Monthly Archives: September 2014

Discounts, loyalty awards and warranties: Are you recording them correctly?

A1When you sell a product a discount in the form of a volume discount or an early settlement discount may be given to the customer. Another way of encouraging customers to buy from you is to offer a loyalty award. The selling price of a product can also include a provision for a warranty for after-sales service supplied to the customer. 

Volume discounts

The seller can offer a volume discount on the selling price if a customer buys or orders products in excess of an amount or volume as determined by the seller.

An example of a volume discount would be when the seller offers a 10% discount on the selling price of products sold to the customer if the customer buys products to the value of more than R10 000. Alternatively, a discount of 10% may be offered if the customer buys more than 50 units of a certain product.

The amount of a volume discount will be recorded as a reduction in the selling price paid by the customer, thus decreasing revenue in the seller’s books.

Early settlement discounts

An early settlement discount is offered by the seller to customers to encourage them to settle their accounts in a shorter time period than the normal credit terms.

For example, the seller offers customers a discount of 5% if a customer settles their account within 30 days from date of statement instead of the normal credit terms of 60 days.

The seller will record the amount of the early settlement discount as a reduction in the selling price paid by the customer. Once again, the amount of the early settlement discount will reduce revenue in the seller’s books.

Loyalty awards

A loyalty award may be granted to customers in terms of which a customer earns a certain amount of loyalty points based on the amount they spend. The loyalty points can be converted to a Rand value and used by the customer towards paying for products/services in the future.

An example would be where a customer earns one point for each R10 spent on the seller’s products. After the customer earned 500 points, the points are converted to Rands at a rate of 20 cents per point. The loyalty award will come to an amount of R10 (500/10 x 0,20). The customer can then use the loyalty award of R10 towards payment of a next purchase from the seller.

The fair value of the consideration of a transaction subject to a loyalty award must be proportionately allocated between the award credits and the balance of the other components of the sale. The portion of the fair value allocated to the award credits are deferred until the seller fulfils its obligation to supply the loyalty credits. The seller will fulfil this obligation when the customer redeems the loyalty credits.

Warranties/Guarantees

The seller may include an amount as warranty for after-sales service to the customer as part of the sales transaction.

For example, included in the selling price of R5 000 for a lawnmower is an amount of R150 for a standard service six months after purchase date. The seller must defer the portion of the selling price related to the warranty. The deferred amount will be recognised as revenue during the financial period in which the seller fulfils its warranty obligation.

The examples discussed in this article are simple as each example only involves one of the four topics above. In practice, transactions can become much more complicated as a transaction may be subject to two or more of the above terms of payment, in any combination.

If you would like more information about this topic, please contact us for professional assistance and advice.

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 financial adviser for specific and detailed advice. 

Reference List:

  • IFRS for SMEs by IASB
  • Training Material for the IFRS for SMEs by the IFRS Foundation
  • IFRS for SMEs – A summary by W Consulting and SAICA

VAT: The difference between standard-rated, zero-rated and exempt supplies

A2There are three categories of supplies that can be made by a VAT vendor: standard-rated, zero-rated and exempt supplies. Output tax must be levied on all supplies except exempt supplies. The VAT Act gives specific guidelines for zero-rated and exempt supplies but these fall outside the scope of this article. Please contact your tax practitioner for more information.

The following simplified formula is used to calculate the amount of VAT that a registered VAT vendor have to pay to SARS or can claim as a refund from SARS:

Output VAT levied on standard-rated and zero-rated supplies* – Input VAT claimed on qualifying expenses = Net VAT due to/(refundable by) SARS

* A supply is defined as the provision of a product or service by a VAT vendor in return for payment in cash or otherwise.

Standard-rated supplies

Standard-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 14%. The input VAT incurred on purchases of goods and services to generate standard-rated supplies can be deducted from output VAT payable to SARS.

Example 1:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as standard-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on standard-rated supplies (R10 000 x 14/114) R1 228
Less: Input VAT on purchases to make standard-rated supplies (R7 000 x 14/114) (R    860)
Net VAT due to/(refundable by) SARS R   368

Zero-rated supplies

Zero-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 0%. The input VAT incurred on the purchase of goods and services to generate zero-rated supplies can be claimed against output VAT payable to SARS.

Example 2:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as zero-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on zero-rated supplies (R10 000 x 0/114) R     nil
Less: Input VAT on purchases to make zero-rated supplies (R7 000 x 14/114) (R   860)
Net VAT due to/(refundable by) SARS (R   860)

Exempt supplies

Exempt supplies are not subject to VAT. No output VAT, either at 14% or at 0%, is levied on exempt supplies. Input VAT incurred on expenses to make exempt supplies cannot be claimed against output VAT due to SARS.

