Financial Reporting Requirements in South Africa - Essay Example

Accounting Research Report Student Name: University: Subject: Instructor: August 26, 2013 Table of Contents Content…………………………………………………………………………………Page 1.0 Letter of Transmittal…………………………………………………………3 2.0 Executive Summary…………………………………………………………4 3.0 Introduction…………………………………………………………………..4 4.0 Findings………………………………………………………………………6 5.0 Conclusion……………………………………………………………………12 6.0 References……………………………………………………………………13 ACCOUNTING RESEARCH REPORT 1.0 Transmittal Letter August 26, 2013 To: Miss Miriam From: “Your Name” Client Ref: 0002664 File Number: 6754 Perth Avenues Re: Financial Disclosure and reporting issues in South African JSE: Bases on your request, I have analyzed the above mentioned issues and the report of that assessment is detailed in section two. The objective of this assessment is to outline the financial reporting requirements in South Africa based on case study on a mining company (Royal Bafokeng Platinum). The report is based on the analysis of financial reporting of Royal Bafokeng Platinum, the political influences and sustainability reporting. There was no physical inspection conducted. The assessment was carried out and the report was developed in compliance with the Uniform Standards of Professional Assessment Practice. It was a pleasure helping you. In case you may need any additional service, kindly do not hesitate to contact me. Respectfully Submitted: “Your Name” 2.0 EXECUTIVE SUMMARY: This report offers an assessment of auditing and accounting practices and procedures in South Africa. To do that, the report outlines the South Africa’s financial reporting environment within the context of the existing financial reporting provisions for a public listed company in SA. The report also covers if any, recent changes within the reporting requirements since the last decade, and any possible future changes within their reporting requirements. To comprehensive cover financial disclosure and reporting issues, the report examines the cultural effects on the South African financial reporting and highlights the political processes, which influence the establishment of accounting principles in SA and explores how the case study company’s stakeholders seem to have influenced Royal Bafokeng Platinum reporting practices. The report utilizes relevant accounting concepts such as systems oriented theories, cultural theories, and regulatory theories do offer in-depth analysis of the financial reporting issues in South Africa. 3.0 INTRODUCTION: The current state of affairs in South Africa can be termed as transition process. Organizations and companies are moving gradually toward global standardization due to the off-shore listing requirements and to develop user friendly, transparent and simpler information for the potential global investors. Such moves come against the environment where the mineral sector has been a huge economical contributor, either through GDP and fiscus of South Africa. In the course of isolation, huge corporate structures were dominant in the mining sector, providing significant mass to economically support the sector. About three decades ago, the mineral sector was of strategic significance to SA in terms of foreign exchange earnings and exchange. The globalization and restructuring of corporations have on one hand resulted in the emergence of joint ventures, mergers and new companies, and on the other hand foreign bourses listing. These developments have generated a new form of speculative investors which is different from the usual institutional base investor. The outcome of these concerns have been the need for standardization and regulation of financial reporting based on transparency and good international accounting practice, linked to reliable and accurate forecasting. Corporations in SA have transitioned toward the utilization of IASs (International Accounting Standards) for public reporting and analysis and standards for Mineral Reserve and Mineral Resource reporting have been established through the support of SAIMM (South African Institute of Metallurgy and Mining), and greatly implemented by the industry. In addition, the requirements for listing for mining firms under JSE Section 12 have been modified recently to incorporate and handle these issues. Similar to Canada and Australia, whereby CIMVal Code and VALMIN Code has been established, SA is in the process of completing the development of a mineral property valuation code, linked to listing requirements and SAMREC Code that can be used by foreign as well as South African mining firms investing in SA and complies with international standards, which have been established while simultaneously taking care of domestic needs. Scope: The purpose of this report is to cover the Financial Disclosure and reporting requirements in South African JSE for mining companies. Limitation: The report is developed from limited opinions, canvassed from a financial report of a case study mining company (Royal Bafokeng Platinum), it terms of their engagement on the issues. It appears that a degree of secrecy and uncertainty exists in respect to valuation and reporting in SA, as observed in the report. These issues seem to be currently propagated by matters of international competitiveness, globalization as well as the looming Capital Gains Tax and the core changes projected in the description of mineral property rights. 