CHAPTER 1

THE FINANCIAL REPORTING FRAMEWORK

1. BACKGROUND
Prior to the enactment of the Companies Act, 71 of 2008 which established the Financial Reporting
Standards Council as the official standard setting body for South Africa, standard setting was the
responsibility of the Accounting Practices Board. The Accounting Practices Board, formed in 1973,
was established to consider what should be generally accepted accounting practice and thereby issue
South African Generally Accepted Accounting Practice (SA GAAP). In 2003, the Accounting
Practices Board embarked on a programme to harmonise SA GAAP with the International Financial
Reporting Standards (IFRSs) and issued IFRSs as SA GAAP without amendment. In 2005, the
Johannesburg Stock Exchange, which previously required listed companies to comply with SA
GAAP, now required listed companies to apply IFRSs for year ends ending on or after the 1 January
2005.

Since 2005, South Africa has been through a period of corporate law reform which ended when the
Companies Act, 71 of 2008 was enacted with an implementation date of 1 April 2011. This Act
replaced the Companies Act, 61 of 1973 as amended by the Corporate Laws Amendment Act, 24 of
2006. The Act also made provision for the establishment of the Financial Reporting Standards
Council which is now the official standard setter in South Africa. At the same time, the Companies
Act provided for the adoption of IFRSs by certain categories of companies or the International
Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) or, for very small
entities, the possibility of using an entity-specific accounting framework. To ensure a smooth
transition between the Accounting Practices Board and the Financial Reporting Standards Council, the
two bodies are working closely together. One result is that SA GAAP is now withdrawn for years
ending on or after the 1 December 2012.

The proceeding paragraphs provide a short introduction to the many changes which have taken place
over the past few years. Some reasons for the changes were the need to update and modernise
legislation. Changes include enhanced investor protection through improved corporate governance,
the introduction of an engagement review rather than an audit for certain categories of companies and
the removal of unnecessary requirements regarding formation of companies. The changes affecting
financial reporting are discussed in more detail in this chapter.
Financial reporting encompasses a wide range of communications by reporting entities to the users of
that financial information. Financial reporting includes, but is not limited to, the following:
• annual financial statements;
• interim financial statements;
• provisional financial statements;
• prospectuses;
• information memorandums; and
• corporate social responsibility reports.

The need for this wide range of communications to the users is to fulfil the objective of general
purpose financial reporting which can be found in the Conceptual Framework. This is also discussed
later in this chapter. This chapter thus serves to introduce the South African reporting requirements
and also the requirements of the Johannesburg Stock Exchange which apply to listed companies.
Because South Africa has fully adopted IFRS and IFRS for SMEs, this chapter also provides some
background information on the IFRS Foundation and the International Accounting Standards Board.

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2. SOUTH AFRICAN REPORTING REQUIREMENTS

Financial reporting in South Africa is regulated by:
• Statute, including the Companies Act, Companies Amendment Act, Close Corporations Act,
Insurance Act and Banks Act (in respect of affected reporting entities only);
• International Financial Reporting Standards (IFRSs and IFRS for SMEs); and
• The JSE Limited (JSE) (in respect of listed companies only).

2.1 Statutory financial reporting requirements

South Africa has been through a period of corporate law reform. The Companies Act, 71 of 2008 was
implemented on the 1 April 2011, replacing the Companies Act, 61 of 1973 as amended by the
Corporate Laws Amendment Act, 24 of 2006.

The reporting requirements of the Companies Act, 71 of 2008 are summarised as follows:

• S28 sets out the requirements for accounting records;

• S29 sets out the requirements for any financial statements provided by a company;
• S30 sets out audit requirements in respect of annual financial statements; additional requirements
in respect of the remuneration of directors (including loans and financial assistance to subscribe
for shares) or prescribed officers of the company; and
• S34 requires public companies and state-owned enterprises to also comply with the extended
accountability requirements set out in Chapter 3 of the Act.

The Companies Act, 71 of 2008 allows for two types of companies, profit companies and non-profit
companies. Profit companies include state-owned companies, private companies, personal liability
companies and public companies. The Act also allows the Minister, after consulting with the
Financial Reporting Standards Council, to establish different standards for profit and non-profit
companies, and for different categories of profit companies.

The Companies Regulations, 2011 summarises the reporting requirements of the various categories of
companies as follows:
State owned and Profit companies
Category of Companies Financial Reporting Standard
State owned companies. IFRSs, but in the case of any conflict of any
requirement in terms of the Public Finance
Management Act, the latter prevails.
Public companies listed on an exchange. IFRSs
Public companies not listed on an exchange. One of –
(a) IFRSs; or
(b) IFRS for SMEs, providing that the company
meets the scoping requirements outlined in IFRS
for SMEs.
Profit companies, other than state-owned or One of –
public companies, whose public interest score for (a) IFRSs; or
the particular financial year is at least 350. (b) IFRS for SMEs, providing that the company
meets the scoping requirements outlined in IFRS
for SMEs.
Profit companies, other than state-owned or One of –
public companies – (a) IFRSs; or
(a) whose public interest score for the particular (b) IFRS for SMEs, providing that the company
year is at least 100 but less than 350; or meets the scoping requirements outlined in IFRS
(b) whose public interest score for the particular for SMEs; or
financial year is less than 100, and whose (c) SA GAAP (withdrawn for years ending on or
statements are independently compiled. after the 1 December 2012).