Example 3:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000.
  3. All inventory sales are exempt supplies for VAT purposes.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on exempt supplies R nil
Less: Input VAT on expenses incurred to make exempt supplies (R nil)
Net VAT due to/(refundable by) SARS R nil

Combination of standard-rated, zero-rated and exempt supplies

Where a VAT vendor makes standard-rated supplies and/or zero-rated supplies and/or exempt supplies, input VAT must be apportioned in the same ratio as the three different types of supplies stand to each other.

Example 4:

  1. ABC Distributors made the following supplies for VAT purposes (VAT included where applicable):
Standard-rated supplies R  60 000   60%
Zero-rated supplies R  10 000   10%
Exempt supplies R  30 000   30%
Total supplies R100 000 100%
  1. Expenses incurred in the making of total supplies amounted to R85 000 (VAT included).

Net VAT due to/(refundable by) SARS will be calculated as follows:

Prorata Output VAT levied on standard-rated and zero-rated supplies[(60 000 x 14/114) + (R10 000 x 0/114)]

Output VAT on exempt supplies

  R7 368 

R      nil

Less: Apportioned input VAT on expenses to make standard-rated andzero-rated supplies [(R85 000 x 60% x 14/114) + (R85 000 x 10% x 14/114)]

Less: Apportioned Input VAT on exempt supplies

(R7 307) 

R      nil

Net VAT due to/(refundable by) SARS  R       61

Accounting software can be set up so that VAT is automatically recorded correctly for standard transactions. However, a computer programme will not be able to classify unique transactions for VAT purposes. Therefore it is still important that accounting staff is trained to handle VAT correctly, especially where grey areas exist.

If you would like more information about this topic, feel free to contact us for professional assistance and advice. 

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 financial adviser for specific and detailed advice. 

Reference List:

  • VAT 404 – SARS Guide for Vendors

To sign or not to sign: Handwritten versus electronic signatures

A3We all know that a handwritten signature is legally binding on the party who made the signature. But what about an electronic signature? What is an electronic signature? Will a document be legally binding if signed electronically and not by hand? How easy is it to forge an electronic signature? Why should one consider using an electronic signature? 

What is an Electronic Signature or e-signature?

An e-signature is not an image of a scanned signature which is copied and pasted into a typed document.

E-signatures can be divided into three categories, being Digital Signatures, Digital Certificates and Advanced Electronic Signatures (AESs). All three of these types of signatures are very reliable. The requirements of your business will determine which one of the three to use. The rest of the article will convey information regarding AESs as they are the category of e-signatures recognised by South African Law whenever a signature is required. 

What are the benefits of using AESs?

Making a move to AESs can let things flow faster and smoother in your business while saving you time and money, and even the auditors will be happy because AESs leave an audit trail they can follow.

Once a business starts using AESs, there are certain costs which will be significantly reduced. Some of these costs are:

  • Printing expenses – the business as a whole will use less paper and ink.
  • Courier and postage – documents can be sent electronically via email.
  • Archiving and searching costs – documents can be stored in electronic format and searches can be done electronically when looking for a specific document, instead of filing and paging through piles of paper.

Shorter time delays in certain business processes (e.g. approving quotes for customers) can improve efficiency. AESs are significantly more secure than handwritten signatures due to them being almost impossible to forge, even with the help of powerful computers. The only circumstances where an AES is easily forgeable, is when the signer gives his/her private key out to someone. And finally, adopting AESs will result in your business being more environmentally friendly by saving paper and thus trees and other resources which are in limited supply. 

Why should I trust an AES instead of a handwritten signature?

Even when you are presented with an original document signed by hand, you can’t be 100% sure that it was actually signed by the right person or that the document hasn’t been tampered with, as a handwritten signature can be forged relatively easily. In contrast, AESs require that an accredited authority verify the signer’s identity in person before providing the signer with signing tools.

The electronic signing of a document involves two electronic keys: a private key and a public key. The private key is only known to the signer of the document and the recipient who wants to authenticate the signature. The recipient uses both the public and the private keys to confirm the identity of the signer and that the document was not altered in any way during the transmission process. 

Electronic Signatures and the Law

The laws of different countries have different requirements regarding the use of electronic signatures, which will influence which category of e-signature you will choose to use. AESs are recognised by South African Law as a reliable and valid form of signing legally binding documents for more than a decade already.

The biggest benefit of AESs is its low risk of forging and tampering with a document signed by an AES. Despite the fact that AESs offer better protection to users of documents than traditional handwritten signatures, and that the Law already recognises the validity of AESs, there are still those who are resistant to change. Resistance is often the result of ignorance and education about the benefits of AESs will go a long way to increase acceptance of this safer, cheaper and more convenient way of conducting business.

If you would like more information about this topic, feel free to contact us for professional assistance and advice. 

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 financial adviser for specific and detailed advice. 

Reference List: