as
developed by the IFRS Interpretations Committee (formerly IFRIC).
 Members of the IASB are appointed by the IFRS Foundation Trustees through an
open and rigorous process that includes advertising vacancies and consulting relevant
organisations.

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Solution 1.6 continued . . .

 The IFRS Interpretations Committee

 The IFRS Interpretations Committee (Interpretations Committee) is the interpretative

body of the International Accounting Standards Board. The Interpretations
Committee works with the IASB in supporting the application of IFRS Standards.
 The Interpretations Committee responds to questions about the application of the
Standards and does other work at the request of the Board.
 The Interpretations Committee comprises 14 voting members, appointed by the
Trustees of the IFRS Foundation. The members provide the best available technical
expertise and diversity of international business and market experience relating to the
application of IFRS Standards

 The IFRS Foundation Monitoring Board

 The Monitoring Board ensures that the IFRS Foundation and the IASB’s decision-
making are independent. According to both the Constitution and the Monitoring
Board’s Charter, the Monitoring Board's main responsibilities include:
 ensuring the Trustees discharge their duties as defined by the Constitution;
 approving the appointment or reappointment of Trustees;
 meeting with the Trustees at least once a year (or more often if appropriate). 1

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Solution 1.7

Are par value shares permissible in terms of the Companies Act?

Companies may not authorise any new par value shares (also known as shares having a
nominal value) on or after the effective date (1 May 2011). However, for pre-existing
authorised par value shares the following applies:
 Companies that had authorised par value shares that were already in issue on the effective
date may leave these par value shares in issue, although the company also has the option
of converting them instead. See Companies Act Schedule 5 S6(2)
 Companies that had authorised par value shares in existence on the effective date that had
not yet been issued by this date, must apply the following rules:
- If none of the authorised par value shares have yet been issued or some have been
issued but all of these have subsequently been re-acquired, then none of these
unissued par value shares may be issued – these shares will first need to be converted
into shares of no par value. See Companies Regulations 31(3)
- If some of the authorised par value shares have been issued with some still remaining
unissued, these remaining unissued par value shares may still be issued...but only
until such time as the company chooses to convert these shares into no par value
shares and publishes a proposal to this effect. See Companies Regulations 31(5)

Close Corporations

New Close Corporations (CCs) may not be created after the effective date (1 May 2011).
However, CCs that were already in existence on this effective date may either:
 continue as a CC; or
 convert into a company.

Existing CC’s were given the option to continue as CCs instead of being forced to convert to
companies due to logistical reasons. (There are roughly 2 million CCs in South Africa
compared to roughly only 400 000 companies).

CCs that choose not to convert into a company must note that the Close Corporations Act has
been amended such that CCs will have to comply with most sections of the Companies Act
and related Regulations as if the CC were a company. For example, CCs will be subject to
the same criteria as companies when deciding what reporting standards to use and whether an
audit or independent review is required.

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Solution 1.8

a) Differential reporting refers to the various levels of compliance which apply depending
on the category of company.
The purpose of differential reporting is to allow smaller and less sophisticated companies
to produce financial statements using a simpler set of reporting standards than the
international standards that larger companies must comply with. The concept of
differential reporting was borne out of the acceptance that the content of the financial
statements should be driven by the needs of users. In other words:
 very small entities, for example, would need less complex financial statements
because the users of the financial statements are generally involved in the
management of the entity; whereas
 very large entities, for example, have thousands of shareholders who have no
involvement in the running of the business and thus need more information to be
included in the financial statements in order to assist in their decisions.
b) South Africa was the very first country in the world to adopt both the exposure draft and
the final IFRS for SMEs. South Africa’s Institute of Chartered Accountants (SAICA)
also provided substantive input to the IASB in the development of the standard.
c) Although prepared on IFRS foundations, the IFRS for SMEs is a stand–alone framework
which is separate from all other IFRSs. The IFRS for SMEs will be available to be used
by certain qualifying entities (i.e. some entities will have to apply full IFRSs and other
qualifying entities may apply IFRS for SMEs instead). The IFRS for SMEs provides the
following benefits:
 provides disclosure relief (less detail needs to be disclosed in financial statements);
 simplifies many recognition and measurement criteria;
 removes choices for accounting treatments; and
 eliminates certain topics that are generally not relevant to SMEs
d) SME is the acronym for small and medium-sized entity and refers to an entity that has no
public accountability but still produces general purpose financials for external users.
e) An entity has public accountability in the following circumstances:
 if its debt/equity instruments are publicly traded or the company is in the process of
issuing such instruments.
or
 one of its primary businesses is to hold assets in a fiduciary capacity (i.e. having the
legal authority and duty to make financial decisions) for a broad group of outsiders.
e.g. banks, insurance companies, mutual funds etc.