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Profit companies, other than state-owned or The Financial Reporting Standard as determined
public companies, whose public interest score for by the company as long as no Financial
the particular financial year is less than 100, and Reporting Standard is prescribed.
whose financial statements are internally
compiled.

Non-Profit Companies
Category of Companies Financial Reporting Standard
Non profit companies that are required in terms IFRSs, but in the case of any conflict with any
of regulation 28(2)(b) to have their annual requirements in terms of the Public Finance
financial statements audited. Management Act, the latter prevails.
Non profit companies, other than those One of –
contemplated in the first row above, whose public (a) IFRSs; or
interest score for the particular financial year is at (b) IFRS for SMEs, providing that the company
least 350. meets the scoping requirements outlined in IFRS
for SMEs.
Non profit companies, other than those One of –
contemplated in the first row above – (a) IFRSs; or
(a) whose public interest score for the particular (b) IFRS for SMEs, providing that the company
financial year is at least 100, but less than 350; or meets the scoping requirements outlined in IFRS
(b) whose public interest score for the particular for SMEs; or
financial year is less than 100, and whose (c) SA GAAP (withdrawn for years ending on or
financial statements are independently compiled. after the 1 December 2012).
Non profit companies, other than those The Financial Reporting Standard as determined
contemplated in the first row above, whose public by the company as long as no Financial
interest score for the particular financial year is Reporting Standard is prescribed.
less than 100, and whose financial statements are
internally compiled.

An example as to how to calculate the public interest (PI) score is as follows:

Points
Average number of employees during the financial year (1 point for each employee) 300
For every R1 million of third party debt or part thereof at financial year end (= 1 point) (thus
on R30m of third party debt, the number of points is 30) 30
For every R1 million of turnover or part thereof during the financial year (= 1 point) (thus on
turnover/revenue of R400m, the number of points is 400) 400
If a profit company, then for every security holder at the end of the financial year end (= 1
point) (thus if there were 100 security holders at the end of the financial year, the number of
points is 100) 100
(Or: if a non-profit company, then for every member of the company or member of an
association that is a member of the company at the end of the financial year ( = 1 point)
Total points 830

Regardless of the public interest score, if the company is listed on the JSE, it is required to apply
IFRSs. If the company is a for profit company, then the company has a choice between using IFRSs
or IFRS for SMEs. It can only use IFRS for SMEs if it meets the scoping requirements in IFRS for
SMEs. Each company is required to calculate a PI Score annually. The PI score is also important in
deciding whether a company must be audited or independently reviewed; who may perform the
independent review, and whether a company must appoint a Social and Ethics Committee.

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2.2 JSE Limited requirements

2.2.1 General requirements of the JSE Limited
Every company listed on the JSE is required to comply with the Listing Requirements of the JSE.
The JSE requires, in terms of its Listing Requirements, full compliance with International Financial
Reporting Standards (IFRSs).
Section 8 of the Listing Requirements deals with financial information and is categorised as follows:
• report on historical information;
• pro forma financial information;
• profit forecast and estimates;
• accountant’s report;
• minimum contents of interim reports, provisional annual financial statements and abridged
annual financial statements; and
• minimum contents of annual financial statements.

Each of the above reporting requirements are triggered by specific events or the passage of prescribed
time periods. The chapters that follow deal with the reporting requirements relevant to interim
financial statements, provisional financial statements, prospectuses and annual financial statements.

The listing requirements of the JSE require annual financial statements:

• to be prepared in accordance with the listed company’s national law,
• to be prepared in compliance with International Financial Reporting Standards and AC 500
Standards,
• to be audited in accordance with International Standards on Auditing – ISAs, or in the case of
overseas companies, in accordance with national auditing standards acceptable to the JSE;
• to be presented in the form of consolidated financial statements where the reporting entity has
subsidiaries,
• fairly present the financial position, changes in equity, results of operations and cash flows of the
group, and
• provide a narrative statement of how it applied the principles set out in the King Code.

The detailed disclosures arising from the listing requirements of the JSE are too numerous to list here,
but are dealt with in detail in the chapters that follow.

The list below summarises those annual financial statement disclosure requirements of a general
nature that are not dealt with elsewhere in this text. Such disclosures include:
Reference:
• Where a profit forecast was published for the year under review and the actual 8.63(g)

results differ therefrom by 10% or more, an explanation of the difference in

performance of the company against the forecast shall be presented;
• Disclose full details of special resolutions passed by the company’s subsidiaries 8.63(i)

since the date of the previous director’s report that relate to:
• capital structure,
• borrowing powers,
• the object of the company or memorandum of association, or
• other matters material for an understanding of the group; and
• Details must be given of all issues of securities for cash during the period under 8.63(j)

review, distinguishing between general and specific issues, and including, at

least, the number of securities issued, the price at which and (in the event of a
specific issue to non-public shareholders as defined in paragraph 4.25 of the
listing requirements) to whom they were issued.

