The new auditors report is coming – how will it affect you?

The single most important document released by auditors is the auditor’s report, which appears in the audited annual financial statements.

The so-called new and revised auditor reporting standards are effective for audits of financial statements for periods ending on or after 15 December 2016; in essence, 31 December 2016 financial year-ends. Although the audit opinion as such does not change, the auditor’s report has been enhanced to improve its communicative value and to provide more entity-specific and audit-specific information about the audit that has been performed.

The main changes

  • The revised audit report will begin with the audit opinion – currently it appears well down in the audit report. This will immediately be followed by a section wherein the auditor describes the basis for opinion.
  • The auditor is required to make an affirmative statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and that the auditor has fulfilled his/her other ethical responsibilities in accordance with these requirements.
  • Introduced into the audit report is a section on key audit matters (KAM). The auditor will communicate those matters that, in the auditor’s professional judgment, were the most significant in the audit of the financial statements of the current period. KAM are mandatory for listed entities and in those instances where required by law or regulation. For all other audits it is voluntary.
  • Enhanced reporting on going concern:
    – The auditor’s report will provide a description of management’s responsibilities in terms of assessing the entity’s ability to continue as a going concern and the auditor’s responsibilities pertaining to management’s use of the going concern basis of accounting.
    – If the auditor concludes that a material uncertainty exists, this is to be reported in a separate section of the auditor’s report called “Material Uncertainty Related to Going Concern”.
  • Enhanced description of the auditor’s responsibilities in the audit of financial statements and key features of the audit.

Expected benefits

  • Improved communication between the auditor and those charged with governance, as well as providing a basis for investors to further engage with the governance custodians in the entity (e.g. the board of directors and the audit committee).
  • Increased focus by management and those charged with governance on disclosures in the financial statements.
  • Enhanced focus by the auditor on items to be reported on. This should sharpen the “professional scepticism” of the auditor.
  • More transparency should flow from this as the informational value of the audited financial statements should improve.

It is worth noting that these new requirements are not intended to change the scope of the audit.

Your relationship with your auditor will probably be more robust but it will enhance the quality of the audit and your understanding of the audit process. 

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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Trustees: The new tax return – take advice now!

CalTowards the end of 2015, SARS introduced a new IT12T tax return form for trusts. For the 2015 tax year these need to be completed in full. The return needs be lodged on or by 29 January 2016.Trustees be aware – the form has become very detailed and will need planning and preparation.

Why a new form?  

The SARS five year compliance programme (2012-2017) focused on high risk areas to SARS – one of which was high net-worth individuals and the use of trusts to shield assets from tax liability.

Thus, SARS is looking to gain new tax revenues from trusts and with twenty two pages of disclosure you need to be on your guard when completing the return.

The main features

  • Expanded financial and legal reporting requirements
    – Details of the trust’s offshore and local assets and liabilities
    – Comprehensive information on types of income (rental, farming partnerships etc)
  • Foreign and local capital gains and distribution of such gains to beneficiaries
  • Full details of all parties contributing funds, assets, loans etc. into the trust will need to be provided as well as details of the actual transactions made
  • Full details of any party benefitting in any way from the trust as well as details of the benefits received or enjoyed will need to be provided for every beneficiary:
    – If there are 50 or less people to whom these transactions applied, then list every transaction in the IT12T return.
    – If there are more than 50 people then provide detail of every transaction in excess of R500,000
  • What type of rights the beneficiaries enjoy (vested or discretionary rights).

As you can see this is quite an undertaking which apart from the time to prepare will also require substantial knowledge and understanding of taxation. 

To complicate matters further SARS intends to issue a replacement for this new return. Note that any data captured and saved but not yet submitted to SARS on the current return will be lost on implementation of the new return.

Should you require our services in this regard, please contact Petrus Erasmus at petrus.erasmus@bassgordon.co.za or on 021 405 8612, to assist you.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your business consultant for specific and detailed advice.

 

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PAIA manuals: Another last minute extension


AA
“Procrastination is the thief of time” (Edward Young, 18th c. poet)

If your business is one of those (mostly smaller – see below) businesses temporarily exempted from lodging your PAIA manual until 31 December 2015, you will be happy to hear that the pressure is off for another 5 years, and that the turnover thresholds have been increased.  This is now three times since 2005 that government has, after telling us there will be no further extensions, done an about-face at the very last minute.

Don’t kick yourself however if you rushed to beat the deadline – you will almost certainly still have to comply somewhere down the line, and at least you crossed off one annoying little red tape item from your To-Do list.

Procrastinators on the other hand are doomed to repeat the eleventh-hour panic in 2020. Rather comply now if you haven’t already done so.

Does this extension apply to you?