4.0 FINDINGS About Royal Bafokeng Platinum: The company adopted integrated financial reporting in (2010), the first year they were listed on the JSE. 2013 is their third year of applying the reporting guidelines proposed by IIRC (International Integrated Reporting Committee) to help them in highlighting the link between material information regarding their strategy, prospects, performance and governance and how their strategy is affected and affects by financial, social and environmental issues. Their approach is aligned to their mission and vision to deliver and seek the good from mining industry through unrelenting stakeholder beneficiation, hence creating a lasting legacy. To ensure easy access to any extra information that stakeholders may need, they have link references throughout their report that links one to more sources of reporting information. Besides, implementing the integrated system in their reporting, they have also applied SAMREC Code, King II, JSE listing requirements and have also been guided by the GRI (Global Reporting Initiatives). Financial Reporting According to JSE (2012) South African firms have generally adopted GAAP principles as the basis of reporting and the below summary offers the current reporting practice. Construction, development and Exploration Expenditure Accounting practice handles development and exploration based on costs. This either requires write-off of expenses or carry-forward of costs, based on the perceived promise or viability of the project. On this aspect, entities engaged in exploration functions appear to carry forward the expenditure up to: The sale of the project Abandonment of the project and the expenditure is written off When the project moves the stage of development, and is transferred to become a development asset The IASs required: From 2005, adherence to the IFRS International Financial Reporting Standards is needed for any listed company. A company reporting under a separate acceptable standard accounting reporting principles has to submit reconciliation to the IFRS. This requirement is set to bring the company’s consistency, comparability and global credibility of its financial statements. JSE has outlined that interim financial reports are needed for firms that report quarterly, whereby the interim report is published alongside the second quarterly statement to the shareholders. JSE further clarifies that a second interim statement is needed in any situation where the fiscal period has gone past 12 months, and that report should be viewed by the auditors of the company. All the interim reports must abide by the Companies Act, SA GAAP and the JSE listing requirements (Royal Bafokeng Platinum, 2012). GAAP Monitoring Committee JSE formed a GAAP monitoring committee function on the JSE’s advisory capacity on matters pertaining to non-compliance with the IFRS or SA GAAP by the JSE listed companies. Upon meeting with the listed company, the committee reports its findings to the JSE listing department, who can recommend corrective measures to the listed company if need be. Some of the possible corrective measures my comprise correction in the subsequent reporting period, restatement of published reports and/or fining the directors/ company (Anderson, 2009). Requirements of Working Capital A pack of working capital should be completed if a director makes a statement on a circular. It has to be completed according to the provisions of Chapter 25 of the JSE listing requirements. The sponsor is charged with the responsibility of ensuring adherence to these requirements and evaluating the working capital. The company directors should ensure that sponsor has enabling environment to accomplish his/her duties (Haniffa & Cooke, 2002). Historical accounting information Review and Audit Requirements Effective from financial calendars ending December 31, 2003, henceforth, auditors are required to auditors are required to revise their audit views if issuers fail to disclose the information. Directors JSE has developed penalties not exceeding one million Rand to the directors on their individual capacity for not complying with the JSE listing requirements. JSE has broadened the current scope of what needs to be disclosed in respect to the emoluments of directors to entail; Amounts obtained from the holding company’s issuers, joint ventures, associates, fellow subsidiaries, subsidiaries as well as any other entity which provides any advisory or management services to those entities Requirements for Main Board Listing The firm must have a minimum of R25 million as subscribed capital. The subscribed capital is determined based on the assets and fair values of assets, however not including intangible assets- except if independently appraised by an