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2.2.2 Primary and secondary listings

A distinction needs to be drawn between those companies that have their primary listing on the JSE
and those that have their secondary listing on the JSE. Generally, the exchange on which the primary
listing resides takes preference in the enforcement of any listing requirements ahead of the exchange
on which the secondary listing resides.

However, where such primary listing is not on the JSE, the JSE will allow the requirements of the
primary exchange to take precedence provided that the annual financial statements and any other
communication with the shareholders states where the primary and secondary listings of the entity’s
securities reside. However, it must provide headline earnings per share disclosures together with an
itemised reconciliation between headline earnings and the earnings used in the calculation in both its
interim and year-end results.

2.2.3 Dual Listed Companies structure

Dual Listed Companies structure applies to an aggregated group with combined businesses accounted
for under two separately listed companies:
• one company housing the South African based businesses with its primary listing on the JSE;
and
• another company housing the foreign businesses with its primary listing on another stock
exchange acceptable to the JSE and its secondary listing on the JSE.

The two companies together form the dual listed company structure. The dual listed company must:
• use common accounting policies;
• publish aggregated annual financial statements (i.e. in effect consolidated financial
statements) in accordance with IFRSs. If the annual financial statements are not in
accordance with IFRSs, a comprehensive reconciliation to IFRSs must be published and
presented in Rands. The annual financial statements of the individual companies may be
published as supplementary information to the aggregated accounts ; and
• publish aggregated interim financial information in accordance with and containing the
information required by IAS 34 Interim Financial Reporting as well as the AC500 standards.

2.2.4 Powers of suspension, termination, censure and penalties

Listings are granted subject to compliance with the Listing Requirements (Section 1.2). The JSE has,
subject to certain limitations, the power to review, suspend or terminate a listing of securities (Section
1.1).

Where a listed company (applicant issuer) or any of its directors has contravened the Listing
Requirements, the JSE may censure (in private or in public) and impose a fine not exceeding
R5 million on the company and/or its directors, individually or jointly (Section 1.20). The JSE has the
discretionary power to announce (including reasons) that it has investigated dealings in a listed
security, censured, suspended, terminated or imposed penalties (Section 1.27). Wilful or persistent
non-compliance can further lead to the JSE publicly stating that in its opinion the retention of office
by the directors concerned is prejudicial to the interests of investors (Section 1.27).

2.3 South African Reporting Practice

South African financial reporting pronouncements are currently divided into five categories, as
follows:
• Conceptual Framework for Financial Reporting referred to in the International Financial
Reporting Standards as the Framework;
• The IFRS and IAS series);
• Interpretations (these comprise the IFRIC and SIC series);

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• AC 500 series (Statements of Generally Accepted Accounting Practice which are unique to South
Africa); and
• Circulars issued by the South African Institute of Chartered Accountants (SAICA).

In the chapters that follow, reference is made using only the number of the relevant IFRS, IAS, IFRIC
or SIC.

Compliance, in all material respects, with IFRSs (including the AC 500 series) and Approved
Interpretations (i.e. IFRICs and SICs) is required in respect of all companies listed on the JSE and any
unlisted company that purports such compliance.

However, in extremely rare circumstances where compliance would be so misleading that it would
conflict with the Framework’s objective of financial statements1 (and permitted by the regulatory
authority), then non-compliance in order to achieve fair presentation is condoned provided that
specified additional onerous disclosures are made.
1
i.e. to provide economic decision useful information to a wide range of users about the financial position, performance
and changes in the financial position of the entity. This information also enables users to assess the stewardship of
management.

Companies listed on the JSE are required to prepare annual financial statements in compliance with
IFRSs from 1 January 2005 and to disclose that fact (in accordance with paragraph 16 of IAS 1).

The Framework provides an overriding requirement for information that is useful in making economic
decisions (Foreword to the Framework - paragraph 02).

During 2002, in a bid to clamp down on the creative accounting of JSE listed companies, SAICA and
the JSE jointly established the GAAP Monitoring Panel (GMP). The GMP did not review all listed
companies’ financial statements for compliance with SA GAAP or IFRSs, but investigated complaints
referred to it by the JSE. The findings of the GMP are reported to the JSE that at its sole discretion is
able to (Listing Requirement 8.65):
• censure the issuer (see 2.2.4 above);
• instruct the issuer to publish or re-issue any information that the JSE deems appropriate; and
• refer such non-compliance to SAICA, the Independent Regulatory Board of Auditors (IRBA)
or any other professional or relevant body (i.e. where their members have been involved with
the inappropriate preparation or auditing of financial statements).

Subsequently, in 2011, the JSE replaced the GMP with the Financial Reporting Investigations Panel
(FRIP) and has begun pro-actively monitoring listed companies’ financial statements. The JSE has
commented that the integrity of financial information is a critical element of a well functioning
market. The objective of the review process is therefore to contribute towards the production of
quality financial reporting of entities listed on the JSE.

In terms of the Companies Act, 71 of 2008, the Companies and Intellectual Property Commission
(CIPC) will promote the reliability of financial statements by monitoring patterns of compliance with,
and contraventions of, financial reporting standards and making recommendations to the Financial
Reporting Standards Council for amendments to financial reporting standards to secure better
reliability and compliance (Section 187(3)). CIPC has yet to announce as to what arrangements it has
made to carry out this function.

