Pafa bulletin vol 3

TECHNICAL BULLETIN

Vol.3

April 2014

in association with:

Table of contents 1. Note from the editor 2. Foreword by CEO 3. Financial reporting

3.1. The IIRC release of the International Integrated

Reporting Framework

Technical queries email: technicalhelp@pafa.org.za

4. Auditing

4.1. Audit Quality

4.2. IRBA Code of Conduct and Rules for Improper Conduct

5. Other: Matters of Interest

5.1 Improving the performance of organisations in Africa

1. NOTE FROM THE EDITOR We have received positive feedback from readers on the

In addition, the South African Institute of Chartered

previous PAFA Technical bulletin, and as a result, and in

Accountants have committted to share with us on a regular

discussion with the PAFA Chief Executive Officer, we would

basis their efforts to influence the International Standard

like to issue this Bulletin on a monthly basis. We aim to keep

setting process. This is done through comment letters

you informed on Technical matters within three categories

on Exposure Drafts and attendance of standard setters

being ‘Financial Reporting ’, ‘Auditing ’ and ‘Other Topics’.

meetings.

The category ‘Other Topics’ is reserved for matters relating to the International Integrated Reporting Framework,

We hope you enjoy the terrains of this issue.

Legislation and Regulatory matters and any articles of business interest to PAFA members.

Regards,

You will find in this issue a collection of inspired and

Cynthia Mbili CA(SA)

instructive articles written by experts in their various fields.

Technical Director SizweNtsalubaGobodo.

We try to bring valuable insight on a variety of issues that affect the accountancy profession as a whole.

In this issue we received a contribution from Naomi Smith, Head of Policy Research at CIMA : Improving the Performance of Organisations in Africa .

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2. FOREWORD BY CEO During the planning phase of the formation of PAFA,

PAFA is currently coordinating the formation of a

it was apparent that there was need to accelerate the

PAFA Standard Setters Forum. We believe once this

development of the accountancy profession on the

gains enough traction, the group will coordinate

African continent, as well as to create a mechanism

themselves and come up with a name that will

through which the voice of the profession from the

suit their aspirations. The African accountancy

continent may be strengthened.

professionals must rise to the occasion.

The destiny of the accountancy profession is in our

It was recognised that there was need to enhance the

hands.

reputation of the accountancy profession in Africa.

This is done by facilitating the formal adoption and

2014 Events

implementation of international standards and best practice, in both the private and public sector, within a

• 07 May 2014 – Standard Setters/Technical Forum –

strong regulatory and legislative framework.

Douala, CAMEROON

• 08 May 2014 – Seminar/Conference – The adoption and implementation of international

Douala,CAMEROON

standards must go beyond accepting standards that

• 09 May 2014 – 3rd General Assembly (Morning) -

have been presented by the standard setter. The

accountancy profession of Africa needs to participate

• 09 May 2014 - PAFA Board Meeting – (Afternoon) -

in the standard setting process. Currently there is

need to:

• 15 August 2014 - Standard Setters Forum

Douala, CAMEROON Douala, CAMEROON Johannesburg, SOUTH AFRICA

• Submit credible candidates for consideration on

standard setting boards.

2015 Events

• Provide input into the standards through well

researched and articulated comments to

• 12 May 2015: Standard Setters Workshop -

exposure drafts and discussion papers.

Mauritius

• Providing standard setting boards with practical

• 13, 14 and 15 May 2015: African Congress of

implementation issues as experienced by users in

the African continent.

• 16 May 2015: General Assembly - Mauritius

• Contribute financially to the standard setting

Accountants - Mauritius

• 16 May 2015: Incoming Board meeting – Mauritius

boards.

Vickson Ncube Various regions in the World have formed standard

Chief Executive Officer

setter groups to increase their visibility. These are as follows: • Asian- Oceanian Standard Setters Group (AOSSG).

• European Financial Reporting Advisory Group

(EFRAG).

• Group of Latin American Accounting Standard

Setters (GLASS).

