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ACCOUNTING STANDARDS BOARD MEETING HELD ON 2 JUNE 2011

At its meeting held on 2 June 2011, the Accounting Standards Board (the Board) considered the following:

The proposed Standard of GRAP on Related Party Disclosures (GRAP 20). The proposed transitional provisions for GRAP 25 Employee Benefits (ED 80) and GRAP 104 Financial Instruments (ED 81). The proposed transitional provisions for the initial adoption of GRAP 18 Segment Reporting, GRAP 105 Transfer of Functions Between Entities Under Common Control, GRAP 106 Transfer of Functions Between Entities Not Under Common Control and GRAP 107 Mergers. The analysis and discussion of comment received on Discussion Paper 5 Comparison of the Standards of GRAP to the IFRS for SMEs.

The Board also discussed the application of reporting frameworks by trading entities and Government Business Enterprises (GBEs) and the impact of the new Companies Act on public sector entities.

Technical Activities

Related Party Disclosures

The Board considered the proposed Standard of GRAP on Related Party Disclosures (GRAP 20) incorporating the written and verbal comment received on ED 79. Even though no significant issues were raised during the comment process, the Board agreed to clarify the Standard to require that only when oversight includes the responsibility for planning, directing and controlling, would the person exercising such oversight become a member of management. A separate paragraph will also be introduced to explain the impact of political influence. The Board clarified that a reporting entity is exempt from all the disclosure requirements in the Standard: if the transaction occurred within normal supplier and/or client/recipient relationships on terms and conditions no more or less favourable than those which can reasonably be expected if the entity deals with that individual entity or person under similar circumstances; and when the terms and conditions, established by that reporting entity’s legal mandate, are within the normal operating parameters. Subject to other minor editorial amendments, the Board unanimously approved GRAP 20 as a final Standard of GRAP.

Proposed transitional provisions for GRAP 25 Employee Benefits (ED 80) and GRAP 104 Financial Instruments (ED 81)

As the Board did not receive any substantive comments on ED 80, no amendments have been made to the proposed transitional provisions for the initial adoption of GRAP 25. Apart from the derecognition of financial instruments, respondents requested that the proposed transitional provisions for GRAP 104 should not be applied retrospectively. The Board supported the Secretariat’s view, however, that since entities are already required to apply IAS 32, 39 and IFRS 7, there should be no significant implementation issues other than those already dealt with in the transitional provisions, eg on classification of assets and liabilities. The retrospective requirements were thus retained. Amendments were nevertheless made to clarify that the existence of assets, that were not previously capitalised, is an issue of recognition rather than derecognition. The approved transitional provisions will be included in Directives 2 to 4 and 8.

Proposed transitional provisions for the initial adoption of GRAP 18, 105, 106 and 107

Following the approval of the GRAP 18 Segment Reporting, 105 Transfer of Functions Between Entities Under Common Control, 106 Transfer of Functions Between Entities Not Under Common Control and 107 Mergers, the Board considered the proposed transitional provisions for these Standards of GRAP. The treatment of the opening balance of goodwill recognised under IFRS 3 Business Combinations was debated. The Board supported the project group’s proposal that the opening balance of goodwill should be recognised against accumulated surplus or deficit for the earliest period presented. The Board noted that such recognition was less complicated and supported comparability of financial statements. Subject to other minor editorial amendments, the Invitation to Comment was approved unanimously for issue as an Exposure Draft with a comment period of three months.

Analysis and discussion of comments received on Discussion Paper 5 Comparison of the Standards of GRAP to the IFRS for SMEs