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3. THE IFRS FOUNDATION AND THE INTERNATIONAL ACCOUNTING

STANDARDS BOARD

South Africa has been represented on both the IFRS Foundation and the International Accounting
Standards Board (IASB) for many years. The Foundation is an independent, not-for-profit private
sector organization working in the public interest and is headquartered in London. Its principal
objectives are:
• to develop a single set of high quality, understandable, enforceable and globally accepted
IFRSs through its standard-setting body, the IASB;

• to promote the use and rigorous application of those standards;

• to take account of the financial reporting needs of emerging economies and small and
medium-sized entities (SMEs); and

• to promote and facilitate adoption of IFRSs, being the standards and interpretations issued
by the IASB, through the convergence of national accounting standards and IFRSs.
The IASB is the independent standard-setting body of the IFRS Foundation. Its members (currently
15 full-time members of whom one is South African) are responsible for the development and
publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as
developed by the IFRS Interpretations Committee (formerly called the IFRIC). The IASB follows a
thorough, open and transparent due process of which the publication of consultative documents, such
as discussion papers and exposure drafts, for public comment is an important component. The IASB
engages closely with stakeholders around the world, including investors, analysts, regulators, business
leaders, accounting standard-setters, academics and the accountancy profession.

The IFRS Interpretations Committee is the interpretative body of the IASB. The mandate of the
Interpretations Committee is to review on a timely basis widespread accounting issues that have
arisen within the context of current IFRSs and to provide authoritative guidance (IFRICs) on those
issues. Interpretation Committee meetings are open to the public and webcast. In developing
interpretations, the Interpretations Committee works closely with similar national committees and
follows a transparent, thorough and open due process.

More than 120 countries now require or permit IFRSs. While all major economies have established
time lines to converge with or adopt IFRSs in the near future, the United States of America (US) have
yet to adopt IFRSs for domestic companies although IFRSs has been allowed for foreign issuers in the
US since 2007. The IASB and the Financial Accounting Standards Board (FASB) of the US have a
joint convergence project to converge the standards of the IASB with those of FASB.

4. THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

The Framework, issued in 1989 and partially updated in 2010, is a statement of generally accepted
theoretical principles which form the frame of reference for a particular field of enquiry, and thus
provides a basis for:
• developing new practices, and
• for evaluating existing ones.

The IASB thus use the Framework as it enhances consistency over the standards, it ensures
consistency over time as Board members change, and it provides a benchmark for judgments. The
IFRS Interpretations Committee (IFRIC) use the Framework to interpret IFRSs when there is no IFRS
requirement. Preparers of financial statements also use the Framework to develop accounting policies
in the absence of a specific standard. IAS 8, Accounting Policies, Changes in Accounting Estimates
and Errors, notes that in the absence of an IFRS that specifically applies to a transaction, other event

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or condition, management shall use its judgment in developing and applying an accounting policy that
results in information that is relevant and reliable. The Conceptual Framework thus forms a solid
foundation for the principles on which IFRSs are built.

The Framework is necessary to demonstrate that accounting treatments are derived from a sound
theoretical foundation. Certain parts of the Framework were reissued in September 2010. The
Framework is being re-issued in a chapter format. The Objective of General Purpose Financial
Reporting is found in Chapter 1 and the Qualitative Characteristics are found in Chapter 3. A new
chapter, Chapter 2, will cover The Reporting Entity. The remaining sections of the Framework are
currently part of the IASB’s work plan and will be re-issued sometime in the future as Chapter 4.

Currently, the Framework covers four areas:

• The objective of general purpose financial reporting (Chapter 1);
• Qualitative characteristics of useful financial information (Chapter 3);
• The definition, recognition and measurement of the elements from which financial statements are
constructed (1989); and
• The concepts of capital and capital maintenance (1989).
(A Chapter 2 on the Reporting Entity is to be added.)

4.1 The objective of general purpose financial reporting

The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity. These decisions involve buying, selling or holding
equity and debt instruments, and providing or settling loans and other forms of credit (paragraph
OB2).

The Framework (1989) defines a reporting entity as an enterprise for which there are users who rely
on the financial statements as their major source of financial information about the enterprise.

Users include:
• Existing and potential investors (including the foreign investor), and
• Existing and potential lenders and other creditors.

Users cannot expect general purpose financial reports to contain all the information they need and
therefore need to consider other sources of information such as economic, political, industry and
company outlooks.

Chapter 1 elaborates that financial performance reflected by accrual accounting and by past cash
flows provides relevant information to users.

4.2 Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial information are those attributes that make
information useful to users.

The two fundamental qualitative characteristics are:

• relevance (including materiality), and
• faithful representation.

Relevant financial information is information that is capable of making a difference in the decisions
made by users. Information is material if omitting it or misstating it could influence the decision that
users make using information about a specific reporting entity. Thus, materiality could be based on
the nature of the item, or its magnitude, or both. The frame of reference for all materiality decisions
must be based on the user. Preparers therefore make materiality assessments on behalf of users.

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Accordingly, financial statements should disclose all items that are material enough to affect users’
decisions taken on the basis of the financial statements.

