PROPOSED AMENDMENTS TO THE STANDARDS OF GRAP ON BORROWINGS COSTS (ED 99) AND NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (ED 100)

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1 ANALYSIS AND RESPONSES TO VERBAL COMMENT RECEIVED ON PROPOSED AMENDMENTS TO THE STANDARDS OF GRAP ON BORROWINGS COSTS (ED 99) AND NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (ED 100)

2 RESPONSES TO THE VERBAL COMMENT RECEIVED ON PROPOSED AMENDMENTS TO THE STANDARDS OF GRAP ON BORROWING COSTS (ED 99) AND NON- CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (ED 100) The Accounting Standards Board (Board) approved the invitation to comment on ED 99 and ED 100 on 25 June A Notice was also published in the Government Gazette on 6 July 2012 (Notice 35480). The results of discussions held with various stakeholders are summarised in this document. The following discussions were held: SAICA Northern Region SAICA North West SAICA Eastern Region SAICA Central Region SAICA Southern Region 2

3 ANALYSIS OF COMMENTS RECEIVED DURING WORKSHOPS HELD WITH THE SAICA REGIONS ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO No. Comment Board s response 1. GRAP 5 Borrowing Costs 1.1 SAICA Northern Region The expensing of borrowing costs was broadly supported. Some participants were of the view that the capitalisation of borrowing costs may be appropriate in certain instances. Specific examples were provided at public entities and trading entities (roads and intellectual property) where borrowing costs can be attributed to specific assets and that capitalisation of these costs provides important information to users of the financial statements about the actual cost to construct the asset. These respondents were of the view that the Standard should allow an accounting policy choice, i.e. that expensing should be the benchmark treatment, with capitalisation permitted in specific instances. These respondents noted that attributing borrowing costs incurred on centralised borrowings to assets on a theoretical basis was not useful. The requirements for capitalisation of borrowing costs should therefore be more explicit and narrower than the current capitalisation requirements. Broad support for the expensing of borrowing costs noted. The debate about whether borrowing costs should in fact form part of the acquisition cost of a qualifying asset has proved to be contentious both locally and internationally. While an argument could be made in favour of the borrowing costs being similar to other transaction costs and thus part of the cost of the asset, the alternative argument is that the cost of an asset should not vary as a result of how it its acquisition is funded. Based on the fact that the Board is in the process of considering the application of Standards of GRAP to GBEs, which apply Statements of GAAP or IFRSs, it may be appropriate to allow both expensing and capitalising as this may minimise the possible differences between the reporting frameworks. This approach, although it may reduce comparability, would also align the current Standard with the equivalent IPSAS. The ASB draws its Standards primarily from 3

4 ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO the IPSASs in developing its Standards. Based on respondents support for both expensing and capitalising borrowing costs, the Board agreed to allow entities an accounting policy choice. This approach is consistent with the approach in IPSAS 5 Borrowing Costs Participants supported the proposed transitional provisions. It was noted that, on initial adoption, it might be appropriate to provide explanations about why the values of assets in comparative periods and the current year may be disparate. The disclosure could include, for example: in the prior years, borrowing costs to the value of X were capitalised to the following class(es) of assets; in the current year Participants agreed with the Board s view that the disclosures in the existing Standards of GRAP. Some participants did however debate whether it would be useful to disclose information about the extent to which borrowings have been incurred to fund the acquisition or construction of assets Participants supported the proposal to retain a separate Standard, particularly because the definition of borrowing costs includes a number of expenses from a range of Standards. Support for the proposed transitional provisions noted. Overall support noted. Noted. The Board is however of the view that the notes to the statement of financial position provide sufficient information about the nature, timing, extent and use of borrowings and their related costs. Noted. 1.2 SAICA North West Participants expressed mixed views about the expensing of borrowing costs. Many of the participants supported the capitalisation of borrowing costs when it was clear that money had Noted. See the response to above. 4