The Board considered the comment and proposed responses to the comment received on Discussion Paper 5. Based on the analysis of the comment, the Board noted that two views have emerged concerning differential reporting: One reporting framework is appropriate for all entities; and There should be a separate reporting framework for medium and low capacity municipalities. After some debate, the Board confirmed its view that there should be only one reporting framework for the public sector as one uniform basis of accounting for all entities will improve comparability and enable, amongst others, consolidation. A research report will be developed to outline the Board’s analysis and response to the differential reporting issues. The research paper will distinguish between conceptual or technical issues, implementation and other issues and will indicate the Board’s responses to these issues. The Board agreed that some of the issues raised by respondents regarding Standard simplification matters could be addressed as part of the Improvements project for 2011. Other issues need to be addressed as part of a broader “GRAP Simplification” project that will be added to the work programme. Issues that are to be considered in the Improvements project include: Amend GRAP 7 Investments in Associates to clarify that transaction costs should be capitalised as part of the cost of the investment. The meaning of “significant”, used in classifying multi-use investment properties, should be explained in GRAP 16 Investment Property. Content should also be provided for the disclosure on the range of estimates within which fair value is likely to lie for investment property measured at cost when a fair value model has been selected. Clarifying the meaning of “temporarily idle” property, plant and equipment. Guidance from the IFRS for SMEs should be included in GRAP 3 Accounting Policies, Changes in Accounting Estimates and Errors clarifying that it is not a change in accounting policy when an entity changes from fair value to cost, or vice versa, based on the availability of information. A specific example will be provided of when this would apply. Issues that will be included in the broader “GRAP Simplification” project are, amongst others: Expensing of borrowing costs that will result in the repeal of GRAP 5 Borrowing Costs and amendments to other existing Standards of GRAP. Consideration as to whether GRAP 100 Non-current Assets Held for Sale and Discontinued Operations should be separated between requirements for assets held for sale and discontinued operations. Public sector specific indicators need to be developed to review the residual values, useful lives and depreciation methods using an indicator basis. Componentisation of assets based on whether such components have different useful lives.

The application of Reporting Frameworks by trading entities and Government Business Enterprises (GBEs)

The Preface to the Standards of GRAP currently requires trading entities to apply Statements of Generally Accepted Accounting Practice (GAAP). An exemption to apply Standards of GRAP has in the past been granted by the National Treasury on the basis that such entities operate on a cost recovery basis, as opposed to a profit generating one. The trilateral parties proposed at their last meeting that the Reporting Framework for trading entities should be changed from Statements of GAAP to Standards of GRAP since the issue of such exemptions on an on-going basis is not feasible. The Board agreed that an Exposure Draft should be issued requesting respondents’ views on the proposed change in the Reporting Framework. Comment should also be requested on proposed transitional provisions for those trading entities that migrate from Statements of GAAP to Standards of GRAP, and a modified cash basis of accounting to Standards of GRAP. The Board further noted that a number of recent discussions had seen the view expressed that Government Business Enterprises (GBEs) should also be required to apply Standards of GRAP instead of International Financial Reporting Standards (IFRSs). Some Board members expressed concern about this and the potential impact it could have on the international competitiveness of the GBEs in the capital markets and the implications for compliance with stock exchange regulations. The Board noted that the new Companies Act required State-owned enterprises (SOEs) to apply IFRS. However, a clause in the Act states that the Public Finance Management Act (PFMA) overrides the Companies Act when there is a conflict. The current debate on the existence of the SOEs, ie if the SOEs fulfil a public service obligation, then the application of Standards of GRAP is appropriate or if the SOEs are required to be profit-making, then the application of IFRSs is appropriate. All of these may inform the motivation for a specific Reporting Framework for SOEs. To address the application of different frameworks, the Board agreed that a Discussion Paper should be issued on the use of Standards of GRAP or IFRSs by GBEs. This will, outline the arguments for and against the use of the two frameworks. The Paper will also explore the application of IFRSs by Schedule 2 entities, and Standards of GRAP by Schedule 3B and 3D entities. The Board noted that the application of Statements of GAAP by certain public sector entities poses challenges for the Accounting Practices Board (APB) in implementing the new Companies Act. The Companies Act requires entities with a public interest rating of more than 350 to apply either IFRS or IFRS for SMEs, while those with a score of 350 or less apply IFRS, IFRS for SMEs or Statements of GAAP. The APB would like to repeal Statements of GAAP. Currently the Preface to the Standards of GRAP lists the public sector entities that are required to apply Statements of GAAP. This is also prescribed in the Treasury Regulations. The Board noted that if an amendment is made to the Treasury Regulations then an amendment to the Preface to the Standards of GRAP may not be necessary. The Secretariat of the ASB and the National Treasury should work together to resolve this issue

General

Next ASB Meeting

The next meeting of the Board is scheduled for 26 July 2011. Observers are welcome at these meetings, but space is limited. In order to accommodate observers at ASB meetings interested parties are asked to complete the registration form available on its website

Accessing documents issued by the ASB

Persons and organisations interested in the activities of the ASB should monitor the website, www.asb.co.za, or contact info@asb.co.za, to be advised of the release of the latest Exposure Drafts for public comment.