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Solution 1.9

a) False: The Companies Act 2008 does not require that directors’ remuneration be split
between executive and non-executive. The JSE Listing Requirements does, however,
require that directors’ remuneration be split between executive and non-executive and
therefore, if the company is a company listed on the JSE, this split is still a requirement.

b) False: The Companies Act 2008 requires disclosure of directors’ remuneration for only
those companies that require an audit in terms of the Act (section 30(4)).

c) False: The Companies Act 2008 lists remuneration separately from pensions paid by the
company and compensation for loss of office (section 30(4) (a) and section 30 (4) (b)
respectively)

d) False: The Companies Act 2008 requires that certain types of remuneration be disclosed
for each current director but there are other types of remuneration that would need to be
disclosed for each current and past director and some types of remuneration would even
need to be disclosed for each current, past and future director, including all relatives:
 Directors’ remuneration to be disclosed for each current director: directors fees,
salaries, performance related payments (such as bonuses) and certain expense
allowances;
 Directors’ remuneration to be disclosed for each current and past director:
contributions to any pension scheme not otherwise needing separate disclosure.
 Directors’ remuneration to be disclosed for each current, past and future directors,
including all relatives: options or rights given directly or indirectly, financial
assistance for the subscription of options or securities or purchase of securities and
any loans and other financial assistance.

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Solution 1.10

 SAICA is the national professional organisation of Chartered Accountants in South

Africa.
 The Accounting Practices Board (APB) was formed in 1973 by SAICA along with other
relevant business bodies.
 The APB was formed to develop generally accepted accounting practices and issue
Statements of Generally Accepted Accounting Practice (i.e. SA GAAP).
 SAICA established an Accounting Practices Committee to be the technical advisory body
to the APB.
 SAICA’s role as technical advisor to the national standard-setter, the APB, continued
until late 2011.
 The Companies Act was then revised and a newly constituted governmental body known
as the Financial Reporting Standards Council (FRSC) assumed responsibility as the
advisor to the Minister of Trade & Industry on financial reporting standards.
 The New Companies Act refers directly to IFRSs and the IFRS for SMEs as issued by the
IASB as the available reporting frameworks.
 As a consequence of the establishment of the FRSC and changes to the Companies Act as
mentioned above, the fundamental motivation for the APB’s existence has fallen away,
including the need to endorse IFRSs as SA GAAP.
 Therefore SA GAAP was withdrawn for years commencing on or after 1 December 2012.
 SAICA had always been the technical secretariat for the APB and is the interim technical
secretariat for the FRSC with the Government's consent and until such time as they have
appointed staff for this role and the handover has taken place.

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Solution 1.11

Study card: Reporting frameworks in SA

Listed public company Apply International Financial Reporting Standards (IFRS)
as this is a JSE requirement as well as a Companies Act
requirement
Unlisted public company Apply IFRS or International Financial Reporting
Standards for Small and Medium Entities (IFRS for
SMEs)
State-owned company Apply IFRS or whatever the Public Finance Management
Act requires
Not-for-profit companies that Apply IFRS
are required to audited in
terms of Regulation 28(2)(b)
Private company and close corporations
 PI score 350+ Apply IFRS or IFRS for SMEs
 PI score 100 to 349 Apply IFRS or IFRS for SMEs
 PI score <100 and financial Apply IFRS or IFRS for SMEs
statements are
independently compiled
 PI score <100 and financial Apply the Financial Reporting Standards as determined by
statements are internally the company * Before IFRS for SMEs can be applied, the
compiled company must meet the scope requirements of this
standard on an annual basis.

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