INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS

 

	GAAP Standards
IFRS/I	Title
IFRS1	First-time Adoption of International Financial Reporting Standards
IFRS2	Share-based Payment
IFRS3	Business Combinations
IFRS4	Insurance Contracts
IFRS5	Non-Current Assets Held for Sale and Discontinued Operations
IFRS6	Exploration for and Evaluation of Mineral Resources
IFRS7	Financial Instruments:  Disclosures
IFRS8	Operating Segments
IAS1	Presentation of Financial Statements
IAS2	Inventories
IAS7	Statements of Cash Flows
IAS8	Accounting Policies, Changes in Accounting Estimates and Errors
IAS10	Events after the Reporting Period
IAS11	Construction Contracts
IAS12	Income Taxes
IAS16	Property, Plant and Equipment
IAS17	Leases
IAS18	Revenue
IAS19	Employee Benefits
IAS20	Accounting for Government Grants and Disclosure of Government Assistance
IAS21	The Effects of Changes in Foreign Exchange Rates
IAS23	Borrowing Costs
IAS24	Related Party Disclosures
IAS26	Accounting and Reporting by Retirement Benefit Plans
IAS27	Consolidated and Separate Financial Statements (January 2008)
IAS28	Investments in Associates
IAS29	Financial Reporting in Hyperinflationary Economies
IAS31	Interests in Joint Ventures
IAS32	Financial Instruments: Presentation
IAS33	Earnings per Share
IAS34	Interim Financial Reporting
IAS36	Impairments of Assets
IAS37	Provisions, Contingent Liabilities and Contingent Assets
IAS38	Intangible Assets
IAS39	Financial Instruments: Recognition and Measurement
IAS40	Investment Property
IAS41	Agricultures

 

	Interpretations
IFRIC/SIC	Title
IFRIC1	Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC2	Members’ Shares in Co-operative Entities and Similar Instruments
IFRIC4	Determining whether an Arrangement contains a Lease
IFRIC5	Rights to Interests Arising From Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC6	Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Environment
IFRIC7	Applying the Restatement Approach under IAS Financial Reporting in Hyperinflationary Economies
IFRIC8	Scope of IFRS 2
IFRIC9	Reassessment of Embedded Derivatives
IFRIC10	Interim Financial Reporting and Impairment
IFRIC11	IFRS 2 – Group and Treasury Share Transactions
IFRIC12	Service Concession Arrangements
IFRIC13	Customer Loyalty Programmes
IFRIC14	IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
SIC2	Introduction of the Euro
SIC10	Government Assistance – No Specific Relation to Operating Activities
SIC12	Consolidation – Special  Purpose Entities
SIC13	Jointly Controlled Entities – Non-monetary Contributions by Ventures
SIC15	Operating Leases – Incentives
SIC21	Income Taxes – Recovery of Revalued  Non-depreciable Assets
SIC25	Income Taxes – Changes in the Tax Status of an Entity or its Shareholders
SIC27	Evaluating the Substance of Transactions Involving the Legal Form of a Lease
SIC29	Service Concession Arrangements:  Disclosures
SIC31	Revenue – Barter Transactions Involving Advertising Services
SIC32	Intangible Assets – Web Site Costs

 

	South African Statements and Interpretation of GAAP
AC500 Series	Title
AC501	Accounting for ‘Secondary Tax on Companies’ (STC)
AC502	Substantively Enacted Tax Rates and Tax laws
AC503	Accounting for Black Economic Empowerment (BEE) Transactions

 

	Circulars issued by the South African Institute of Chartered Accountants
Circular	Title
CC 09/06	Transaction giving rise to adjustments to revenue/purchases
CC 12/06	Operating leases
CC 08/07	Headline earning

 

1.1     What is GAAP and why do we need it?

Before understanding what GAAP is, it helps to understand why it is needed. Why do accountants spend so much time deciding how to record and report business events?

The accountant's purpose is to help communicate the effect of business events and transactions on the financial position of the entity. There are several stakeholders that have an interest in knowing the financial position of the entity, as well as how this financial position has changed over time.

