Complying with Changes in Legislation

Specific line items on the financial statements

Land and Buildings

Land and buildings is carried at cost less accumulated depreciation and any accumulated impairment losses and no depreciation of land is required. Subsequent expenditure on land and buildings shall either be expensed or capitalised, depending on whether it is day to day maintenance expenditure or increasing the value or output of the property. Land and buildings should be separated, where possible, except when to do so would involve undue cost or effort.

Plant and equipment

The cost of an asset shall be allocated to plant and equipment if it is a directly attributable cost. The cost of an item of plant and equipment shall be allocated on a straight-line basis over its economic useful life or by applying the units of production method. Subsequent expenditure on plant and equipment shall either be recognised in profit and loss or capitalised depending on the type of cost.

Residual values for plant and equipment do not need to be estimated and all plant and equipment will be depreciated to zero.

Intangible assets and goodwill

All internally generated goodwill and intangible assets shall be expensed as incurred. Intangible assets are to be amortised at the option of the entity over their useful lives on a straight-line basis.

Residual values for intangible assets and goodwill need not be estimated and all intangible assets and goodwill will be depreciated to zero.

Leases

Leases should be classified as either operating or finance leases. It distinguishes between instalment sales and leases. Operating lease payments are to be recognised as income or expense by the lessor and lessee respectively. Finance leases shall be recognised as assets and liabilities equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments.

Installment sales

For installment sales, the purchaser shall recognise an asset and an installment sale payable (the seller recognises an installment sale receivable) in its Balance Sheet at amounts equal to the cost of the asset to be purchased (sales price), excluding interest charges, i.e. principal debt plus any deposits paid. The purchaser and seller will recognise interest expense and income respectively, while the purchaser will recognise depreciation charges.

Inventories

Rebates and trade discounts indicated on the invoice must be deducted in determining the cost of inventory. This excludes early settlement discounts and other discounts and rebates received by the entity subsequent to the original invoice.

The method to measure the cost of inventories shall be first-in, first-out (FIFO) or weighted average cost formula.

Impairment of assets

An entity shall tests goodwill and other assets for impairment only if there is an indication of impairment.

This Framework only allows the fair value less costs to sell as the basis for impairment, thereby disallowing the value-in-use basis.

Investments

The initial measurement basis for all investments is at cost, and subsequent measurement also at cost.

For investments with control, joint control or significant influence, the alternative allowed method is to prepare consolidated financial statements. This election for an alternative treatment may be undertaken on an investment-by-investment basis.

The Framework does not allow for any investments to be carried at fair value. The attributed value may, however, be disclosed.

Revenue

Revenue should be measured at the net invoiced value. Only rebates and discounts included on the invoice will be taken into account. Pre-invoiced amounts are specifically not allowed to be recognised as revenue.

Discounts

An entity shall disclose discounts allowed and received, which are not indicated on sales ‘invoices issued and invoices for goods and services received respectively, separately on the face of the Statement of Income and Retained Income.

Taxation

Taxes should be treated as part of the income tax charge in the Statement of Income and Expenditure of the period in which the event that gave rise to the tax occurred or immediately if the event took place in a previous period.

Related party disclosures

This Framework requires the disclosure of the total compensation of the Board of Directors or equivalent management body.

This Framework requires detailed disclosure if there have been transactions between related parties on terms not equivalent to those that prevail in arm‘s length transactions, as well as any encumbrances.

Events after the Balance Sheet date

Dividends should be recognised when the dividends are declared. Dividends declared after Balance Sheet date, but before the AFS are finalised, should only be disclosed and not recognised as a liability.

Environmental taxes

In the Budget 2010/11, announced on 17 February 2010, reference was made to environmental taxes. A carbon tax on new passenger vehicles was announced, and a broad statement was made that "further research is being done to expand environmental taxes and levies".

It is believed that government will implement a comprehensive carbon mitigation and adaptation strategy, supported by appropriate economic instruments like a carbon tax, in the 2011/12 fiscal year.

The following are extracts from the Budget 2010/11 papers.

Carbon dioxide vehicle emissions tax

The proposed carbon dioxide (CO2) vehicle emissions tax, which will come into effect on September 1, would now be implemented as a specific tax and not as an ad valorem tax.

New passenger vehicles will be taxed based on their certified CO2 emissions at R75 per g/km for each g/km above 120 g/km.

The CO2 emissions tax was expected to encourage South Africans to move towards more energy-efficient and environmentally friendly vehicles.

This tax could add between R 5 000 and R 10 000 to the price tag of the average new passenger vehicle.

Environmental fiscal reform and the pricing of carbon

The electricity levy announced in 2008 was the first step towards a carbon tax in South Africa. Various lobbying efforts are underway to expand the carbon market to include the developing world. Although government's preference is for a carbon tax, a discussion document on the possible scope and administrative feasibility of emissions trading in South Africa will also be released for public comment towards the end of 2010.

The following environmental taxes and charges will also be investigated:

• 
  A waste water discharge levy in terms of the Water Act
  
• 
  Pollution charges in terms of the new Air Quality Act
  
• 
  Levies on the waste streams of various products
  
• 
  A landfill tax at municipal level
  
• 
  Traffic congestion charges.
  

