Mafia Buzz Issue 3 s1

IFRS Buzz 005

P C Finance Research Clarifying Complexities

Registration Number: 1985/000022/23

Members: P E Hattingh and C P Hattingh

Tele: 011 476-3626; Fax: 011 476-3627; Email: ; Web: www.mafiabuzz.co.za; Add: P O Box 731625 Fairland 2030

IFRS Buzz 005

Contents

The purpose of this IFRS Buzz is to illustrate two excellent examples of applying IFRS to listed companies.

First Rand

First Rand produced a booklet running into 58 pages illustrating what the impact of changing over to IFRS was. It is really well presented and the summary at the beginning of the booklet has been reproduced here because of its educational value.

“The change from SA GAAP to IFRS has primarily impacted the following areas:

1. Applying the “incurred loss” basis with respect to credit impairment as apposed to the “expected loss” basis.

2. Expensing the cost of share options awarded to employees and other share-based payment transactions on a fair value basis.

3. Revaluing certain properties and adjusting the depreciation methodology used.

4. Reallocating certain fees and expenses from non-interest revenue and operating expenses to interest income and recognising the fees and expenses on an effective yield basis.

5. Transferring the accumulated foreign currency translation reserve and unrecognised actuarial loss on the defined benefit funds on 1 July 2004 to retained income.

6. Reclassification of policy contracts between the insurance and investment categories based on the IFRS 4 Insurance Contracts criteria.

7. The creation of a deferred acquisition cost asset by capitalising the costs that are directly attributable to the acquisition of an investment management conrtact. The previous reduction in policyholder liabilities arising from the capitalisation of future fees used to recover acquisition costs has been removed resulting in an increase in policyholder liabilities. The term ‘policyholders’ refers to holders of both insurance and investment contracts.

8. The deferral of direct front-end fees that are charged for securing investment management contracts by creating a deferred revenue liability. These fees are recognised over the period that the related service is provided.

9. Eliminating deemed treasury shares and the associated gains and losses thereon, held on behalf of policyholders in the group’s insurance operations on 1 July 2005.

10. Consolidation of certain immaterial investment vehicles controlled by the group, which were previously recognised at fair value.

11. Reclassification of policy loans to policyholder liabilities.”

Comment

I would have loved to have been a fly on the wall when management were being forced to make some of the above changes. At least half of them contravening the concept of fair presentation.

Sanlam

IAS 8.30 states that if an entity has not applied a standard or interpretation that has been issued but is not effective, it shall disclose this fact and the estimable information relevant to assessing the impact it will have on the financial statements in the first year it is applied. I have tried to encourage companies to comply with this standard to no avail. Not so Sanlam. In their accounting policy notes they list the new or revised IFRSs that have been issued with effective dates applicable to future financial statements (they do not early adopt) and state that the new standards are not expected to have a significant impact on the reported results, financial position and cash flows. [One must wonder why these IFRSs are necessary if the financial statements of a company such as Sanlam will not be affected!] The note lists the following new standards:

• IFRS7 Financial instrument disclosures

• IAS 1 Capital disclosures

• IAS 19 Employee benefits amendments

• IAS21 Changes in foreign exchange rates - amendments to the net investment in a foreign operation

• IAS 39 Financial instruments – intragroup cash flow hedges

• IAS 39 Financial instruments – the fair value option

• IAS 39 Financial instruments – financial guarantees

• IFRIC4 Determining whether an arrangement contains a lease

• IFRIC 8 Scope of IFRS 2

I have a little problem here: what about all the others, e.g. IFRSs 5, 6, 7 and 9?

Kind regards,

Charles Hattingh

April 2006

CPD 10 Minutes