One of the stakeholders of a company is the owner - the shareholder. The ownership of shares in a company is an investment for a shareholder, who demands a return commensurate with the level of uncertainty attached to that investment. Shareholders need information to estimate the potential return on the capital they have invested, and to assess whether the company has increased their wealth over a particular period of time. This information helps the shareholders to decide whether to keep, increase or reduce their investment in the company. Financial accounting facilitates the preparation of the reports that shareholders use in this decision-making process.

Financial information is also needed by the decision-making individuals who have been given the task of improving the financial position of the entity, thereby creating wealth for the owners. These individuals consist of the senior employees, for example, the managers and directors of the company, who are appointed by the shareholders, and who are responsible for safeguarding the shareholders' investment. The directors and managers use the financial information provided in financial reports to make financing, investing, operating and dividend decisions, as well as to evaluate the success of previous decisions in increasing the equity of the company.

The accountant also needs to communicate an entity's financial affairs to other stakeholders (such as potential investors, suppliers, customers, regulators and the South African Revenue Service). These parties need information to make certain financial decisions in relation to the entity, such as whether to invest (in the case of the investors), whether to continue to supply goods on credit (in the case of the suppliers), whether to use the entity as a preferred supplier (in the case of the customer), and how to view the tax status of the entity (in the case of the South African Revenue Services).

Recognising, measuring and reporting business events all result in the communication of relevant and reliable financial information to stakeholders in order to assist them in making their respective decisions. Stakeholders are prepared to make investment and other decisions about the entity only if they have financial information that they know reliably represents the entity's financial position and financial performance. In addition, shareholders cannot evaluate the success of their investments without comparing the entity's financial results with other investment opportunities. The shareholders therefore require the information about an entity's financial affairs to be reliable, relevant to their information needs, and in a form that makes it possible to compare their investments in the entity with other investment opportunities.

It was these needs that resulted in the formulation and implementation of Generally Accepted Accounting Practice (referred to as GAAP). GAAP consists of a number of practices and principles that govern how the financial events of a business are recognised, measured and reported. GAAP is formulated by representatives of the various interest groups (for example, accountants, academics, businesspeople, and representatives of various industries) and it is documented in a set of published standards which are collectively referred to as Generally Accepted Accounting Practice.

These accounting standards are formulated with a view to meeting the information needs of an entity's respective stakeholders. GAAP addresses these needs by:

•     Using defined recognition, measurement and reporting practices, which provide the stakeholder with some confidence that the financial reports of an entity represent the entity's actual financial results in a fair and accurate way

•     Providing a set of accounting principles and practices that should be applied consistently by all entities when preparing financial reports, allowing stakeholders to make valid comparisons between different entities, as long as they comply with GAAP.

1.2    Compliance with GAAP

When you read an entity's financial reports, how do you know that they are prepared in accordance with GAAP?

If an entity's financial reports are prepared in accordance with GAAP standards, then these financial reports will state this fact. If you refer to the notes of the financial statements, you will normally find that the first notes listed are the accounting policies of the entity. The accounting policies are the practices and principles that the entity has applied when it prepared its financial statements. Look out for the following paragraph:

‘The principal accounting policies of the company and the disclosures made in the annual financial statements conforms with South African Statements of Generally Accepted accounting Practice and comply with International Financial Reporting Standards.  The principal policies are consistent with those applied in the previous year.’

This is an example of a statement of compliance with GAAP which is usually included in the financial statements of a company. When the financial statements of a sole proprietor, trust, close corporation or partnership are prepared in accordance with GAAP, they should state the fact in a similar way.

 

2    The process of formulating GAAP standards

A GAAP standard is issued to prescribe or clarify how an accountant must treat a business event or a situation in the business environment with regard to its financial statements.

Initially, most developed countries developed their own accounting standards which specified how various transactions were to be accounted for by local businesses. As these GAAP standards were developed independently and with reference to the local market, their requirements were often quite different from those of other countries, to the extent that a transaction that resulted in a certain profit in the income statement component of the statement of comprehensive income in one country could have resulted in quite different figures in another country. For example, South Africa used to develop their own set of GAAP standards based on the needs of local investors, and these were in use until recently.