5 ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO been borrowed to fund the construction of a particular asset. These participants were of the view that capitalising the borrowing costs provides valuable information for accountability and decision-making purposes about the present cost of the asset, as well as the fact that debt funding may be required in future to replace the asset Participants did not support the proposed transitional provisions which require prospective application on an asset-by-asset basis. Participants instead favoured prospective application from a particular date. Some comments raised out of session indicated that they supported the application of the changes on an asset by asset basis as this would result in the most meaningful information. If the capitalisation of borrowing costs is stopped when the amendments become effective, then the cost-base of the assets will be misleading. Noted. Respondents who commented on the transitional provisions noted that comparability is important, and broadly supported the change in the treatment of borrowing costs on an asset-by-asset basis. Applying the revised treatment of borrowing costs from a particular date would not result in useful information to users of the financial. Under this approach, assets that are in the process of being constructed during the change have the potential to attract only partial borrowing costs. 1.3 SAICA: Limpopo and Mpumalanga The expensing of borrowing costs was supported. Participants also supported the proposal that a separate Standard should be retained as the definition of borrowing costs is dealt with and explained in the proposed Standard and cannot be incorporated in another Standard, as it brings together the concepts on borrowings from a few Standards Even though some participants indicated that information should be available to require retrospective application of the amended GRAP 5, the majority of participants supported the prospective application of the proposed Standard. Support for the proposals noted. Support for prospective application noted. 5

6 ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO In ensuring comparability, participants were of the view that the transitional provisions should be applied prospectively to all assets that are currently under development, even if it met the criteria to be classified as a qualifying asset prior to the effective date of the amendments. See the response to above. 1.4 SAICA Southern Region The expensing of borrowing costs was supported. Participants also supported the proposal that a separate Standard should be retained as the definition of borrowing costs is dealt with and explained in the proposed Standard and cannot be incorporated in another Standard, as it brings together the concepts on borrowings from a few Standards Participants supported the prospective application of the Standard and the transitional provisions. Support for the proposals noted. Support for the proposal noted. 1.5 SAICA Eastern Region The expensing of borrowing costs was supported. Participants also supported the proposal that a separate Standard should be retained as the definition of borrowing costs is dealt with and explained in the proposed Standard, and cannot be incorporated in another Standard, as it brings together the concepts on borrowings from a few Standards Participants supported the prospective application of the Standard and the transitional provisions Support for the proposals noted. Support for the proposal noted. 6

7 2. GRAP 100 Non-current Assets Held for Sale and Discontinued Operations 2.1 SAICA Northern Region Description of significant assets in proposed disclosure The description of a significant asset includes a reference to high value items. Participants were of the view that this may be misleading and subjective. Participants noted that it may be useful to indicate that the assets should have a high value in relation to the assets as a whole, or to a particular class of assets. It was also noted that this could possibly be moved lower down the list to give prominence to the consideration of other the other issues. Some participants noted that a threshold might be useful, for example, schedule 4 of the previous version of the Companies Act required disclosure of disposals over 10% of the value of assets. ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO Reference to management decision in the proposed disclosure Participants highlighted that legislation such as the PFMA requires entities to obtain certain approvals before being able to disclose the intention to sell assets in the financial statements Disclosure of management s intention to dispose of assets at the reporting date Participants questioned the linkages with GRAP 14 and any decisions made by management to sell assets after the reporting date. Noted. When management has made a decision to dispose of a particular asset, group of assets and/or liabilities or components will be subjective and depend on the legislative framework applicable to specific types of entities. Noted. The proposed disclosures are consistent with the disclosure of non-adjusting events after the reporting date in the Standard of GRAP on Events After the Reporting Date. 2.2 SAICA North West When the comparative information is restated for accounting purposes, it will be useful to require entities to indicate to which categories of assets (and/or liabilities) the assets or Noted. This disclosure is encompassed on the requirements in the Standard of GRAP on Presentation 7

8 disposal groups held for sale were classified to. ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO of Financial Statements which requires that entities provide information about changes made to comparative information. 2.3 SAICA: Limpopo and Mpumalanga Participants supported the deletion of the requirements in GRAP 100 for the classification, measurement, presentation and disclosure of non-current assets and disposal groups held for sale. Participants also supported the disclosures to be included in GRAP 1 as a result of the deletion of these requirements Participants were concerned about the requirement that the transitional provisions should be applied retrospectively, as this would require them to adjust the amounts presented in prior periods statement of financial performance and the statement of financial position for those non-current assets and disposal groups held for sale, for the earliest period presented, even though these assets or disposal groups are already sold when the amended Standard becomes effective. Participants therefore proposed the prospective application of the Standard. Amendments could be considered for those non-current assets and disposal groups held for sale from prior periods which are not yet sold when the amended Standard becomes effective. Support for the proposed amendments noted. Noted. The wording in the transitional provisions has been modified to be more explicit about what retrospective application means. 2.4 SAICA KZN The attendees supported the proposed changes to the Standard. Support for proposed amendments noted. 8

9 ANALYSIS AND RESPONSES TO VERBAL COMMENT ON PROPOSED AMENDMENTS TO 2.5 SAICA Western Cape The attendees supported the proposed changes to the Standard Support for proposed amendments noted. 9