CORPORATE REPORTING PROPOSALS
3.4 Exposure draft 163 - Differential corporate reporting
In June 2003, after the questionnaires upon which this study is based were received back from the respondents, the SAICA exposed for public comment its proposed LPFRS for use by entities that qualify in terms of the draft bill to prepare financial statements in compliance with LPFRS, namely, ED 163 (SAICA,2003a:para3). The proposals included exempting qualifying entities from some of the requirements of IFRS. SAICA deliberately referred to IFRS, as SA GAAP is being harmonised with IFRS.
The SAICA justified the exemptions proposed in ED 163 on the basis of:
• Users and their information needs (para7). The users of LPFRS are the owners, South African Revenue Services, lenders and anyone else entitled to receive the financial statements in terms of any Act (para9). Such users are not solely dependent of the financial statements of the enterprise for decision-making purposes.
• A different assessment of the requirement for comparability (para7). The users of LPFRS are less concerned with comparability between the financial statements of different users (paral2).
• A different assessment of balance between benefit and cost (para7). Benefits usually decrease with a decrease in the number and diversity of users and their information needs (paral3).
The proposal included the relaxation of certain disclosure requirements of IFRS and very limited relaxation of certain recognition and measurement requirements of IFRS, that is, in respect of deferred taxation (para28) and aspects of financial instruments (para38). These alternatives were justified on the grounds that the costs to the reporting entity of compliance with IFRS would exceed the benefits arising from compliance enjoyed by the users (para22).
SAICA (2003 a) further proposes that qualifying entities be exempted from the requirements to present:
• a cash flow statement (para27), and
• consolidated financial statements (para34).
The exemptions proposed from the requirements of IFRS for entities that qualify to prepare financial statements in accordance with the LPFRS are summarised as follows:
• IAS 1 (AC 101) - Presentation of financial statements: Exempt from the requirement to prepare a cash flow statement.
• IAS 2 (AC 108) - Inventories: Exempt from certain detailed disclosure requirements where inventories are impaired or a prior period impairment of inventory is reversed.
• IAS 7 (AC 118) - Cash flow statements: Exempt from the requirement to prepare a cash flow statement.
• IAS 12 (AC 102) - Income taxes: Exempt from the requirement to provide for deferred tax.
• IAS 14 (AC 115) - Segment reporting: Exempt from the requirements to report financial information by segment.
• IAS 16 (AC 123) - Property, plant and equipment: Exempt from the requirement to disclose the depreciated historic cost of revalued classes of property, plant and equipment.
• IAS 17 (AC 105)-Leases:
• Exempt the lessee in a finance lease from all of the IAS 17 (AC 105) disclosure requirements that require for each class of asset, the net carrying amount at balance
sheet date to be disclosed.
• Exempt the lessee in an operating lease from the requirement to disclose lease and sublease payments recognised in income and from the requirement to present a general description of its significant leasing arrangements.
• Exempt the lessor in a finance lease from all of the IAS 17 (AC 105) disclosure requirements.
• Exempt the lessor in an operating lease from the requirement to disclose total contingent rents recognised in income and from the requirement to present a general description of its significant leasing arrangements.
The above listed exemptions for both lessees and lessors do not provide for exemption from the disclosure requirements of IAS 39 (AC 133).
• IAS 21 (AC 112) - The effects of changes in foreign exchange rates: Exempt from the requirement to present:
• a reconciliation of exchange differences classified as a separate component of equity at the beginning and the end of the period; and
• disclosures in respect of a change in the classification of a significant foreign operation.
• IAS 27 (AC 132) - Consolidated financial statements: Exempt from the requirement to present consolidated financial statements.
• IAS 28 (AC 110) - Accounting for investments in associates: Exempt from the requirements of IAS 28 (AC 110) to the extent that consolidated financial statements are not required to be presented.
• IAS 31 (AC 119) - Financial reporting of interests in joint ventures: Exempt from the requirements of IAS 31 (AC 119) to the extent that consolidated financial statements are not required to be presented.
• IAS 32 (AC 125) - Financial instruments: disclosure and presentation: Exempt from the requirement to split compound financial instruments, that is, ED 163 introduces an allowed alternative of classifying the compound financial instrument according to its main element.
ED 163 also provides for exemption from the requirement to present financial risk management objectives and policies and credit risk disclosures.
• IAS 39 (AC 133) - Financial instruments: recognition and measurement: Where in accordance with the allowed alternative set out in respect of compound financial instruments above, ED 163 introduces an allowed alternative of recognising and measuring the compound financial instrument according to its main element. ED 163 also provides for exemption from the requirement to present:
• the methods and significant assumptions applied in estimating fair values of assets and
liabilities that are carried at fair value;
• a description of the entity's financial risk management objectives and policies; and
• the IAS 39 (AC 133) paragraph 171(b) disclosures where the presumption that fair value can be measured reliably for all financial assets that are available for sale or held for trading has been overcome.
• IAS 33 (AC 104) - Earnings per share: Exempt from the requirement to present earnings per share.
• IAS 34 (AC 127) - Interim financial reporting: Exempt from the requirement to present interim financial statements.
• IAS 36 (AC 128) - Impairment of assets: In respect of an impairment loss that is recognised or reversed during the period and that is material to the financial statements of the reporting enterprise as a whole, exemption from:
• the segment specific disclosure requirements; and
• the requirement to describe the current and former way of aggregating assets and the reason for the change where the aggregation of assets identifying the cash-generating unit has changed since the previous estimate of its recoverable amount.
• IAS 37 (AC 130) - Provisions, contingent liabilities and contingent assets: Exempt from the requirement to disclose in respect of each class of provision:
• a brief description of the nature of the obligation and expected timing of the cash outflows;
• an indication of the uncertainties and the major assumptions; and
• the amount of any expected reimbursement.
Where qualifying entities have prepared their financial statements in accordance with the LPFRS, they must in the accounting policies notes disclose the fact that LPFRS have been adopted and full details of the allowed alternatives adopted.
The relief proposed in ED 163 is inadequate and unlikely to bring much relief to qualifying companies as:
• private companies are not required to comply with some of the more significant time saving exemptions proposed by ED 163, such as, the presentation of segmental disclosures, earnings per share and the presentation of interim financial statements, and
• the proposed recognition and measurement concessions were particularly limited.
In June 2004, the IASB issued a discussion paper setting out its preliminary views on accounting standards for small and medium-sized entities (DP SME) (IASCF,2004). DP SME was immediately issued for comment in South Africa by SAICA as ED 181 and supersedes ED 163. The DTI's 2004 comprehensive guidelines for corporate law reform are reviewed in the next subsection after which the proposals of ED 181 are discussed.