Partner, Audit Department – Mazars
The three new standards introduce enhanced disclosure that will increase the transparency to the users of the financial statements.
CIARAN RYAN: This is CFO talks and today we’re joined by Wiehann Olivier, he is a partner in the audit department at Mazars in Cape Town and his responsibilities include ensuring the overall quality of assurance engagements, staff management and development and business development. His client portfolio and clients range from small individuals and trusts to high-net-worth individuals and large multinational groups from all different sectors. Welcome, Wiehann.
WIEHANN OLIVIER: Thank you so much, Ciaran, I really appreciate it.
CIARAN RYAN: Great to have you on, just give us a little bit of a background, you are with Mazars and you are a chartered accountant, just take us through a little bit of your background and the reason I’m asking that is because you are keeping a very close eye on accounting standards and how this would affect the finance executives and chief financial officers. So a little bit of background on yourself please.
WIEHANN OLIVIER: As mentioned, I am a chartered accountant and, also, a registered auditor with IRBA. I’m currently in Mazars Cape Town, sitting in the audit department, I’ve been with Mazars for ten years now, straight out of varsity I joined Mazars and basically worked myself through the ranks to work up to the point where I am now. As mentioned, we need to keep a close eye on any changes in the regulations or laws affecting companies to make sure that we are able to assist our clients in the best way possible.
CIARAN RYAN: I think it’s quite a tough job if you are a finance exec or chief financial officer to keep ahead of all these changes that are happening in accounting standards. Can you take us through some of the major changes in reporting standards in recent years? I know last year there were quite a few changes in IFRS and I think revenue recognition is a big one, and, also, if you can point out some of the ways this is impacting companies and the way they reflect their financial statements.
WIEHANN OLIVIER: Looking at the major changes recently, it was definitely the introduction of IFRS 9, which is the new financial instruments standard, IFRS 15, which is the new revenue standard, and IFRS 16, which is the new leases standard, all of which have had a significant impact on companies. It’s a bit difficult to say what the general affect was on companies, the new standards and the effect on the companies are very much dependent on the nature of the individual company and the nature of the transactions they enter into. The new revenue standard has a major impact on companies that sell goods with a warranty or add-on service, for example. The new revenue standard requires you to apply a five-step model to identify each of the performance obligations of a specific transaction to determine the transaction price and basically split out the total sales value of the different elements or performance obligations. The new leases standard will result in significant changes in the manner where the lessee accounts for the leased assets, while the accounting treatment for the lessor has remained relatively the same. Also adding to that, I think there’s going to be a lot more disclosure on the balance sheet from the lessee’s side, again the impact will depend on the nature of the company and the specific transactions they enter into. If you have covenants with the banks, for example, it’s definitely something you take note of, it will have a significant impact on both the balance sheet and the EBITDA of the different companies. As I believe, the new financial instruments standard has probably had the most significant impact on companies using IFRS. The new standard has tried to simplify the old standard to a certain extent when it comes to the classification of different financial instruments, it brought along a new concept called expected credit losses and also additional disclosure. The expected credit losses is basically you need to apply it to your financial assets such as your debtors and your loans receivable on your bank balances sitting on your balance sheet to assess the possibility of default, which can be quite a complex assessment to make. The standard is also more focused on fair values, rather than costs, and could possibly result in more volatility on the income statement level. Overall the three new standards also bring along additional disclosure or rather, enhanced disclosure, which will increase the volume of the financial statements but also increase the transparency to the users of the financial statements.
CIARAN RYAN: I see that one of the changes in revenue recognition has got to do with land sales, which is, of course, quite a complex thing because when you do a land sale there are a lot of legal and regulatory steps that have to be gone through before you can actually count that as a transaction. You see instances where a transaction, there might be a co-development, you might selloff a piece of land if you’re the owner of that land and it might take several years before that development is actually complete. But in practice what I think has been happening is companies have been recognising that revenue right up front. Now, of course, it’s going to be much more difficult to do that, am I correct in saying that?