Material is defined in IAS 1 paragraph 7 as follows: “Omissions or misstatements of items are

material is they could, individually or collectively, influence the economic decisions that users make
on the basis of the financial statements. Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances. The size or nature of the item, or a
combination of both, could be the determining factor.”
Thus size and nature of the item must be considered together in determining the materiality of an
item. Materiality does not impose financial reporting requirements of its own but modifies other
requirements that have arisen in response to other concepts. Specific disclosure requirements arising
from IFRSs need therefore not be met if the resulting information is immaterial.

Faithful representation means that the financial information must not only represent relevant
economic phenomena in words and numbers, but that it must also faithfully represent the phenomena
it purports to represent. The financial information thus needs to be complete, neutral and free from
error. Faithful representation requires that the economic substance of transactions should be recorded
where this differs from its legal form. For example, lessees engaged in finance lease agreements
reflect an asset and a corresponding liability in their accounting records where the legal form (lease
agreement) of the lease transaction does not pass ownership and does not give rise to a legal liability.

Comparability, verifiability, timeliness and understandability enhance the two principal qualitative
characteristics.

There is no prescribed order in applying the enhancing qualitative characteristics. For example, it may
be necessary to compromise on comparability as a result of applying a new financial reporting
standard which improves relevance. Furthermore, the balance between the benefits derived from the
information and its cost, is a pervasive constraint on the provision of information.

The application of the principal qualitative characteristics and appropriate accounting standards
normally results in financial statements that fairly present such information.

IAS 1 paragraph 15 clarifies that the application of IFRSs, with additional disclosure when necessary,
is presumed to result in fair presentation. Fair presentation is also contextualised as a faithful
representation of the effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for the elements of financial statements.

IAS 1 paragraph 17 specifies that fair presentation requires:

• selecting and applying accounting policies in accordance with IAS 8,
• presenting information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information , and
• providing additional disclosures where appropriate.

4.3 Definition, recognition and measurement of the elements of financial statements

This section of the Framework has not been amended to reflect the changes made by IAS 1 but will be
updated in due course by the IASB.

An underlying assumption is that of going concern (i.e. the enterprise will continue in operation for
the foreseeable future).

The elements of financial statements identified by the Framework are grouped as follows:

Element Classification Statement

Assets Financial position Statement of financial position

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Liabilities Financial position Statement of financial position

Equity Financial position1 Statement of changes in equity
Income Performance Statement of comprehensive income
Expenses Performance Statement of comprehensive income
1
To the extent that the statement of changes in equity includes gains and losses recognised directly in equity, it is a
performance statement.

4.3.1 Definitions
In assessing whether an item meets the definition of an element, attention must be given to its
economic substance and not merely its legal form.

An asset is:
• a resource controlled by the enterprise
• as a result of past events, and
• from which future economic benefits are expected to flow to the enterprise.

A liability is:
• a present obligation of the enterprise
• arising from past events,
• the settlement of which is expected to result in the outflow of resources from the enterprise.

Equity is the residual of ‘assets’ minus ‘liabilities’.

Income is:
• increases in economic benefits
• during the accounting period
• in the form of inflows or enhancements of assets or decreases in liabilities
• other than those relating to contributions from equity participants.

Income thus encompasses both revenue and gains.

Expenses are:
• decreases in economic benefits
• during an accounting period
• in the form of outflows or depletions of assets or incurrences of liabilities
• other than those relating to distributions to equity participants.

Once it has been established that an element of financial statements exists (by applying the economic
substance of a transaction or event to the definition of the elements listed above), then the recognition
test set out below must be applied before the transaction can be recorded in the financial statements of
the enterprise.

It is important to observe that the definitions of income and expenses refer to movements in assets and
liabilities. The effect of this relationship is that financial reporting is determined from a statement of
financial position perspective with statement of comprehensive effects being measured as the resultant
differences in the statement of financial position items.

This statement of financial position focus has greatly diluted the importance of matching. Matching
was crucial to the statement of comprehensive income focused approach. Should fair value accounting
be adopted in respect of all assets and liabilities, the importance of the statement of comprehensive
income (income and expenses) would be drastically reduced.

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However, few IFRSs adopt fair value accounting and accordingly, the statement of comprehensive
income remains a most important statement. Gains and losses are determined by analysing the
movements in assets and liabilities. These gains and losses are recorded, as provided by the individual
IFRSs, in the statement of comprehensive income.

4.3.2 Recognition
An element is recognised in the financial statements if:
(a) it is probable that any future economic benefit associated with the item will flow to or from
the enterprise, and
(b) the item has a cost or value that can be measured with reliability.

4.3.3 Measurement
Measurement involves selecting a basis of measurement for the recognition of elements that have
passed both of the recognition criteria. Many different measurement bases are employed in various
combinations. The Framework lists the following:
• Historical cost
• Current cost
• Realisable value
• Present value.

The above measurement bases are described in paragraph 100 of the Framework.

It is common for a single enterprise to use more than one basis of measurement in the presentation of
its financial statements. For example:
• Inventories at the lower of historical cost and net realisable value,
• Land and buildings at current cost,
• Investment properties and financial assets at fair market value, and
• Warranty provision at present value.

IFRSs currently adopt an eclectic mix of accounting models ranging from the cost model1 on the one
extreme to the fair value model2 on the other. Other hybrid accounting models sanctioned by IFRS
include the revaluation model3 and IAS 39’s variant of the fair value model in respect of available-for-
sale financial assets4.

IFRSs sometimes allow preparers a free choice between accounting models in accounting for a
particular asset5 or liability6. These fundamental inconsistencies between and within IFRS greatly
impair the usefulness of financial statements that are prepared in accordance with their requirements.
1
Under the cost model:
• depreciable assets are carried at their depreciated historic cost;
• financial liabilities with fixed maturities are carried at amortised cost;
• non-depreciable assets (including indefinite useful life intangible assets) are carried at their original cost.
This model is sanctioned, for example, by IAS 40 – Investment property, IAS 16 – Property, plant and equipment
(benchmark treatment) and IAS 38 – Intangible assets (benchmark treatment).
2
Under the fair value model assets and liabilities are carried at their fair values with movements in fair values being
reported in the determination of profit for the period in which the fair value changed. This model is sanctioned, for
example, by IFRS 9 – Financial instruments (with respect to financial assets and liabilities at fair value through profit or
loss) and IAS 40 – Investment property.
3
Under the revaluation model the increase in the ‘fair value’ of the asset is recorded directly in equity. This model is
included in IAS 16 – Property, plant and equipment (allowed alternative treatment) and IAS 38 – Intangible assets
(allowed alternative treatment).
4
In accordance with IAS 39 the fair value adjustment on available-for-sale financial assets is recorded directly in other
comprehensive income until such time as the financial asset is derecognised at which time it is recorded in the
determination of profit for the period in which derecognition takes place.

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5
For example, the benchmark and allowed alternative treatments of IAS 16 and IAS 38 and the choice between the cost
model and the fair value model contained in IAS 40.
6
For example, IAS 39 allows any financial liability (or asset) that in accordance with that Standard would otherwise have
been carried at cost, amortised cost or the hybrid of the fair value model (see 4 above) to be deemed to be “at fair value
through profit or loss” and therefore carried under the fair value model.

4.4 Concepts of capital and capital maintenance

The two concepts of capital in the Framework are:
• Financial concept of capital (i.e. the maintenance of purchasing power), and
• Operating concept of capital (i.e. maintenance of operating capacity).

The concept of capital maintenance is concerned about how an entity defines the capital it seeks to
maintain. It provides the link between the concept of capital and the concept of profit because it
provides the point of reference by which profit is measured (paragraph 105). Only inflows of assets in
excess of the amount needed to maintain capital may be regarded as profit.

Attempts by standard-setters at inflation accounting were often based on a concept of capital

maintenance.

4.5 How IFRSs build from the Framework

IFRSs are built on the foundation of the Framework. IFRSs therefore:

• Refine the definition and recognition criteria of the elements (i.e. assets, liabilities, income
and expenses) for the specific accounting matter on which the particular IFRS focuses;

• Set the parameters within which the accounting matter governed by the IFRS is to be
accounted for, including recognition and measurement (these, for example, are reflected in
limited permissible accounting policies);

• Set the presentation and disclosure requirements for the matter governed by the IFRSs.

The diagrams set out below demonstrate how the definition and recognition criteria of a liability and
an asset have been refined by selected IFRSs.

ASSET DEFINITION AND RECOGNITION CRITERIA

The Framework IAS 16: Property, plant and IAS 38: Intangible assets
equipment
An asset is Property, plant and equipment are An intangible asset is
tangible an identifiable non-monetary
a resource items asset without physical substance.
controlled by the enterprise that are held by an enterprise
as a result of past events and
from which future economic for use in production or supply of
benefits are expected to flow services, for rental to others, or
to the enterprise. for administrative purposes, and
are expected to be used during
more than one accounting period
An asset is recognised when The costs of an item of Property, An intangible asset shall be
plant and equipment shall be recognised if, and only if:
recognised as an asset if, and only

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if:
it is probable that the future it is probable that future economic it is probable that the expected
economic benefits will flow benefits associated with the item future economic benefits that are
to the enterprise, and will flow to the entity, and attributable to the asset will flow
to the entity, and
the asset has a cost or value the cost of the item can be the cost of the asset can be
that can be measured reliably. measured reliably. measured reliably.
Subsequent to recognition an Subsequent to recognition an
allowed alternative treatment of allowed alternative treatment of
revaluation is permitted. revaluation is permitted only
where there is an active market for
the intangible asset.
Internally generated brands,
mastheads, publishing titles,
customer lists and items similar in
substance should not be
recognised as intangible assets.

It can be seen from the table set out above that IAS 16 and IAS 38 refine the Framework’s definition and
recognition criteria of an asset in defining property, plant and equipment and intangible assets
respectively.

LIABILITY DEFINITION AND RECOGNITION CRITERIA

The Framework IAS 37: Provisions, contingent liabilities and

contingent assets
A liability is A provision is a liability of uncertain timing or
amount. A liability is
a present obligation of the enterprise a present obligation of the entity
arising from past events, arising from past events,
the settlement of which is expected to result in an the settlement of which is expected to result in an
outflow from the enterprise of resources outflow from the entity of resources embodying
embodying economic benefits. economic benefits.

A liability is recognised when A provision is recognised when

the entity has a present obligation (legal or
constructive) as a result of a past event;
it is probable that an outflow of resources it is probable that an outflow of resources
embodying economic benefits will result from the embodying economic benefits will be required to
settlement of a present obligation, and settle the obligation; and
the amount at which the settlement will take a reliable estimate can be made of the amount of the
place can be measured reliably. obligation.

It can be seen from the table set out above that IAS 37 in respect of provisions refines the Framework’s
definition and recognition criteria of a liability.

Currently the IASB and the Financial Accounting Standards Board (FASB) of the United States of
America are working on a joint conceptual framework project. The goals of the new project are to
build on the existing frameworks by refining, updating, and merging them into a common framework
that both Boards can use in developing new and revised accounting standards.

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5. INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR SMALL AND

MEDIUM –SIZED ENTITIES (IFRS FOR SMEs)
For some time, South Africa and the international community have been grappling with the problem
of accounting standards for small and medium-sized entities (SMEs). Less onerous reporting
standards for SMEs are justified on the basis of:

• public accountability (i.e. full IFRSs are suitable only for entities that have public
accountability);
• users and their information needs (i.e. the owners, South African Revenue Services, lenders
and anyone else entitled to receive the financial statements in terms of any Act);
• a different assessment of the requirement for comparability (i.e. the users of SME financial
statements are less concerned with comparability between the financial statements of different
users); and
• a different assessment of balance between benefit and cost (i.e. benefits usually decrease with
a decrease in the number and diversity of users and their information needs).

In South Africa, relief was granted to private companies from complying with IFRSs in terms of the
Corporate Laws Amendment Act, 24 of 2006 and entrenched in the Companies Act, 71 of 2008.
The Companies Act, 71 of 2008 as amended by the Companies Amendment Act, 3 of 2011, allows for
two types of companies, profit companies and non-profit companies. Profit companies include state-
owned companies, private companies, personal liability companies and public companies. The Act
also allows the Minister, after consulting with the Financial Reporting Standards Council, to establish
different standards for profit and non-profit companies, and for different categories of profit
companies. Thus differential reporting is now entrenched in South African legislation.

In South Africa, an entity must meet the scoping requirements of IFRS for SMEs in order to use it as
its accounting framework. These are as follows:

IFRS for SMEs is applicable to entities that do not have public accountability, and publish general
purpose financial statements for external users. An entity is deemed to have public accountability if:
• its debt or equity instruments are traded in a public market or it is in the process of issuing
such instruments for trading in a public market; or
• the entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses.

The standard clarifies that where entities hold assets in a fiduciary capacity as an incidental part of
their business activities, this does not make them publicly accountable. Entities that fall into this
category may include travel agents, schools or charities.

IFRS for SMEs is a stand-alone standard, separate from full IFRSs. Many of the principles in the full
IFRSs have been simplified. Some of the differences to be found in IFRS for SMEs upon comparison
to full IFRSs are as follows:

Accounting policies, estimates Management may consider the requirement of full IFRSs in
and errors - determining an appropriate accounting policy, however,
management is not required to do so.
Basic financial instruments - The recognition model for basic financial instruments is the
amortised cost model. Initial measurement is at transaction price
including transaction costs.
Other financial instruments - The recognition model for other financial instruments is the fair
value model through profit or loss. Initial measurement is at
transaction price excluding transaction costs.
Investments in associates - An entity may elect to account for all its associates:

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• at cost less impairment provided there is no published price for

the investment,
• using the equity method, or
• at fair value with changes in fair value being recognised in
profit or loss (Initial measurement is at transaction price
excluding transaction costs).
Investments in joint ventures - An entity may elect to account for its investments in jointly
controlled entities:
• at cost less impairment, provided there is no published price
for the investment,
• using the equity method as for associates, or
• at fair value with changes in fair value being recognized in
profit or loss (Initial measurement is at transaction price
excluding transaction costs).
Purchased investment property - Measurement is initially at cost and includes costs to bring it into
use.
Subsequently investment property must be measured at fair value
with changes in fair value recognised in profit of loss, unless a
reliable fair value cannot be obtained without undue cost or effort.
If fair value cannot be determined, the investment property is
treated as property, plant and equipment.
Property, plant and equipment - Initial measurement is at cost and includes costs to bring it into
use, including the costs of dismantling and removing the item and
restoring the site. Subsequent to acquisition, the entity shall
measure its property, plant and equipment at cost less accumulated
depreciation and accumulated impairment losses.
Intangible assets other than All expenditure incurred internally on an intangible item including
goodwill - all research and development expenditures are recognised as an
expense when incurred unless it forms part of the cost of another
asset which meets the recognition criteria in terms of IFRS for
SMEs.
After recognition intangible assets are measured at cost less any
accumulated amortization and any accumulated impairment losses.
All intangible assets are considered to have a finite useful life.
Business combinations and All business combinations are accounted for by applying the
goodwill - purchase method.
Goodwill is amortized over a period not exceeding 10 years.
Borrowing costs - All borrowing costs are expensed.

First time adopters of IFRS for SMEs should follow the transitional provisions in IFRS for SMEs.