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3. FINANCIAL REPORTING PAFA believes that as more and more African

The South African Institute of Chartered Accountants

countries adopt International Reporting and Auditing

(SAICA) Accounting Practices Committee (APC)

standards, Africa needs to organise itself to influence

submitted the following comment letter to the

the outcome of these standards. All PAFA members

International Accounting Standards Board (IASB)

have a role to play. To share with you what South

in 2014. SAICA was generally supportive of the

Africa is doing, we will include their comment letters

preliminary views on the Discussion Paper but had

on various International Standards. SAICA would

some reservations. It was concerned that the revised

welcome input from PAFA members on International

Conceptual Framework could bring about change in

Standards setting process and any suggestions of how

certain principles currently applied on a standards

African countries can collaborate in this effort. To

level such as the threshold for the recognition of

send your input to start the dialogue, please use a

provisions, the presentation of items in OCI, the

technical email address: sandrak@pafa.org.za

application of the distinction between liabilities and equity and the application of measurement options.

The detailed SAICA comment letters can be

In this regard the SAICA urged the IASB to start

downloaded at www.saica.co.za/Technical/Financial

identifying standards that should be updated to

Reporting/Exposure Drafts & Submissions.

align them with the new concepts of the Conceptual Framework and to develop a work programme to

DP/2013/1 – A Review of the Conceptual

update such identified standards.

Framework for Financial Reporting.

• This Discussion Paper was the first step towards

SAICA also strongly recommended that both profit

issuing a revised Conceptual Framework for

or loss and OCI should be sufficiently be explained

Financial Reporting (Conceptual Framework).

as part of the elements of the statement(s) of profit

In the Discussion Paper the IASB was seeking views

or loss and OCI, so as to create robust principles to

and comments on a number of matters, and focused

make decisions whether income and expenses should

on:

be classified in profit or loss or OCI. In its view such

• the revised statement of the primary purpose

of the Conceptual Framework;

principles should start with what the role of profit and loss is in performance reporting, with clear reasoning

• the revised definitions of assets and liabilities;

why certain items could be reported outside the scope

• providing additional guidance on applying the

of profit or loss. Without such robust principles the

decision to recognise income and expenses outside

definitions of assets and liabilities;

• the revised guidance on when assets and

profit or loss could result in arbitrary decisions.

liabilities should be recognised;

• new guidance on when assets and liabilities

ED/2013/10 – Equity Method: Separate Financial

Statements – Proposed Amendments to IAS 27 –

should be derecognised;

• a new way to present information about equity

Separate Financial Statements.

claims against the reporting entity;

• a new section on the concepts that should guide

The IASB published this exposure draft of proposed

the IASB when it selects measurements in a new

amendments to IAS 27 to restore the option to use

or revised Standard or Interpretation;

the equity method to account for investments in

• a new section on presentation and disclosure;and • Principles for distinguishing profit or loss from other comprehensive income (OCI).

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subsidiaries, joint ventures and associates in the entity’s separate financial statements in December 2013.

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The SAICA APC was supportive of the proposed

Financial Liabilities is not specifically required for

amendment to IAS 27 to restore the equity method

all interim periods. However, the additional

to account for investment in subsidiaries, associates

disclosure is required to be given in condensed

and joint ventures. It also requested the IASB to

interim financial statements that are prepared in

incorporate the conceptual basis for permitting

accordance with IAS 34 when its inclusion would

the use of equity accounting in separate financial

be required by the requirements of IAS 34.

The SAICA APC was supportive of these both these

proposed amendments.

statements, particularly as this method was rejected by the IASB in 2003.

ED/2013/11 – Annual Improvements to IFRSs 2012 – 2014 Cycle.

• IAS 19 – Employee Benefits.

In December 2013, the IASB issued the following

This proposed amendment clarifies that the high

proposed amendments under the annual

quality corporate bonds used to estimate the

improvements project:

discount rate for post-employment benefit

obligations should be denominated in the same

currency as the liability.

• IFRS 5 – Non-current assets held-for-sale and

discontinued operations.

Under this proposed amendment, the IASB clarifies

The SAICA APC did not object to this proposed

that in circumstances in which an entity determines

amendment given that this not an issue in South

that the asset (or disposal group) is no longer

Africa. It noted though that this might be an issue

available for immediate distribution or that the

in other countries within the African region which

distribution is no longer highly probable, it should

the IASB ought to consider.

cease held-for-distribution accounting and apply

the guidance in paragraphs 27–29 of IFRS 5.

• IAS 34 – Interim Financial Reporting.