WIEHANN OLIVIER: Essentially what you need to have a look at when a sales transaction occurs, you need to see what the performance obligations of the sale are and when those obligations are met by the person basically selling off the land. So it has to be looked at in more detail as well. There are specific criteria that needs to be assessed very thoroughly before a sale transaction is recognised. So it can become complex but you need to look at the individual transaction and look at all the criteria involved with the sale transaction.
New IFRS standards can be complex and onerous
CIARAN RYAN: The new IFRS standards have been found to be quite onerous and complex by most people who’ve dealt with these new accounting and disclosure requirements. Most companies in South Africa, aside from the listed groups, they often struggle to see the benefit of these new standards and why they should be adhered to. Would you agree with this that they are sometimes a little bit too complex and onerous?
WIEHANN OLIVIER: I do tend to agree with that to a certain extent but, once again, not all companies are required to apply IFRS. The ones that are trying to avoid the overly complex and onerous accounting standards it might be that IFRS for SMEs is a more suitable accounting framework. The South African Companies Act requires a company to compile its financial statements in accordance with an acceptable accounting framework, one of which is either IFRS or IFRS for SMEs or an accounting framework as determined by the company. The most common of these are IFRS or IFRS for SMEs, as very few companies apply specific accounting policies, due to various reasons. I think one of the things that should be assessed as well or let me say, the general misunderstanding that’s generally out there is that the accounting framework that can be applied is dependent on the public interest core of a company, which is not the case, there are only two companies in accordance to the Companies Act that need to apply IFRS and those are state-owned companies, which is defined by the Companies Act and also listed companies on an exchange such as the JSE or AltX. All other companies are basically able to apply IFRS for SMEs. The other thing as well, to take into consideration, is whether the memorandum of incorporation actually requires a specific accounting framework to be followed because I have seen instances where the MOI specifically asks that the financial statements are compiled in terms of IFRS. But another aspect that needs to be taken into account is what the shareholders require because I’ve seen instances where the holding company compiles its financial statements in accordance with IFRS, and the subsidiary, for example, needs to use the same accounting framework as the holding company because essentially the subsidiary is consolidated into the holding company and, therefore, they require the same accounting framework, it just makes the whole consolidation aggregation process more efficient and accurate.
CIARAN RYAN: So IFRS really applies to the bigger companies, the state-owned companies, the stock exchange-listed companies, so for the rest they can apply IFRS for small and medium enterprises, which is a much, much lower standard. There’s been a lot of debate in accounting circles about the undue reliance on a rules-based system of accounting and you can understand what the rule setters are trying to do, they’re trying to standardise accounting reporting so that you’re able to compare apples with apples. You’ve already mentioned the creditors books and the standards that must be applied in writing off bad debts, for example, and I think there’s been a lot of judgement applied in that and companies have had policies when the debt hasn’t been paid after a 12-month period or even a two-year period, at that point we’re going to write it off. Now, of course, it’s going to be much more difficult for them to do that. But there’s still an element of judgement that auditors can apply in many situations, so are we really solving anything by imposing new and more burdensome accounting standards, what do you think about that?
WIEHANN OLIVIER: You are correct in saying that there’s an element of judgement involved. However, it’s the accountant who needs to apply this element of judgement and then it needs to be assessed by the auditor for reasonability. The new standards are moving more in the direction of fair value accounting, as opposed to the old cost accounting that we knew, which does require a bit of a judgement. However, it needs to be substantiated by reason, if we specifically look at the expected credit loss that’s been brought in by the New Financial Instruments Standard, there are a number of factors that you need to take into consideration, you need to look at the credit rating, the historical bad debt, possible customer default in the past, credit insurance, current market and environment and economic conditions. So there are a lot of things to take into consideration, at the end of the day, when assessing the fair value of an item on the balance sheet, for example. The accounting standard of IFRS has become more onerous and complex, specifically for the reason to decrease the possible grey areas. The fact that more disclosure is required by IFRS is a good thing, as it gives more transparency to the users of the financial statements. Once again, it’s not necessarily additional disclosure, it’s more a case of enhancement of disclosure for the users of the financial statements. Basically, if I look at the new standards and amendments that come out every year, it’s actually a good thing, it’s showing that the people setting the standards are consistently trying to improve the standards by making amendments to it. I would be more concerned from the perspective if these standards weren’t revised and reviewed on an annual basis.