expert approved by the JSE. It must have a history of audited profit of over R8 million is the past three years. Public shareholding, as prescribed in the listed company must be over 20 percent of capital issued. Possible future changes in reporting requirements in South Africa There is the impending mineral development bill currently under public inquiry. The fundamental objective of this emending Bill is to revert the Minerals Rights to government tenure. The outlined objective of the Bill is to unlock minerals rights to be accessible to a wider proportion of the community, and to spur investment into the SME mining industry. The effect of the Bill is perhaps that mineral rights have to be exploited and that the undeveloped rights must be redistributed. From economic perspective, this would require that all rights be appraised, either from the viewpoint of assessing their feasibility, or from assessing for the aim of expropriation (Verhoef, 2011). Besides, the intention of the Bill has already witnessed the entrance and establishment of several new firms either as joint ventures or independently. The situation just discussed would require that small mining firms carry out feasibility studies and valuations, for raising capital. The code for Valuation would also factor in the requirement for these companies that methodologies that need considerable level of external views are not prohibitively costly, and thus becoming self-defeating. Production reporting As with development and exploration, all the expenditure till the point of attaining the commercial extents of production has to be appropriated and capitalized. This entails establishment costs, and pre-production costs that are written off based on operating income, prior to tax, for the purposes of tax (Kirsch, 2006). While the company amortizes these expenditures so as to conform with the IASs, the changeover determination to commercial production levels is based on a number of criteria for instance, continuous production, proportion of design capacity attained among others. Upon production, cost is expended on the duration upon which the product losses its value or sold. In view of Gold Institute Standards cash cost reporting has been implemented within the gold sector and gradually more in other mineral industries. Additional Information: The following additional information is needed in either annual or interim financial statement reporting. A change in policy regarding the use of equipment, plant and property as well as any other significant change in the nature thereafter; Details of regarding any material loan receivable, for instance repayment and interest terms, date given, recipient, period, security nature , whether it come from assets sale by the issuer or its subsidiaries. The annual or interim financial statement reports have to be drawn in compliance with the South African law applicable to the issuer. They must comply with IFRS or GAAP. They have to be audited in respect to the terms of statements of International Standards of Auditing or SA Auditing Standards. They must be in consolidated form and present fairly the changes in equity, financial position, cash flows and results of the operations of the group. Conformity with King II standards is encouraged. It is required that the issuer discloses the level of compliance and facts and reasons for every non-compliance, detailing whether or not the corporation has complied the entire period and outlining for which period any instance of non-compliance has happened. . Sustainability Reporting In respect to sustainability reporting in South Africa on mineral sector, a company has to provide for the social capital I matters related to HIV/AIDS prevalence, ever-increasing standards for environment development, training and care, as well as tackling residual liabilities and risks. The reporting of these issues must be thoroughly taken into consideration. Cultural Influence on Financial Reporting It is broadly recognized that accounting is the business language that facilitates communication among the providers of financial information and its users (Gray, 2008). In the same way each country has its own language; it cannot be a surprise if different nations have different standards of accounting. Culture is viewed as a significant factor in the agenda of understanding the way social systems change since cultural influences implies the values and norms of such systems as well as the group’s behavior in their interaction across and within systems. According to Hope (2003) cultural characteristics and historical factors seem to have a considerable influence on corporate practice, business ethics and the board members behavior in South African firms that have advanced from the traditional family enterprises to public listed companies. Even though there are culture proxies, ethnicity serves as an appropriate substitute for culture in South Africa that has multi-racial society, of which each section still retains its individual unique values and ethnic identity. In South Africa the British and Boars play a critical