With globalisation, a number of corporations started to have listings on multiple stock exchanges all over the world. In order to provide the shareholders in the various countries with financial information, these corporations were required to prepare a different set of financial statements for each country. This was because the GAAP standards of each country were different and the financial statements had to be prepared in accordance with the relevant country's set of standards. This exercise was costly, and it was also difficult for investors to compare the various entities in the global markets as financial statements were prepared using different accounting standards.

These different GAAP standards led to different profits being reported in different countries. The extent of these differences became clear when Daimler-Benz, the German automobile manufacturer, wanted to list on the New York Stock Exchange and was required to prepare financial statements in accordance with US GAAP. The company prepared its 1993 financial statements in accordance with German GAAP, and recorded a profit of DM615 million. It then used US GAAP to calculate its profit for the same reporting period, resulting in a loss of DM1,8 billion. This raised the question: which of these profits was correct? Both were, but they were calculated based on specific rules and guidelines, which were based on different principles. The Daimler-Benz incident indicated the different effects of the various sets of GAAP standards and highlighted the need for a globalised set of GAAP standards that could be used by all countries.

It was obvious that investors lacked useful financial information, so accountants responded to the needs of the global investors by initiating the development of unified accounting standards. These global standards helped to produce comparable and transparent financial information. The movement towards unified standards was therefore motivated by economic and market forces.

The need for comparability in financial reporting resulted in the establishment of the International Accounting Standards Board (IASB), which is based in London. The objective of the IASB is 'to develop in the public interest a single set of high quality, global accounting standards that require transparent and comparable information in general purpose financial statements'. The board works with the respective standard setters in all member countries, such as the South African Institute of Chartered Accountants (SAIGA), as their aim is not to override the authorised standards of the various member countries but to work towards global standards.

The unification process resulted in the need to investigate and review the different standards adopted by various countries. The process of raising the quality and consistency of financial reporting included drawing on best practice from around the world and removing options in international standards - a process known as the Improvements project'. This project caused significant changes in international standards in 2004, which became effective from 2005.

2.1  The International Financial Reporting Standards (IFRS)

The International Accounting Standards Board is responsible for the formation and implementation of international accounting standards. It publishes accounting standards referred to as International Financial Reporting Standards (IFRS).

The IASB consists of 14 individuals from auditing, academic and business backgrounds. It began operations in 2001 when it took over from the International Accounting Standards Committee (IASC).This previous committee had already done significant work in the development of international accounting standards and had produced a number of accounting standards referred to as International Accounting Standards (IAS’s).The IASB has adopted these standards, therefore international standards consist of both IFRSs and IAS’s, and both form part of GAAP. Each standard has either 'IFRS' or ‘IAS' as a prefix. The reason for the two numbering systems (IFRSs and IAS’s) is that the newly-formed body wanted to identify standards that it was largely responsible for (IFRSs) from those standards based on the principles developed by the previous body (IAS’s). But the term ‘IFRS' is usually used to refer collectively to standards with an IFRS number and to those with an IAS number.

In addition to the IASB's standards, the International Financial Reporting Interpretations Committee (IFRIC) issues interpretation guidelines (previously the body was known as the Standards Interpretation Committee (SIC)). The IFRIC reviews both newly-identified financial reporting issues not specifically addressed in IFRSs and issues where unsatisfactory or conflicting interpretations have developed. The IFRIC applies a principle-based approach in providing interpretive guidance with the view to reach consensus on the appropriate treatment of certain aspects of specific IFRSs. The interpretations issued by the IFRIC are called IFRIC 1, IFRIC2, and the like, and those issued by SIC are called SIC1, SIC2, and the like.

2.2    The current status of IFRS

These international standards have been accepted by the majority of countries, including the United Kingdom, Australia, New Zealand and South Africa with the major breakthrough when these standards were adopted by listed companies in the European Union (EU) since the beginning of January 2005. The IASB issued a specific standard, IFRS1, to cater for the first-time adoption of the international standards. This standard contains specific concessions affecting the take-on of the international standards at the date of transition.

However, the term 'international' is actually misleading, as the world's largest economy, the United States of America (US), has not played a significant role in the development of these standards. The US standards are developed by their own standard-setter, known as the Financial Accounting Standards Board ('FASB'). There is a major conceptual difference between the US standards and the international standards. While the international standards were largely based on principles, the US standards were based on a complex and rigorous set of rules.

After the various large corporate collapses in the US, the US standard-setters became more involved with the international standard-setting process. In 2002 an agreement was reached between the IASB and the FASB to work together to remove differences between international standards and US standards, with the aim of creating one set of truly global standards. The aim is that these standards will be consistent, comprehensive, and based on clear principles which fairly reflect the economic reality of transactions, and that they will result in understandable and timely financial reports. This process is known as the convergence process. The IASB and FASB have, since the agreement, developed a number of accounting standards, with many more to come. Although complete convergence between the IFRS and US standards is not expected to be completed until 2011, sufficient progress has been made that foreign entities are no longer required to prepare the reconciliation of their IFRS-calculated results to the US equivalent. This was a complex requirement and it is now easier for foreign entities to list in the United States.

 

3    Interpreting an entity’s financial statements in the light of GAAP’s limitations

GAAP consists of practices and principles governing the recognition, measurement and reporting of an entity's financial transactions. It is necessary to understand how transactions are measured and reported to understand fully the meaning of the information reported in financial statements. This is illustrated by the following examples.

In the past, the accounting practice was to measure assets at their original cost and not to increase their value for subsequent increases in the asset's market value. For example, if a company purchased land in 1980 for R10 000, this land would be reported on the company's statement of financial position on 31 December 2007 at R10 000. It would be important to know the measurement basis for property, as this knowledge changes the conclusions you would reach about the business's financial position. If the land had a market value of R10m on 31 December 2007, this would have a significant impact on your valuation of the company.

Another example is where assets of a company are not recorded on the company statement of financial position because these resources do not meet the recognition criteria stipulated by GAAP. An example of this would be where a company has a talented managing director who has managed to increase profits by 400 per cent over 2 years. This staff member is an asset to the company and is regarded as intellectual property. However, the value of the staff member to the company is not permitted to be shown on the company statement of financial position. As with any measurement system, GAAP can lead to financial results that do not report items that are difficult to quantify - such as the value of the above managing director.

A detailed knowledge of the basis on which the financial statements are prepared, as well as the associated limitations, prevents users of financial statements from making conclusions that are distorted owing to these limitations. If users know these limitations they can factor this information into their evaluations of an entity's financial position and performance as reported in the financial statements.

 

4    Practical implementation of IFRS in South Africa

South Africa has a strong economy and is regarded as the economic powerhouse of Africa. The strong performance of the South African economy has resulted in increased interest in the market from local and international investors. South Africa's decision to become one of the world's first nations to adopt IFRS has received positive confirmation by the International Federation of Accountants (IFAC) and has also led to increased confidence in South Africa as an investment destination. The JSE Limited plays an important role in providing an efficient, well-regulated exchange that makes the investment process simple and transparent.

4.1   The South African financial reporting system

The main regulatory body formed with a view to creating and regulating accounting standards is the South African Institute of Chartered Accountants (SAICA). This institute was formed only in 1980, although its predecessor, the Institute of Accountants and Auditors in the South African Republic, was formed in 1894. SAICA is responsible for the creation and implementation of GAAP standards, but the responsibility for developing these standards is delegated by SAICA to the Accounting Practices Board (APB), which consists of representatives from commerce and industry, regulators, professional bodies, academics and user groups. The Accounting Practices Committee (APC) is an advisory body to the APB, and is where much of the technical debate takes place. The APB approves standards on the advice of the APC.

Some of the main objectives of the APC are to do the following:

•     Review IFRSs, the framework for the preparation and presentation of financial statements, and accounting issues that are likely to require authoritative guidance with a view to reaching consensus, all within the context of existing GAAP standards.

•     Develop new local standards, interpretations or opinions in instances where the IASB does not address issues that are of importance in South Africa (the AC500 series).

•     Seek to influence the setting of new international standards, where appropriate, by nominating members to the IASB steering committees, and to provide feedback on proposed new standards.

Once the APC has discussed and debated an accounting issue it produces a draft accounting standard, referred to as an exposure draft (ED). This ED is then circulated amongst various interested parties (such as accountants, academics, and representatives of business and industry) for comment and debate. Once all comments have been received the final document, an AC standard, is published by SAICA.

Amendments to the Companies Act, No. 61 of 1973 at the end of 2007 will in due course give rise to changes in the way in which the standard-setting process works in South Africa. A Financial Reporting Standards Council (FRSC) will be appointed in terms of the amendments. The Standards issued by the FRSC will form part of the law with which companies are required to comply.

SAICA, the JSE and the APB have recognised the need to be part of a global economy with respect to financial reporting, resulting in local accounting standards being harmonised with international accounting standards since 1993. The process of developing and implementing standards has been made considerably less onerous since the decision to harmonise South African accounting standards with the international standards (IFRSs and IASs). As part of this harmonisation process, the texts of the IFRSs and the IASs were approved, without amendments, as South African GAAP standards. The result is that South African GAAP standards are now the exact replica of the relevant IFRS or IAS, and, to indicate this, a dual numbering system is used to refer to both the IFRS or IAS and the GAAP standard. The main reasons (and benefits) of the harmonisation process were:

·   'for South African companies to attract foreign investment;

·   to provide credibility to the financial statements of South African companies in the global market; and

·   to do away with the need for dual listed entities to prepare financial statements in accordance with more than one set of accounting standards'*

In 1999, when SAICA took the decision to harmonise South African GAAP with the IFRSs and IASs, a number of new AC standards (also sometimes referred to as 'statements') were issued in an attempt to align South African GAAP with these international standards. The AC standards, now aligned with the improved IFRSs and IASs, were applicable for annual periods beginning on or after 1 January 2005 (in other words, for annual financial reporting dates ended 31 December 2005), but earlier application was encouraged. However, in order for an entity to state that it has prepared its financial statements in accordance with international standards, the entity has to comply with not only all of the standards but also all of the interpretation standards, namely those standards that are issued periodically to help interpret the requirements of a paragraph of a particular GAAP standard (the IFRIC and SIC documents).

The South African-specific interpretations are issued where users of financial statements have had difficulty in interpreting what a particular section of a GAAP standard means. The interpretation is the clarification of the GAAP standard and must be followed.

The numbering system of accounting standards
	Standards	Interpretations
International Financial Reporting Standards	IFRS1-8, IAS1-41	IFRIC1-14, SIC7-32, and the like
South African standards	AC100-145	AC407-AC443
South African-specific interpretations		AC 500-503

 

A full list of the IFRSs and IASs current at the time of publication, with the corresponding AC standard, is included in the front of this book.

Transitional arrangements

If an entity applies South African Statements of GAAP it cannot claim compliance with IFRS, because of the transitional differences that still exist. These transitional differences, such as implementation dates, exist because South African due process is still followed. The IASB issued IFRS1 to cater for first-time adoption of the international standards. This standard contains specific concessions affecting the 'take-on' (adoption) of the international standards at the date of transition. It would appear that South African companies applying GAAP standards are therefore applying international standards as well. Technically, this is not the case, as the transitional arrangements which South African companies may have followed may not correspond with those provided for in IFRS1 - in other words, the starting point may be different. However, for many companies this is not an issue, and for those that are affected, the issue will become less and less important with the passage of time.

4.2 IFRS for SMEs

The Accounting Practices Board (APR) approved the issue of the South African statement of GAAP referred to as 'IFRS for Small and Medium-sized Entities', commonly known as IFRS for SMEs, in October 2007 in response to market needs and the differential reporting allowed by the Corporate Laws Amendment Act, No. 24 of 2006. IFRS for SMEs may be used by companies with no public accountability.

IFRS for SMEs is intended for use by small and medium-sized entities. These include entities that:

•    Do not have public accountability

•    Do not publish general purpose financial statements for external users. External users include owners who are not involved in the management of the entity, exiting and potential creditors, and credit rating agencies.