The following 'green' deductions / allowances are among those currently in the Income Tax Act:

• 
  Section 12B  Deduction in respect of certain machinery, plant, implements, utensils and articles used in framing or production of renewable energy
  
• 
  Section 37B  Deductions in respect of environmental expenditure
  
• 
  Section 37C  Deductions in respect of environmental conservation and maintenance
  
• 
  Section 11D  Deduction for research and development costs
  

Exemptions for certified emission reductions

The Kyoto Protocol, the main environmental instrument of the United Nations Framework Convention on Climate Change (UNFCCC), has been ratified by 189 countries including South Africa. The Kyoto Protocol provides mechanisms to ensure that developed countries (as listed in Annexure 1 of the UNFCCC)) can meet their emission reduction targets. At the same time, the Clean Development Mechanism (CDM) ensures participation of developing countries in a global carbon reduction market. The Kyoto Protocol financing and technology transfer is accomplished through CDM projects which are available only within developing countries. These CDM projects focus on development in renewable energy, energy efficiency and other related fields designed to achieve emission reductions.

A key feature of CDM projects is the demonstration of additionality, which means that the project participants must demonstrate that the envisaged project would not have been viable without Kyoto Protocol support:

• 
  Emissions (environmental) additionality: This element ensures any emissions reduction is additional to what would occur without the proposed project;
  
• 
  Financial additionality: This element ensures that any public funding from Annexure 1 countries for the CDM project is additional and not a diversion of pre-existing official development assistance;
  
• 
  Investment additionality: This element ensures that the investment project would not take place without a CDM project;
  
• 
  Legal additionality: This element ensures that the project is additional to what is already mandated by laws or regulations; and
  
• 
  Technical additionality: This element ensures that superior technology is used that would not have been possible to transfer to the developing country without the CDM project.
  

If these elements are satisfied, the Kyoto Protocol allows for these CDM projects to yield GHG reduction credits (commonly known as carbon emission reduction credits) in the form of certified emission reductions (CERs). These CERs are technically saleable to and usable only by developed countries for the purpose of meeting legally binding Kyoto Protocol emissions reductions obligations. CERs effectively operate as a concomitant revenue source for CDM projects, thereby seeking to make otherwise marginal projects viable.

Exemption of certified emission reductions (Section 12K)

There must be exempt from normal tax any amount received by or accrued to or in favour of any person in respect of the disposal by that person of any certified emission reduction derived by that person in the furtherance of a qualifying CDM project carried on by that person.

However, expenditure incurred in the production of CERs sold will not be deductible for tax purposes, as it was incurred in the production of exempt income. It will therefore be imperative that adequate records are kept to distinguish between expenses incurred in the production of this exempt income and expenditure incurred in the production of taxable income.

Allowance for energy efficiency savings (Section 12 L)

The primary energy sources in South Africa are fossil-fuel based. Energy derived from fossil fuel has a negative effect on the environment and current electricity prices do not reflect the environmental costs. Given the need to address the challenges relating to climate change and to improve energy use, it has become necessary to find ways improve energy efficiency. Energy efficiency can indeed be viewed as one of the low-hanging fruits to help address the concerns relating to climate change and energy security.

Energy efficiency savings, expressed in kilowatt hours (kWh), is the favourable energy use measured against a baseline, set as a threshold by a Measurement and Verification agent. These agents are internationally recognised professionals. SANEDI will make the energy efficiency saving and determinations. SANEDI will issue the energy savings certificate, certifying the energy efficiency savings based on the information obtained from the measurement and verification agents.

The conversion by the taxpayer of old technologies to new ones often involves a substantial amount of capital expenditure for the taxpayer. Once the energy savings are realised there will be a corresponding increase of accounting profits and taxable income. Therefore, government fully partakes in the profits gained from the energy savings. This tax impact creates an added hurdle to the conversion of new energy efficiency processes. The same holds, but to a lesser extent, for energy efficiency savings brought about by improvements in production processes and operating procedures.

It is proposed that taxpayers be entitled to claim a notional allowance for energy efficiency savings resulting from activities in the production of income. This notional allowance will enable the taxpayer to capture the full profit from the energy savings during each year in which incremental energy efficiency savings is realised.

The allowance for each year of incremental savings is determined as follows:

(Energy efficiency savings x Applied rate) / 2

Energy efficiency savings is determined by an accredited Measurement & Verification professional using the baseline methodology and is expressed in kilowatt hours (kWh) and certified by SANEDI.

The applied rate is the lowest feed-in-tariff expressed in Rands per kWh determined in terms of the Regulatory Guidelines by the National Energy Regulator. Given that the lowest feed-in tariff rate is higher than the current rate per kWh for electricity generated from fossil fuels the allowance is 50 per cent (the division by 2) of the amount derived by multiplying the energy efficiency gains with the applied rate. The Minister may change this percentage, (i.e. the amount by which the rand value of the savings is divided).

The energy savings certificate is the key pre-requisite for the allowance. The certificate must contain the M&V determined energy used baseline, the annual energy efficiency savings expressed in kilowatt hours (kWh) and the revised baseline. All this information must be authenticated and issued by SANEDI

The amendment is effective for years of assessment ending on or after 1 January 2010. This provision also has a sunset clause, resulting in the expiry of the incentive on 1 January 2020.

1 This section is not yet operational and the threshold for reporting has not yet been established.

2 This section is not yet operational

3 This section is not yet operational