role in economics and politics, where the regulators are predominately the natives and investments majorly owned by the British. Political Influence in Financial Reporting in South Africa Accounting and financial policies matter to companies because they define the distribution of wealth, income and risk perceptions (Hofstede, 2001). Today, it is broadly accepted that the establishment of financial and accounting policies is a residue of political bargaining and negotiations amongst a political elite and corporations. The accounting policymaking politics are accorded visibility by functions of the standard setting organs that simultaneously need to put up with diverse demands as well secure their individual legitimacy by depicting themselves as objective, rational and pluralistic. South Africa experienced exclusion from the second wave of globalization due to global objections on the local political policies during apartheid era. These global protests eventually resulted into boycotts and sanctions of varies degree. The profession had a global heritage and in spite of professional closure plans to curb public practicing rights, it did not compromise on the accounting knowledge quality. The profession took charge of accounting training and educations in practice from the formative eras of accounting societies (Harris, 1987). As the issue of regulation and control of the accountancy become a central matter following international and domestic sandals, the profession in close association with global bodies worked together with the state is developing new statutory guidelines of professional accountability and regulation. Historically, South Africa was once a British colony. Therefore, the creation of company law in the country closely follows the systems of the UK’s company laws (Davenport and Saunders, 2000). South African auditing and accounting standards duplicate those found in the United Kingdom and other commonwealth nations such as New Zealand and Australia. 5.0 CONCLUSION IFRS adoption has evidently enhanced South Africa’s role as an international player within the accounting arena and has improved uniformity in utilization of IFRS within South Africa. JSE listed firms and the accounting profession has diligently tackled the undertaking of implementing IFRS and has remarkably attained success. It is clear that a number of teething issues have been managed. IFRS adoption has improved consistency of the IFRS application and in addition substantiated the need for a domestic technical body, which would contribute to due process of IASBs and mitigate specific domestic divergence and issues in practice. South Africa has witnessed considerable development within the technical accounting units of audit companies to deal with the growing technical demand. Nonetheless, a number of South African accounting experts have left South Africa due to the global demand for the expertise. The report has also established that most South African firms have adopted GAAP principles as the basis of their financial reporting. The report found that since 2005, adherence to the IFRS International Financial Reporting Standards is needed for any listed company. South African JSE has formed a GAAP monitoring committee to act on advisory capacity on matters pertaining to non-compliance with the IFRS or SA GAAP by the JSE listed companies. The report also established that impending Bill is to revert the Minerals Rights to government tenure. 7.0 References Johannesburg Securities Exchange Listing requirements: Section 12. JSE, Johannesburg, September 2012. Gray, S. J. (2008). Towards a theory of cultural influences on the development of accounting systems internationally. ABACUS, 24(1), 1-15 Kirsch, R J (2006) The International Accounting Standards Committee: A Political History. Wolters Kluver: London. Verhoef,G and L .J. van Vuuren (2012)” South Africa” in G J Previts, P Walton and P Wolnitzer (eds) A Global History of Accounting, Financial Reporting and Public Policy. Emerald Books. Haniffa, R. M. & Cooke, T. E. (2002). Culture, Corporate Governance and Disclosure. Abacus 38(3): 317 – 349. Harris, M. (1987). Cultural Anthropology. Harper & Row. Culture, Corporate Governance and Disclosure. Abacus 38(3): 317 – 349. Verhoef, G (2011) The Globalisation of South African conglomerates’ in Economic history of developing Regions, 26(2):83-106. Anderson Gough, F (2009)”Education”, in J R Edwards and S P Walker (eds): The Routledge Companion to Accounting History. Routledge: London: 297-316. Davidson, R., Goodwin-Stewart, J., & Kent, P. (2005). Internal governance structures and Davenport, H and Saunders C, (2000) South Africa. A Modern History. Fifth edition. London: Macmillan Press. Hofstede, G. (2001). Culture’s consequences: International differences in work-related values. Newbury Park CA: Sage. Hope, O. K. (2003). Firm-level disclosures and the relatives roles of culture and legal origin. Journal of International Financial Management and Accounting, 14(3), 218-248. Accountancy SA, 2005-2008 Royal Bafokeng Platinum (2012) financial Statement. Read More