The new 31 December 2020 deadline applies to most smaller businesses – specifically to any “private body”, including any private company, but not to any non-private company, nor to any private company in any of the business sectors listed below with either –

  • 50 or more employees, or
  • An annual turnover of or above specific thresholds – see the table below for details.

PAIA

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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When should you outsource?

A1SMEs (Small and Medium-sized Entities) go through many cycles, one of which is figuring out how to get their business to the next level. As your business grows you face an increasing need for specialised skills which are either unavailable due to skills shortages, or are too expensive.

Give your business a sizeable boost

One of the tools often used to leverage the entity upwards is outsourcing – an organisation commissions third parties to run one or more of its functions, such as human resources.

A recent international survey forecasted outsourcing to grow by 12-26% in 2015, depending on the function. The reason it is growing so fast is the incredible pace of new technology becoming available at competitive prices. This has made it possible to source, say, design innovation from a company in Poland.

Advantages of outsourcing

There are many –

  • It can lower your costs leading to more sales, greater market share and increased profitability, e.g. shifting manufacture to lower cost countries like China.
  • When your alternative to outsourcing is to increase your staff complement, you avoid all the associated risks and costs, including long-term commitments like employment contracts, additional work space, facilities, management time etc.
  • By outsourcing functions, you can focus on the key areas of your business. Payroll is a frequent example.
  • Outsourcing reduces your capital and funding requirements. For example, outsourcing distribution saves warehouse capital expenditure plus associated staffing costs. These resources can rather be ploughed into the key areas of your business.
  • Often you cannot afford the expertise in-house or there is a scarcity of the required resource. As said above, technology is cutting across borders making it possible to outsource on a global basis.
  • It helps to level the playing fields for small businesses versus the larger corporates who have substantially more in-house support services.
  • It should help to reduce risk across your company which is now partly assumed by the entity to which you outsource.

How to outsource successfully

The key is to define exactly what you want from outsourcing. This should translate into a clear proposal, so that outsourcing companies can understand your requirements and give you a relevant quote. Once you have decided on the correct outsourcing partner, a formal outsourcing contract should be drawn up setting out what needs to be done by both parties.

Be mindful of any legal requirements that may arise from outsourcing such as how to treat confidential information.

MGI Bass Gordon is able to assist with payroll, accounting and other services. Should you require our assistance or if you need more information, please contact the relevant partner on 021 405 8500

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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What‘s the buzz about Business Rescue?

A1_BIf a company/close corporation is in financial trouble and all possible avenues to save the business have been exhausted, there is one last option available, lodging an application for Business Rescue

Only a company/close corporation that is “financially distressed” can be placed under Business Rescue.

The Act defines the words “financially distressed” to mean that:

  • It seems reasonably unlikely that the business will be able to pay its debts in the normal course of business within the next six months, or
  • It seems reasonably likely that the business will become insolvent in the next six months.

To determine whether a company is financially distressed; either a cash flow or a balance sheet test can be applied. The business rescue process is meant to be used at the earliest moment, when a company is showing signs that it could soon become insolvent but where it has not yet reached the stage of insolvency. The sooner a company is placed in Business Rescue, the greater the chance of the company being successfully rehabilitated.

What is the aim of a business rescue plan?

The aim of placing a company/close corporation under business rescue is to give the business some breathing space to implement the business rescue plan and give the business a fair chance to become a going concern again.

Alternatively, if the business is liquidated despite the business rescue proceedings, the aim is to hopefully have a higher return available for the creditors and shareholders than would have been the case if the business was liquidated before undertaking any business rescue proceedings.

To give a business the maximum chance of recovering its finances and to continue operating as a solvent enterprise, the business rescue plan normally restructures a business’ assets, liabilities and equity, as well as its way of doing business.

What does a business rescue practitioner do?

The appointed business rescue practitioner will investigate the business’ situation and propose a business rescue plan. After the business rescue plan has been approved by the creditors and shareholders, the business rescue practitioner will implement the plan. The reason why the creditors and shareholders must approve the business rescue plan is that they will withhold their rights against the business to claim payment as long as the business is operating under the business rescue plan.

After implementing the business rescue plan, the business rescue practitioner will temporarily oversee and manage the business together with the current management.

The business rescue practitioner also takes over dealing with the creditors and shareholders. In addition, the business rescue practitioner will communicate with registered trade unions which represent employees of the business. If there are employees who are not members of any registered trade union, the business rescue practitioner will deal with these employees or their representatives as well.

Once the business has been placed into Business Rescue by either, a resolution of the board to voluntarily put the business into business rescue proceedings under the supervision of a Business Rescue Practitioner or by order of the court upon application by an affected person, the company must file Form CoR123.1 with the Companies and Intellectual Property Commission (“CIPC”) together with the relevant supporting documents.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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Load shedding and your employees

A2_BWe are getting used to load shedding and it almost certainly is going to be around for several years.