An entity has no public accountability when it is not listed or it does not hold any assets in a fiduciary capacity for a broad group of outsiders. Examples of entities that are accountable to the public are banks, pension funds, insurance companies, and the like.

The main objective for IFRS for SMEs is to provide a simplified, self-contained set of standards for smaller, non-listed companies that will reduce the burden of preparing financial statements in accordance with the compliance requirements of 'full' IFRS. Financial statements prepared in accordance with this standard should still be able to inform investors, lenders and others with financial information that is comparable in terms of the financial performance, financial condition and cash flows of the entity. These financial statements will also be subject to an audit.

IFRS for SMEs applies the same principles of financial reporting as the general IFRS standards, but there are some differences in terms of accounting procedures and disclosure requirements. The standard effectively includes four broad types of simplifications in comparison with 'full' IFRS, namely:

·          Excluding topics that are not expected to be relevant to SMEs, for example, interim financial reporting and earnings per share

·Including the simpler options available in the statement of GAAP for SMEs, for example, the cost model for investment properties, property, plant and equipment, and intangible assets

·Providing for recognition and measurement simplifications, for example, financial instruments can be classified into two categories and not four as required by the IFRS standard

·Significantly reducing the disclosure requirements. Current GAAP standards require more than 3 000 items that must be considered for disclosure, where the statement of GAAP for SMEs has reduced this to fewer than 400 items.

From the above list of simplifications you will note that IFRS for SMEs still requires compliance with GAAP. The requirements are just less onerous.

4.3 Legal requirements for compliance with GAAP

In South Africa, a GAAP standard carries substantial weight, and this has been further enhanced by the adoption of the international standards. Initially, there was a lot of uncertainty as to the precise legal effect of GAAP standards, as SAIGA had no direct ability to enforce their application. This resulted in SAIGA advocating for amendments to the Companies Act, No. 61 of 1973 that would provide legal backing for GAAP standards, and would therefore make non-compliance with GAAP standards a contravention of the Companies Act.

The Corporate Laws Amendment Act, No. 24 of 2006 (gazetted on 14 December 2007) made it a legal requirement to comply with all accounting and auditing standards. Non-compliance would therefore be a crime. Section 285A calls for fair presentation irrespective of whether a company is a widely-held or limited-interest company.

Widely-held companies

All widely-held companies have to comply with financial reporting standards. This means compliance with statements of South African GAAP which are now identical with International Financial Reporting Standards (IFRS). A company is defined as widely-held when:

•     Its articles provide for an unrestricted transfer of shares, or

•     It is permitted by its articles to offer shares to the public, or

•     It decides by special resolution to be a widely-held company, or

•     It is a subsidiary of any of the companies described above.

Limited-interest companies

All companies that are not widely-held companies are limited-interest companies. Limited-interest companies that are not publicly accountable (in other words, they are not listed companies and do not hold assets in a fiduciary capacity for a broad group of outsiders) may comply with IFRS for SMEs. This document eliminates some of the more complex reporting requirements and extensive disclosures included in the general IFRS standards (refer to section 4 above). IFRS for SMEs will therefore apply to most, but not all, of South Africa's many unlisted companies.

Close corporations

A close corporation is a simple and less expensive business structure that offers limited liability to its owners. Because of the current reviews of corporate law, the close corporation in its current legal form could soon change. The Close Corporations Act, No. 69 of 1984 requires close corporations to maintain proper accounting records. A close corporation is required, in terms of the Act, to prepare financial statements that include a balance sheet, income statement, notes to the financial statements, and a report of the accounting officer. To meet these accounting requirements, a close corporation must apply the definition and recognition criteria of the elements of financial statements as required by GAAP. Close corporations are similar to limited-interest companies' insofar as they are not publicly accountable. It is therefore appropriate for close corporations that are not publicly accountable to comply with IFRS for SMEs.