Assessing whether companies require IFRS or IFRS for SMEs
CIARAN RYAN: I was going to ask you this question, maybe it is a bit of a tough one, in fact you might have already answered it, but if you were setting the rules what would you recommend, would you go for more simplicity or more complexity, are you happy with these rules?
WIEHANN OLIVIER: I wouldn’t necessarily make any recommendations. I would, however, encourage a company to assess whether they are required to apply IFRS or IFRS for SMEs and what the users of the financial statements want to see. There should be a cost versus benefit assessment done by each company currently applying IFRS. If they are able to apply IFRS for SMEs I would also like to see IFRS for SMEs be kept as simple as possible and not part of the same route as we’ve seen with IFRS but I don’t think it’s likely to happen. As long as there’s an alternative to IFRS that we are able to apply, I wouldn’t recommend any changes because I think the application of IFRS in, let’s call it, high-risk companies and where there’s more public reliance on the financial statements is completely justified but also not having to overkill a smaller company or owner-managed company with the same burdensome complexity of accounting and, also, disclosure.
CIARAN RYAN: Right, I’m sure there’s a bedding down process that’s going to happen here over the next few years, it might sound like it’s very complex at the moment but I think within a year or two things would have settled down and it will become fairly routine, would you agree with that?
WIEHANN OLIVIER: Ja, I think it will settle down, I think like anyone affected by change it’s always something difficult to deal with but, at the end of the day, everyone will get used to the new standard. There will be new interpretations and I think that the dust will settle at the end of the day and companies will make the right call in instances where judgment needs to be applied and also when the decision comes to which accounting framework to apply.
CIARAN RYAN: This is a question that I ask everybody who comes on the podcast, have you read any good books lately?
WIEHANN OLIVIER: Not really good books, I think my wife can attest as well, I’ve watched a lot of documentaries, Sundays are usually for documentaries. I think what’s currently happening in the news, two of the good documentaries that I have watched on Netflix, one is called All the Queen’s Horses. It’s about a lady called Rita Crundwell, she embezzled about US$50 million from a local municipality where she worked. Also, a very good one is the documentary Bernie Madoff, I’m not sure how many of the listeners are familiar with it but Bernie Madoff basically ran the biggest Ponzi scheme ever by basically stealing $65 billion from the general public.
CIARAN RYAN: That’s not Dirty Money, the Netflix series, Dirty Money, that you’re talking about there is it?
WIEHANN OLIVIER: No, that’s not the one.
CIARAN RYAN: That, of course, is a hell of a story in its own right and how he managed to do that for so long because usually these Ponzi schemes get picked up a lot quicker but I think it’s partly because he had A-list clients, who he managed to convince for so long that their money was safe and there were returns that just kept on coming.
WIEHANN OLIVIER: For sure, I think that in combination as well if we look at the investigations done by the SEC at the point, of course I don’t know all the details with not being an auditor there, but I would be quite interested to see what the SEC actually found because I know he was under investigation a couple of times and the one before he actually came out and said, well, this is what he’s doing, it actually became clear where he thought he was going to be locked up after that investigation by the SEC and it also came back clear. So that’s one of the surprising stories, at the end of the day, for me with Bernie Madoff.
CIARAN RYAN: I think once he got away with it the first time he thought, well, this can just continue on and he didn’t change a thing, did he?
WIEHANN OLIVIER: Ja, 100%, I think it’s just always seeing how far you can push because who really needs $65 billion or try to scheme people out of $65 billion but I think it’s just a case of people trying to see how far they can push the limits.
CIARAN RYAN: Wiehann that’s great, thanks very much for coming on, we’re going to have to leave it there. That was Wiehann Olivier, a partner in the audit department at Mazars in Cape Town. Thank you, Wiehann.