Business is already feeling the effects of time disruptions and a major area of concern is how you deal with your workforce in this testing period. A good place to start is with current labour law.

Must you pay for time lost during power cuts?

In terms of labour legislation, the concept of paying for agreed output or performance does not apply. If for example your employee is expected to work from 8.30 a.m. to 5 p.m. and at 9.30 a.m. load shedding takes place, you are obliged to pay the employee in full. The fact that work cannot take place for reasons outside the control of the business, does not affect the employer-employee contract. If your employee is available and ready to work, then that employee is to be paid.

Should you ask your employees to make up for the load shedding downtime, then  you are potentially liable for overtime if working hours are extended beyond the norm.

If employees are required to take their lunch period during load shedding, the employer is required to pay the employee for lunch periods greater than seventy five minutes. With load shedding usually lasting several hours, this puts you in another dead end.

There is only so much training and staff meeting time a business needs to have, so what else can an employer do? 

Speak to your employees

The best way to break this logjam is to negotiate an agreement with your labour force (and any union(s) in the workplace) to adjust working hours and conditions to minimise the impact of load shedding for everyone’s benefit. Remember that any alteration to their working conditions requires their consent to make these changes legally acceptable. It is not in their interests to refuse a reasonable proposal as you can still go down the retrenchment route (see below).

It is worth noting that some industries have already negotiated load shedding procedures which enable flexibility in working hours and conditions.    

What happens if you can’t agree?

Failing agreement with your employees, if load shedding is significantly impacting the business you may be forced to begin a process of restructuring the business in terms of the Labour Relations Act. The process will involve steps like negotiating that there is no pay when there is load shedding, or reduced overtime and/or changes to working hours. Employees who refuse to go with this process face retrenchment proceedings.

The difficulty with this approach is it is time consuming, the requirements for successful retrenchment are complicated and strictly enforced, and if it goes to the Labour Court, it could be costly and take further time. 

Our labour laws are complex and the penalties for getting them wrong are serious – what is set out above is just an overview of the legal situation so take full advice on your particular circumstances.

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Cyber-crime: It is getting worse

A3_BCyber-crime is continually on the rise and it is now taking on a particularly sinister turn. Recent media reports refer to organised crime syndicates that are hijacking databases of companies and demanding ransom for the return of their database. This happened at Target, one of the United States’ largest retailers, last year.

Experts have no doubt that this has already begun happening in South Africa, so be proactive and ensure your systems are as robust as possible.

In the first quarter of 2015, the number of cyber-attacks doubled over that of 2014.  The message is clear, cyber criminals are getting more sophisticated (as an example, one of their new weapons resides in your hardware which makes traditional anti-virus techniques ineffective) and are stepping up their activities.

Research has also shown how seldom people change passwords and how many people use the same password for all their different applications. Worse still, 43% of us don’t place much value in passwords. We are making it easier for cyber criminals to access our data.

Remember that everyone – from banks to businesses to individuals – is considered to be fair game by the hackers.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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SARS exceeds its collection target – But should we expect more tax increases?

A4_BWith much fanfare, SARS announced recently that it had exceeded its 2014-2015 collection targets by R7.4 billion. The reason for the fanfare was SARS has had bad press of late – resignations of key officials, investigation of a rogue spy unit set up by SARS – and pundits were predicting that SARS would not be able to keep up its high performance standards.

This should be put in context:

  1. The R7.4 billion additional inflow was against the estimate made by Minister Nene in the February 2015 Budget address. Compared to the original Budget, the collections are actually down by R7 billion.
  1. When you look closer at the numbers, personal income tax accounts for 35.6% of total collections. This is not sustainable and has risen from 29.5% of collections in 2008. The problem is that corporate tax, VAT and other indirect taxes are dependent on a growing economy to show growth in government revenues and the future outlook for the economy is for relatively low growth. This puts a question mark on future SARS collections.
  1. R8 billion was collected from gains made by individual taxpayers who were on corporate share incentive programs – effectively the difference by which the amended collection targets were exceeded. In 2010, legislation was changed which made individuals liable for tax the moment their share incentives vested (i.e. they were entitled to cash in their share options). As most share incentive schemes take several years to vest and how well they perform depends on market performance, this will be an uncertain future source of income.
  1. Finally, it needs to be accepted that stepping up compliance programs cannot bring in increasing revenue indefinitely.

The government is committed to its social welfare programmes but is going to find it difficult to fund them out of an under-pressure revenue base. It is unlikely that VAT will be raised and other indirect taxes such as the fuel levy have already been substantially increased.

