Despite the complexity involved, the new International Financial Reporting Standards that came into effect this year are expected to provide greater transparency, comparability and consistency across the board.
According to Stephan van der Walt, associate at integrated equity and debt company Bravura, the new standards increase the complexity of structuring black economic empowerment (BEE) transactions. Considering the accounting impact of a BEE transaction by both the BEE shareholders and the company involved has become as important as considering the various tax, legislative, regulatory and commercial requirements.
In terms of the new standards, companies often need to recognise the cost of their BEE transaction to their shareholders upfront. The new requirements force companies to put a value on their deal and to share the cost thereof with their shareholders. Nedbank has, for instance, indicated that its empowerment deal will reduce its earnings by R933 million over 10 years, while Old Mutual SA says its income will be reduced by lb75 million.
"Companies are being sandwiched between pressure to do an empowerment deal and the new accounting standards which could, to begin with, have a negative effect on their earnings," van der Walt observes.
In addition, companies are still digesting the complexity surrounding the different interpretations of the new accounting standards.
The South African Institute of Chartered Accountants has issued exposure drafts on interpreting the requirements set by the new standards for the accounting of BEE transactions, which it hopes will clear some of the uncertainties and facilitate consistent application. Once finalised, these exposure drafts will require companies to apply the interpreted requirements retrospectively. "We may see material restatements of published financial results relating to the accounting for BEE deals," says van der Walt.
In addition to interpretation differences, many of the BEE transactions are structured with complex derivatives, deferred rights, put back options and exotic funding schemes. The accounting thereof is extremely complex, especially in placing a fair value on these financial instruments, which may have a material financial impact.
Van der Walt urges companies to think wider than the usual accounting issues.
"Companies should also consider consolidation issues in broad based schemes, classification between debt and equity, recognition and valuations of put-back options and even the accounting for treasury shares. Overall, BEE transactions will have a material effect on the reported net asset value and earnings per share calculations if the impact of the structures utilized are not carefully considered."
He adds: "I believe that good, sustainable deals will be distinguished from deals which will not result in true BEE empowerment, when analyzing the financial statements of the BEE shareholders, as the true commercial effect and sustainability of such deals will be reflected in their financial statements."
Traditionally, the focus has been on the accounting impact of a BEE transaction for the non-empowered company. However, the accounting impact from the BEE shareholder`s perspective is potentially even more complex and costly.
Looking ahead, van der Walt expects to see volatile financial statements for BEE shareholders as some equity investments are fair valued, while the funding of these investments are recognised at amortised cost. He is concerned that BEE shareholders may not be able to build strong, credible financial statements due to these volatilities.
The negative accounting effect of traditional BEE transaction structures may in future also lead to a welcome move towards more leveraged type of transactions as opposed to special purpose vehicle type of transactions of the past. As a result, the new accounting standards may prove to be one of the key drivers for structuring sustainable BEE transactions.
The key is to consider the new standards from the start of the transaction and not only towards the end, says van der Walt. "Although the new accounting standards are not for the faint hearted, we can look forward to more transparent and comparative financial reporting, which in turn will hopefully lead to better structured BEE transactions," he concludes.
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