6. FINANCIAL REPORTING STANDARDS FOR MICRO ENTITIES

A number of commentators have argued that IFRS for SMEs is still onerous if it is to be applied by
micro entities. In response, the South African Institute of Chartered Accountants (SAICA) has
developed a guide for applying IFRS for SMEs to a micro entity.

This guide comprises a user checklist, an application guide with practical examples, illustrative
financial statements, and a disclosure checklist. The guide focuses on the most practical accounting
policies permitted thereby reducing emphasis on the many elements of the standard that are not likely
to be applicable for a micro entity. If a circumstance exists which such elements are still applicable
the guide includes a user checklist which draws the attention of the user to the standard itself for
further guidance. As the guide is in the form on an electronic toolkit, the user an easily navigate
through the guide by making use of the in-built search function. This also allows for live updates.

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7. THE COMPANIES ACT, 71 OF 2008

This Act represents phase 2 of corporate law reform in South Africa. (Phase 1 was completed with the
promulgation of the Corporate Laws Amendment Act, 24 of 2006.) It must be noted that the
Companies Act, 71 of 2008 required a substantial amount of editorial corrections which are found in
the Companies Amendment Act, 3 of 2011. This brings to an end this period of corporate law reform.

S30 requires all public companies to be audited, but in the case of any other company, the Minister
may take into account the annual turnover of the company, the size of its workforce, the nature and
extent of its activities, and the company could either be audited voluntarily at the option of the
company or independently reviewed. If the company has only one shareholder, then it may be
exempted from audit or the independent review. The Act contains various exemptions depending on
whether the director is the sole shareholder, where there is only one director, and where every director
is also a shareholder.

S203 provides for the establishment of the Financial Reporting Standards Council whose objective is
to protect users of financial reports by developing financial reporting standards. The Act sets out the
composition of the Council and the appointment and removal of Council members.

The functions of the Council are to develop financial reporting standards for public interest companies
and limited purpose companies. These financial reporting standards must be in accordance with the
International Financial Reporting Standards of the IASB or its successor body. The approval and the
publication of standards must follow the procedures laid down in the Act.

In terms of the Companies Act, 71 of 2008, a Companies and Intellectual Property Commission will
promote the reliability of financial statements by monitoring patterns of compliance with, and
contraventions of, financial reporting standards and making recommendations to the Financial
Reporting Standards Council for amendments to financial reporting standards to secure better
reliability and compliance (Section 187(3)).

8. INTEGRATED REPORTING

The JSE listing requirement require companies to apply (or explain why they have not applied) the
requirements of the various King Reports. The latest King Report, King III, introduced Integrated
Reporting and listed companies on the JSE were obliged to produce an integrated report for their
financial years starting on or after 1 March 2010. South Africa has thus much experience in Integrated
Reporting.

Listed South African companies now describe their annual reports as Integrated Reports. An
integrated report should include material information about the strategy, governance, performance and
prospects of the entity in such a way that the interdependence of the economic, social and
environmental contexts in which it operates are reflected.

According to the International Integrated Reporting Committee (IIRC), integrated reporting will meet
the needs of the 21st century.

The IIRC is an international cross-section of leaders from the corporate, investment, accounting,
securities, regulatory, academic, civil society and standard-setting sectors. The IIRC recently issued a
Discussion Paper - Towards Integrated Reporting: Communicating Value in the 21st Century.

The IIRC indicate that five guiding principles underpin the preparation of an Integrated Report:
• Strategic focus
• Connectivity of information
• Future orientation
• Responsiveness and stakeholder inclusiveness

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• Conciseness, reliability and materiality.

The above five principles should be applied in determining the content of an Integrated Report, based
on the key content elements of:
• Operational overview and business model
• Operating context, including risks and opportunities
• Strategic objectives and strategies to achieve those objectives
• Governance and remuneration
• Performance
• Future outlook.

The IIRC intends to develop an International Integrated Reporting Framework. The objective of this
Framework is to guide entities on communicating the broad set of information required by investors
and other stakeholders to assess the entity’s long-term prospects in a clear, concise, connected and
comparable format to assist in their decision making. It has released a prototype of the Framework as
an interim step towards defining key concepts and principles that underpin integrated reporting and to
support entities’ ability to produce an interim report. A draft consultation framework is expected to be
issued in 2013.

9. SUSTAINABALITY REPORTING

South Africa does not have a specific requirement for a sustainability report. However, the integrated
report (see before) integrates financial and sustainability information into one report. Thus, a single
report provides information to the users on how the organization impacts on the environment and
community in which it operates, and how the environment and community impacts on the
organization’s business.

Other names given to such reporting are non-financial reporting, corporate social responsibility (CSR)
reporting and triple bottom line reporting.
Further developments can be expected around climate change reporting.

10. SUMMARY
This chapter has endeavoured to address the financial reporting framework from both a South African
and an international perspective. The main features of the financial environment were described and
the importance of the Framework emphasised. Relief has been granted to SMEs with the recognition
that full IFRSs are inappropriate for SMEs and developments in that area have been described. The
corporate reform process in South Africa is now complete and a period of consolidation will now
follow.

The IASB is currently considering whether IFRS for SMEs requires any changes. The IASB has
begun a period of consultation with relevant stakeholders in order to ensure that any changes, if any,
will serve to improve IFRS for SMEs.

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