Mafia Buzz Issue 3

Accountancy SA

Graeme Tosen writes an excellent article explaining how duration and convexity are calculated, what they mean and how they are used. How I wish that such a clear article on the topic was available when I was studying for my CFA examinations! If you are a CFA student, go for this one. For the SME practitioner, it is not for you! (Page 7)

The two ladies from the University of Stellenbosch have written another brilliant article on the cash flow statement. It is quite obvious to me that this statement is not being given the attention it deserves in practice. Here are the cash flow statement issues discussed:

1. 
   How should a share buy-back be treated? I agree with the authors – it should be a financing activity. Examples are given where local companies treat it as an investment activity.
   
2. 
   How should a reissue of shares bought back be treated? I agree with the authors – it should be treated as a financing activity. Again, examples are given where this is treated as an investment activity.
   
3. 
   How should contributions to a defined benefit plan be treated? This is clearly an operating cash flow. I cannot understand why the authors want Afrox to deal with these contributions separately in their cash flow statement. They say that Rainbow Chicken showed this as a financing activity!
   

Hopefully this series of articles will make preparers and auditors more aware of the pitfalls of the cash flow statement. I was looking at a company the other day and found the cash flow statement to be a disaster. I checked on the auditing firm and found it to be a firm that I lecture to on a regular basis. The partners seem to be quite blasé about the fact that the cash flow statement is not in accordance with AC118. They are probably not aware of the viciousness of the JSE review panel! (Page 18)

Taxable income derived from a permanent establishment outside RSA must be calculated using the average exchange rate for that year of assessment. The taxpayer has a choice as to how this rate is calculated. Whatever choice is made, it must be applied consistently. GAAP requires a suitable average rate to be used in accounting for foreign income so there should not be a deferred tax problem here provided GAAP and the tax choice are the same. There would need to be clarification on how to calculate depreciation/wear and tear in this situation. I have never quite grasped the principle of depreciation in a foreign entity – the balance sheet is translated at closing rate but the depreciation at? We probably need to clarify this situation. (Page 17)

My article was on embedded derivatives in import supply contracts. (Page 32)

Business Day

In a study done some years ago, the Economist found that refuse collectors were consistently the best forecasters of the economy due to their knowledge of what people throw away. (2^nd)

The new Postal Services Amendment Act makes it illegal for a private company to deliver a bunch of flowers, a bottle of pills or a pizza. (You had better clear your car of anything weighing less than 1 kg in case you get stopped and searched!) (2^nd)

The Pension and Provident Action group, under the guidance of SAICA has proposed a new accounting standard for retirement funds. (About time too.) (3^rd)

The third largest retailer behind Wal-Mart Stores of the US and Carrefour of France has turned over a new leaf after losing 63% of its value in one day due to an accounting scandal. The managers are now going to focus their attention on the business! (3^rd)

WJ Morgan, the derivative dealer who was responsible for losing R1,3 billion of a pension fund’s assets, was fined R2 million. It was concluded that they had “cheated, defrauded and deceived a client and committed acts, which were considered to be dishonest, fraudulent or dishonourable.” (Who gets the benefit of the fine? The JSE? Surely the pensioners should benefit?) (3^rd)

Following on from the previous paragraph, the FSB is probing whether the pension fund may have acted criminally by taking kickbacks from WJM. The pension fund had contravened the pension Funds Act by investing more than 2,5% of its assets in derivatives. (8^th)

Albert Grey, former president of the Prudential Insurance Company spent his life searching for one quality that all successful people share. His conclusion was that successful people do things that failures don’t like to do. (Like being at the office at 4 a.m. on Christmas Day writing Mafia Buzz.) (20^th)

Jigsaw Holdings had two interesting adjustments to arrive at headline earnings:

• 
  Intangible asset (not goodwill) amortisation
  
• 
  Impairment of loan to share incentive scheme (I agree with this but SAICA says they are wrong)
  

The JSE is trying to force companies to consolidate their share incentive schemes. I have no idea where this comes from. (20^th)

Proposals have been made to make company directors, bankers, advisers and lawyers personally liable if they give auditors false information relating to a company’s financial statements. (20^th)

Citizen

Jackie Cameron gives seven ways to boost your savings: (13^th)

1. 
   Set aside money for your retirement.
   
2. 
   Save first and then spend.
   
3. 
   Bale out of your poor investments.
   
4. 
   Build a mix of investments (diversify).
   
5. 
   Use Rand cost averaging to build your portfolio.
   
6. 
   Do not gamble with your savings.
   
7. 
   Make use of legal tax breaks.
   

Financial Mail

David Alcock of the Broll Property Group sounds a warning that valuers should have a duty of care to investors but questions whether this exists and whether they have access to the requisite market intelligence to do their jobs properly. (As soon as financial statements are based on valuations, their reliability plummets. One must ask the question whether their relevance improves. One asset manager recently commented to me that companies should give all the information and let the asset managers do their job in arriving at value. There was general consensus on this point within the group.) (10^th, page 10)

Following on from the previous story, the net asset value of Arnold Property Fund fell by 75% due to a new method of valuing its properties (and liabilities). They changed over from a “simple capitalisation model” to the “discounted cash flow method” of valuing properties. (I thought you had to use market value!) Fair value accounting is undermining the reliability of financial statements. The standard setters have no idea of the monster they have created by insisting on fair value accounting. (10^th, page 84)

Government and regulatory authorities need to take a step back and come up with reporting requirements that do not impose unnecessary burdens on companies. It would be self-defeating if economic transformation ran aground because costs became prohibitive. Complicated regulations and compliance requirements kill businesses and stifle entrepreneurship. (Does anyone take note of such comments?) (24^th, page 14)

A summary of the recommendations of the panel appointed to examine legislation affecting accountants and auditors is:

Yes to:

• 
  A new regulatory body to subsume the PAAB
  
• 
  Mandatory deregistration of auditors for fraud or serious dishonesty
  
• 
  Statutory offence for executive management or their advisers to lie to the auditor
  
• 
  Mandatory audit committee of non-executive directors at all listed and large companies
  
• 
  Audit committee to have power to appoint auditors and deal with issues of auditor independence
  
• 
  Auditor obliged to meet the full board of listed or large companies at least once a year
  
• 
  Establishment of a fund to compensate parties who lose from an audit failure (It will have to be a BIG fund!)
  

No to:

• 
  Statutory limitation on non-audit services an audit firm may perform for a client
  
• 
  Compulsory rotation of audit firms or audit partners at a client
  
• 
  Auditors having a financial interest in a client (Don’t agree)
  
• 
  Legislation on internal audit
  

(24^th, page 46)

The labour court in Durban has ruled that if an employee is dismissed and has not been allowed to take his/her full leave, he/she must be paid out in full for the accrued leave, even if it is in excess of the statutory minimum. (31^st, page 46)

The Small Business Project has called on government to ease the tax burden for small businesses. (Last month I took my one cheque covering PAYE, Skills levy, UIF and VAT to be deposited and was informed that FNB will no longer accept one cheque for four invoices to be paid to SARS. Just work out how much additional bank charges the banks are going to earn because of this action, and what the SMEs are going to lose. You can’t win!) (31^st, page 46)