This amendment proposes to clarify the meaning

Whilst the SAICA APC was in agreement with this

of disclosure of information ‘elsewhere in the

proposed amendment it questioned why

interim financial report’ and to require the

retrospective application was not required since

inclusion of a cross-reference from the interim

entities should be possession of all the relevant

financial statements to the location of this

information required for the transition.

information.

• IFRS 7 – Financial Instruments: Disclosures.

The SAICA APC was in agreement with this

In this proposed amendment, the IASB proposes

proposed amendment.

to add guidance to assist an entity to determine

how it should apply the guidance in paragraph 42C

The detailed SAICA comment letter on this exposure

of IFRS 7 to a servicing contract to decide whether

draft can be downloaded at www.saica.co.za/

a servicing contract is ‘continuing involvement’ for

Technical/Financial Reporting/Exposure Drafts &

the purposes of applying the disclosure

Submissions.

requirements in IFRS 7.

It further proposes to clarify that the additional

disclosure required by the amendments to IFRS 7:

Disclosure– Offsetting Financial Assets and

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IASB proposed pronouncements open for public

The deadline to submit comments on the Request for

comment.

Information – Post-implementation review: IFRS 3 – Business Combinations is 30 May 2014.

In an attempt for Africa to work together to influence outcome of International Standards we request

Download the Request for Information – Post-

your comments and feedback on the following IASB

implementation review: IFRS 3 – Business

proposed pronouncements which are currently open

Combinations from the IASB website www.ifrs.org/

for public comment:

Get involved/Comment on a proposal.

• Post-implementation review on IFRS 3 – Business

3.1 The IIRC releases the International Integrated

Combinations

Reporting Framework After three years of developing an intergrated

The IASB is requesting input from accounting

reporting framework, the International Integrated

standard-setters, preparers, investors, market

Reporting Council (IIRC) released the International

regulators, auditors, users and experts as it undertakes

<IR> Framework on 8 December 2013. The Framework

a project to review IFRS 3. The post-implementation

is referred to as version 1.0 as it will be updated when

review on IFRS 3 will enable the IASB to assess

needed. This release heralds a global move to better

the effect of the application of IFRS 3 on financial

corporate reporting. African countries have been on

reporting from the perspective of preparers, investors

a recent drive to try and increase their participation

and other users of financial statements, market

in the creation of corporate reporting frameworks. In

regulators, the audit profession, accounting standard-

light of this the South African Institute of Chartered

setters, valuation specialists and academics.

Accountants (SAICA) made contributions through

In particular, it aims to assess whether:

comment letters to the International Accounting Standards Board (IASB) on the development of the

• IFRS 3 provides information that is useful to users

International Framework.

of financial statements;

• there are areas of IFRS 3 that represent

The IIRC says that the finalisation of the

implementation challenges and, as a result, impair

International <IR> Framework will go a long way to

the consistent implementation of the

encourage organisations around the world to prepare

requirements; and

an integrated report that shows their performance

• unexpected costs that have arisen when preparing,

against strategy, explains the various capitals used

auditing or enforcing the requirements of the

and affected, and gives a longer term view of the

Standard or when using the information provided

organisation. The integrated report is regarded as

by the Standard.

the evolution of the traditional annual report as it offers a more holistic view of an organisation. This

Based on the responses received from this post-

is much broader than financial performance alone,

implementation review, the IASB may decide to

enabling investors and other stakeholders to make a

retain IFRS 3 as issued, continue to monitor the

more informed assessment of the organisation and its

implementation of IFRS 3, if the results of the post-

prospects.

implementation review are inconclusive; or revise IFRS 3 to remedy problems identified by the postimplementation review.

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4.AUDITING 4.1. Audit Quality.

High-quality financial reporting is supported through

c. Outputs. Outputs include reports and

audit quality. Audit quality is a phrase that has been

informationthat are formally prepared and

used in the past by auditors, clients and the wider

presented by one party to another, as well as

public without defining the meaning of the phrase

outputs that arise from the auditing process that

â&#x20AC;&#x153;Audit Qualityâ&#x20AC;?.

are generally not visible to those outside the

audited organization.

With this in mind and given the relevance of audit

d. Interactions. These include both formal and

quality to all stakeholders in the financial reporting

informal communications, are influenced by the

supply chain, the IAASB in 2011, began work to

context in which the audit is performed and allow

identify elements that underlie audit quality. This

a dynamic relationship to exist between inputs and

process culminated in the issue of a Framework for

outputs.

