July 2000: The Debate Continues – Differential Accounting
Response to the response to last month's article
Your job requires you to travel through dangerous areas late at night. You know that the risks of stopping at red robots on your way home from work exceed any fine you may collect. How would you react if the traffic department publishes a circular stating that the law of the land requires motorists to stop at red robots regardless of the time of day or night and regardless of the area in which the robot is placed? You know the law of the land. So why the circular? Are they setting themselves up to trap you? Do they want to drive you out of your job? Do they want to deprive you of your car? Or is there just some power hungry autocrat having fun at your expense?
What should our hard working small audit practitioner members read into Circular 8/99? I meet practitioners right around the country who ask me this question. I figured that by writing a "provocative" article on the consequences of Circular 8/99 we might get some guidance for this particular class of our members. Well we got it: "... we hope that none of our members take him too seriously"! I am passionately serious about spreading the word of GAAP and I would be devastated if our members did not take me seriously. I firmly believe that where an enterprise produces general purpose financial statements that are used as a basis for decision making, there should be 100% compliance with Statements of GAAP. But where we have a small enterprise with one or two directors/shareholders, the bank manager and SARS, we should let the enterprise get on with the job of providing a service to its customers, creating jobs and generating wealth and not burden it with unnecessary accounting and disclosure standards that result in no economic benefits.
Editorial pressure
The editor (Tersia) is pressurising me to start criticising published financial statements to motivate members to improve compliance with Statements of GAAP. It is still a little premature to start this process as AC101 only becomes effective for enterprises with years ending 30 June 2000 and later and all the heavies become effective for enterprises with years ending from 31 December 2000 - there are 24 new AC100 and AC400 statements applicable as from 31 December 2000. For example, I was looking at Chemserve's accounting policies recently and there are at least 10 changes they will have to make in one year. But just to keep her happy in the meantime, here are some snippets:
Regal Treasury Bank Holdings Limited
Why would a company present its financial statements to the nearest Rand? I can only guess that it is hoping the users will miss this fact and think: "Wow, what an impressive company!" You often see insignificant IT companies doing the same thing. It is generally accepted accounting practice to present amounts to the nearest thousand (or million) Rands. Do not underrate users of financial statements. We know the extent that estimates feature in financial statements so rounding to the nearest Rand does not give us any additional confidence in the figures and presenting financial statements to the nearest Rand does nothing for the image of the company.
Netting interest paid and interest received
AC114 requires borrowing costs to be disclosed. Schedule 4, paragraph 42(f) requires interest paid to be disclosed. The intelligent user requires financing costs to be disclosed separately to perform detailed analyses on profitability (see, for example, the du Pont model used for financial analysis). Eight companies published their results in Business Day on 18 May 2000. Six of the eight presented net financing costs on the face of their income statements (Usko, Datatec, Illovo, Softline, Hunt Leuchars and Ec-Hold) and only two presented interest paid separately (Medi-Clinic and Brimstone). Note that AC101 requires financing costs to be presented separately on the face of the income statement and that netting is only permitted if required by Statements of GAAP.
Quick Holdings
Quickco reported a profit of R27 000 for the six months ended 30 December 1999 after the deduction of goodwill amortisation of R125 000. It reported headline profit of R27 000. I thought that goodwill amortisation is added back for headline earnings? Does this company know something I do not know?
Highveld Steel
Note 1.8 of the accounting policies reads: "Provision relating to past events giving rise to an obligation to incur future expenditure for the renewal and replacement of plant and equipment is raised or charged against income in the year such events occur." An amount of R30 million in respect of this "provision" is included in the liabilities of the company. A provision is, by definition, a liability of uncertain timing or amount. A provision to incur future expenditure on plant cannot be a liability under AC000. I sympathise with the company for wanting to smooth the maintenance costs over time. However, one could have achieved almost the same thing by reducing the asset by the provision. A provision for obsolete stock or a provision for doubtful debts is not a liability but a deduction from the assets. Why not deduct the provision for maintenance from the plant? It would make the debt/equity ratio look a little prettier.