That leaves personal income tax. Should we therefore expect more tax increases?

Please be advised that this article is based on opinion and should not be used or relied upon as professional advice.  No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.  Always contact your financial adviser for specific and detailed advice.

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Reinstatement of deregistered companies: Are they (and directors) liable for their actions during deregistration?

A1_BIn terms of the current Companies Act, companies and CCs can be deregistered for administrative reasons (in the vast majority of cases for not lodging annual returns and paying annual duty) and can apply to be reinstated. An anomaly exists in the Act, in that it is not clear if reinstatement means that the decisions and actions taken by the company, while it was deregistered, are legally binding.

This leaves the business and third parties unsure if the company and its directors are accountable for their decisions and activities after deregistration.

The situation is important as 750,000 businesses were deregistered in 2010 by the CIPC (Companies and Intellectual Property Commission) for failure to pay annual duty. Many of these entities are unaware that they have been deregistered and have continued trading. 

In the old Companies Act, there was no doubt that retrospectivity applied, the business was accountable for its actions whilst it was deregistered.

Various High Courts have differed in their interpretation of the current Companies Act which has increased uncertainty. However, the Supreme Court of Appeal (SCA) has now definitively ruled on this.

What did the Supreme Court of Appeal say? 

The Court confirmed firstly that when a company is deregistered it effectively ceases to exist –

  1. It loses its status as an entity and
  2. All of its assets are forfeited to the State.

The current Companies Act allows for deregistered entities to be reinstated. This, ruled by the SCA, is retrospective which means that a reinstated company gets its assets back, it effectively never stopped trading, and its activities in this period are valid and binding.

In this case, company A won an arbitration award against company B after B had been deregistered. The High Court ruled that the reinstatement of B was not automatically retrospective. Company A appealed to the SCA which upheld the appeal.

There is also a section in the current Companies Act which allows third parties prejudiced by a company’s reinstatement to seek relief from the courts. When the CIPC decides to reinstate a company, the application must be advertised to the public. Prejudiced parties can make representation against reinstatement or for any other order “just and equitable in the circumstances” (note the company itself could seek relief if it is prejudiced by reinstatement).  The SCA found that a prejudiced party can appeal to the courts for relief even after a company is reinstated, thus giving additional avenues to prejudiced third parties.

The situation has now been clarified and will be a relief to all entities that could have suffered losses whilst trading with an entity that had been deregistered.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your business consultant for specific and detailed advice.

 

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The new B-BBEE landscape: OK for some, not so good for others

A2_BThe new B-BBEE Codes of Good Practice are set to become effective on 1 May.

For exempted micro-entities (EMEs) there is some good news as the threshold for EMEs has been raised from less than R5 million annual turnover to less than R10 million. EMEs will still automatically get level 4 status.

For qualifying small enterprises (QSEs) – turnover of R10 million to below R50 million – there will be substantial additional workload and it will be increasingly difficult to maintain a good B-BBEE rating which could threaten their sustainability. This is disappointing coming so soon after government signalled its intention to assist these businesses with the creation of a Department of Small Business Development.

As these codes are voluntary, it is a good time for QSEs to re-evaluate their business as substantial extra work and possible restructuring will be required if they wish to continue obtaining  government/public entity work or licences.

Synopsis of changes 

Scorecard elements have been reduced from seven to five elements –

  1. Ownership*
  2. Management control (employment equity was one of the original seven elements but is folded into Management Control)
  3. Skills development*
  4. Enterprise and Supplier Development (ESD)* (Procurement and Enterprise were previously separate elements)
  5. Socio-Economic Development

* = priority elements.

For EMEs there is little change with the new scorecard.

With QSEs, the position is quite different. Under the previous legislation they were required to comply with four of the seven elements. It was thus relatively easy to get a good B-BBEE rating. Now they have to comply with all five and failure to get a 40% compliance with two of the three priority elements (ownership is mandatory and they can opt for ESD or Skills Development as the second element) they will drop a QSE one level in its scorecard rating.

Companies with turnovers of R50 million and above will have to comply with all elements and failure to achieve 40% compliance in all three priority elements means they stand to drop by two levels.

As the criteria in the new scorecard have been considerably widened, it will be more difficult to get points on the new scorecard. In addition, the points under the old system which gave an entity a level 4 rating will now mean a rating of between 5 and 7. The bar has been raised for getting a good B-BBEE rating.

Ownership

At the heart of the new amendments is ownership. Thus a QSE or EME will automatically get a level 2 rating if 51% of the business is black owned and a level 1 rating if the black ownership is 100%. In addition, these businesses will not need accredited consultants to give them a rating – a sworn affidavit will suffice.

Clearly there is an enormous amount of work and thinking to be done.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your business consultant for specific and detailed advice.

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