Audit Quality in February of 2014.

e. Contextual Factors. These are factors that have

the potential to impact the nature and quality of

The Framework for Audit Quality describes in a

financial reporting and, either directly or

holistic manner the different elements that create the

indirectly, audit quality. They include business

environment for audit quality at the engagement, firm,

practices, laws and regulations, information

and national levels, as well as relevant interactions

systems, corporate governance, audit regulation,

and contextual factors. The Framework for Audit

applicable financial reporting framework,

Quality is a non-authoritative document. It is not a

attracting talent and audit regulation

control, ethics and other regulatory requirements

Diagrammatically this model can be demonstrated

nor does it establish additional standards or

in fig 1.1.

substitute for auditing standards, standards of quality

provide requirements for the performance of audit engagements.

The following are elements that are outlined in the framework for Audit Quality: a. Inputs. This element includes having staff that is

sufficiently knowledgeable, skilled, experienced,

and having sufficient time allocated to them to

perform the audit work and displaying appropriate

values, ethics and attitudes.

b. Processes. Under this element the auditor should

apply a rigorous audit process and quality control

procedures that comply with laws, regulations and

applicable standards. There should be clarity how

these apply to an engagement, firm and the national

practice.

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4.2 IRBA Code of Conduct and Rules for Improper Conduct In 2013 the International Ethics Standards Board for Accountants (IESBA) enhanced certain areas of the Code of Ethics for Professional Accountants (the Code) that has been effective since 01 January 2011.

The Code establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants should apply. The Code applies to all professional accountants, whether they are in public practice, industry, commerce, the public sector or education.

Sections of the Code that have been strengthen or enhanced relate to:

TECHNICAL BULLETIN

Conflicts of Interests The explanation of what a conflict of interest means under the Code has been improved. The changes are aimed at better enabling professional accountants to identify potential conflicts of interest early for timely action to be taken by the affected parties. Importantly, the new requirements are intended to stimulate professional accountants to evaluate whether they can remain objective in those circumstances and abide by the other fundamental ethical principles in the Code.

The new requirements are effective from 1 July 2014.

Breach of a Requirement of the Code The revision to the Code establishes a robust

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framework for addressing a breach of an independence

will require any changes to accounting firms’ systems

requirement in the Code. These include requiring a

and methodologies or common practice.

firm to: - Terminate, suspend, or eliminate the interest or

The change clarifies that a subgroup of those

charged with governance of an entity, such as an

relationship that caused the breach;

- Evaluate the significance of the breach and

audit committee, may assist the governing body

determine whether action can be taken and is

in meeting its responsibilities. In those cases, if

appropriate in the circumstances to satisfactorily

a professional accountant or firm communicates

address the consequences of the breach;

with such a subgroup, the Code requires the

- Communicate all breaches with those charged with

professional accountant or firm to determine

governance and obtain their concurrence that

whether communication with all of those charged

action can be, or has been, taken to satisfactorily

with governance is also necessary so that they are

address the consequences of the breach; and

adequately informed. The framework should be used

- Document, among other matters, the action taken

by all those involved in the financial reporting process

and all the matters discussed with those charged

supply chain including auditors, those charged with

with governance.

governance, public sector organisations, academics, regulators and oversight bodies to challenge

These amendments are effective from 1 April 2014.

themselves on how to improve audit quality.

Definition of “Engagement team”

The IAASB will in due course evaluate how and in what way the Framework for Audit Quality is being

Following on the release of the revised International

used and consider follow up activities.

Standard on Auditing (ISA) 610 by the International

The Australian Securities and Investment Commission

Auditing and Assurance Standards Board (IAASB),

have issued an information sheet that provides

Using the Work of Internal Auditors, the IESBA also

guidance to assist directors and audit committees in

amended the definition of “engagement team” in

their role in ensuring the quality of the external audit

the Code. The amendments clarify the relationship

of financial information.

between internal auditors providing direct assistance on an external audit (“direct assistance”) and the

5. OTHER MATTERS OF BUSINESS INTEREST

meaning of an engagement team under the Code. The

5.1 Improving the performance of organisations in

revised definition is effective for audits of financial

Africa

statements for periods ending on or after 15 December

Unlike the discipline of financial accounting - with

2014.