Partnerships

Unlike close corporations and companies, a partnership is not a separate legal entity. This means that a partnership is unable to own assets, incur liabilities, enter into contracts, sue or be sued in its own right. Instead, the rights and obligations of a partnership are legally vested in the individual partners. In South Africa, there is no specific Act of Parliament governing partnerships; their operations are governed by common law.

A partnership therefore does not have to comply with GAAP, but in most cases they will follow the principles for recording transactions and events, and reporting, as provided by GAAP, specifically when they need to produce financial statements that will be used to obtain third-party finance, or for related matters.

A partnership that is not publicly accountable may choose to comply with IFRS for SMEs.

4.4 JSE Limited

The JSE Limited (commonly referred to as 'JSE') was established as the Johannesburg Stock Exchange in 1887. The name changed to the JSE Securities Exchange of South Africa on 8 November 2000, when it became a national exchange and expanded to cover other financial products. In 2005 the JSE revised its corporate identity and changed its name to JSE Limited. At time of writing the JSE was among the 20 largest exchanges in the world and provided capital to large listed entities, with its Alternative Exchange (AltX') offering access for small businesses, and its Social Responsibility Index (SRI) supporting businesses that invest in socially-, economically- and environmentally-sustainable development.

There are currently just over 50 companies that are registered on both the JSE and another securities exchange elsewhere in the world. Such companies are referred to as companies with dual listings. Of these 50 companies, more than half have a primary listing in South Africa. Examples of companies with dual listings are SABMiller and BHPBilliton, which was created through international mergers and take-overs.

The listings requirements of the JSE required companies to comply with IFRS when preparing and presenting their financial statements.

4.5 The King Reports

Some years ago the Institute of Directors commissioned an investigation into the way companies were being administered. This task was assigned to the King Commission. The committee published two reports on corporate governance, the first King Report (1994) and the second King Report (2002), collectively referred to as the Code of Corporate Practices and Conduct (informally known as the King Reports). The committee arrived at a number of recommendations to do with corporate governance or controls of an entity. Corporate governance relates to how an entity should be controlled and managed in the best interests of all its stakeholders (for example, how the risks that an entity faces should be identified and managed). Corporate governance is also concerned about how an entity should achieve its strategic objectives and be successful in a socially-desirable manner, how risks impacts on an entity, and how these risks should be identified, assessed and managed. The King Reports set out the controls and disclosures that a company should comply with to provide protection for the various stakeholders, and identifies seven primary characteristics of good governance:

•    Discipline, which is a commitment to good governance

•    Transparency

•    Independence, which means not being susceptible to undue influence

•    Accountability

•    Responsible management

•    Fairness in dealing with stakeholders

•    Social issues relating to the wider community and the environment.

The types of governance controls included in the reports are:

•     Directors are to be appointed by a committee and their contracts should not exceed a
three-year period

•     Directors' remuneration should be performance-based and decided on by a remuneration
committee (in which the executive directors, who are involved in the management of the
company, may not participate)

•    There should be an internal audit function that reports directly to the Board of Directors.

There are also disclosure requirements set out in the King Reports. 'Disclosure requirements' refer to information (both financial and non-financial) that is required to be presented in the company's annual report. These requirements include disclosure of:

•    The company's economic empowerment policies and practices

•    The company's HIV/Aids strategy, policies and practices

•     The social and environmental impact of the company, as well as its policies and practices
to address these concerns.

The King Reports require the kind of reporting referred to as 'triple bottom line' reporting. This extends the reporting practice of companies from reporting only on financial affairs to commenting on social and environmental practices as well, and thereby addressing the impact of the company in three spheres: economic, social and environmental. The annual report of a company should therefore include reports that not only deal with the financial affairs of the business, but also address the company's social policies and practices, as well as the impact on the environment of the company's policies and practices.

All private and public companies are encouraged to comply with the King Reports. Listed companies have to disclose the extent of their compliance with the second King Report, providing reasons for any failures to comply. These companies face penalties if they do not provide this information. There is no direct censure for other companies that fail to comply with the King Reports, only the increased market uncertainty that this omission will produce. When a company does not provide the public with information that other companies are disclosing, the market interprets this negatively, which may have an impact on the share price.