its mass of both international and local financial reporting standards - management accounting has

Definition of “Those charged with governance”

not enjoyed the guidance of an authoritative set of principles to direct its practice. The Chartered

The changes more closely align the definition of

Institute of Management Accountants, together with

“those charged with governance” in the Code with

the American Institute of CPAs, have joined forces

that in the International Auditing and Assurance

to address this gap, and on 10 February 2014, the two

Standards Board (IAASB)’s International Standard on

institutes jointly launched a public consultation on

Auditing (ISA) 260, Communication with those charged

the first ever set of Global Management Accounting

with governance, thereby eliminating any potential

Principles.

confusion. It is not expected that this enhancement

The aim of the Principles is to promote better business

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through improved performance. Globalisation,

bearing on scarce resources.

technology, innovation and big data, are just a handful of the global trends that make running organisations

In this context, management accounting is more

in the 21st century more complex, as change becomes

relevant than ever before. Forward-looking and

tougher to predict, and value harder to protect. Both

externally facing, it can bring structured solutions

the volume and velocity of information flows have

to the unstructured problems thrown up by today’s

increased, and organisations the world over are

volatile operating milieux. The Principles are designed

becoming increasingly data rich but knowledge poor.

to ensure that management accountants give the

Rather than focusing solely on internal, historic and

right people the right information, at the right time,

financial data, organisations now need to balance this

to ensure they make the best decisions about their

with an understanding of the external, real-time and

organisation’s long-term success. Guided by the

predictive, non-financial information that is pertinent

Principles, management accountants can help African

to their particular business model.

organisations to better understand their external operating environment and emerge successfully and

Sustainable success requires both boards of directors

sustainably on to the global economic arena.

and senior management to craft short and long term strategies, to develop business models through which

There are three headline Principles and nine sub-

plans can be executed, to allocate resources effectively

principles, each derived from the informational role of

and to secure the trust of stakeholders. Effective

the profession. They are:

governance processes and regular communication

• Preparing relevant information – ensures

with customers, investors, suppliers, regulator and

organisations plan for their information needs at

employees are crucial. To achieve any of this however,

the time of creating tactics for execution

organisations need appropriate information and

o

Information is relevant

robust analysis. Nowhere is this truer than in Africa,

o

Information is reliable

where harnessing the best information can make the

o

Information is contextual

difference between long-term value creation, and rapid value erosion.

• Modelling value creation – simulates different

Africa, currently the world’s fastest growing continent,

scenarios that demonstrate the cause-and-effect

relationships between inputs and outcomes

is at an exciting juncture. Over the last decade real

o

Simulations provide insight into options

per capita incomes have risen more than 30 percent,

o

Options inform actions

having shrunk 10 percent in each of the previous two,

o

Actions are prioritised by impact

and African trade with China has increased from $11bn per annum to $166bn. In the six years to 2012, foreign

• Communicating with impact – improves decisions

direct investment climbed from $37bn to $46bn. GDP

is expected to increase by an average of 6% per annum

decisions.

about strategic execution and influences better

until at least 2024. But with the exception of the

o

Strategy execution is a conversation

Arctic and Antarctic, Africa will also be the continent

o

Communication is tailored to the audience

most affected by the vagaries of climate change, with

o

Communication facilitates better decisions.

drought, floods and water scarcity presenting very real threats. Slowing economic growth in China, could have

You can read more about the detail of the Global

a significant impact on African commodity prices and

Management Accounting Principles and how they

Africa’s rapid population growth will have a marked

can be applied to the main practice areas within the

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finance function, at www.cimaglobal.com/principles.

PAN AFRICAN FEDERATION OF ACCOUNTANTS â&#x20AC;&#x201C; PAFA

The CIMA and AICPA consultation runs until 10 May

Integritas II

2014. PAFA members, uniquely expert in the specific

7 Zulberg Close; Bruma Lake, 2198

accounting and finance issues facing Africa, would be invaluable in participating in that discussion.

Early adoption of all the enhancements/ revisions is permitted and encouraged.

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PO Box 59875; Kengray, 2100 Johannesburg, South Africa Email:vicksonn@pafa.org.za Telephone +27 (011) 479 0602/4 Website: www.pafa.org.za

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