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Comments on Companies Amendment Bill 30 November 2010

This portfolio committee provides comments on the Companies Amendment Bill, highlighting concerns about definitions, solvency tests, financial reporting standards, and the need for a Financial Reporting Investigations Panel.

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Comments on Companies Amendment Bill 30 November 2010

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  1. PORTFOLIO COMMITTEE ON TRADE AND INDUSTRYComments on the Companies Amendment Bill 30 November 2010 Ewald Müller Senior Executive – Standards SAICA

  2. General comment We commend the dti on issuing the Companies Amendment Bill: • Most of the legal-technical and grammatical amendments required were made • Purpose and effect of the Bill are maintained and, for the most part, remain clear and unambiguous We are concerned at the short period provided for comment and the apparent exclusion of the NCOP in a Bill that clearly affects the country as a whole – certain comments are included in this presentation but not our original submission

  3. General comment Although SAICA has a number of comments to make in respect of individual sections of the Bill, it has no hesitation in supporting it as an important element in the development of the South African economy and alleviation of the compliance burden for non-public companies

  4. Primary comments Definitions • Asset, creditor, distribution, group of companies, holding company and liability • Extensively defined in various IFRS and subject to ongoing debate (financial crisis) • Distribution’s definition could severely impact the functioning of a group of companies • Define with reference to FRS applicable to the entity in question

  5. Primary comments Definitions • Financial Statements • Inclusion of “interim or preliminary reports” and “circular, prospectus or provisional announcement” has serious and unintended audit implications for public companies • Restrict the definition to annual financial statements

  6. Primary comments Definitions • Private company • A circular reference has been created in conjunction with the definition of public company • The definition of a private company must be amended to state that a “private company” is a company that restricts the transfer of its securities and does not permit its securities to be offered to the public in its Memorandum of Incorporation

  7. Primary comments Section 4 The solvency and liquidity tests should be refined and applied at company level only, not group level • Assets > liabilities • Insolvent subsidiary may be part of solvent group • Legally, each company is a separate entity with no automatic rights to the assets of its subsidiaries and no legal obligation to honour the liabilities of its subsidiaries

  8. Primary comments Section 4 The solvency and liquidity tests should not refer to the “fair value” of liabilities • Fairly valuing liabilities creates the anomaly that the value of liabilities in an insolvent or financially distressed position would be less than the legally recoverable amount

  9. Primary comments Proposals regarding the Financial Reporting Standards being “in accordance” with IFRS • Applying this proposed principle to all FRS would severely limit the flexibility of the Minister in alleviating the cost of of compliance for private and non-profit companies in terms of section 29(5)(c) • Limit the alignment with IFRS to public or deemed public companies

  10. Primary comments The exemption from preparing financial statements should only extend to owner-managed businesses owned by natural persons and not having a significant public interest element • Except to the extent required by the Regulations to the Act determining which companies are deemed to be in the public interest or any other law or agreement, a private company is exempt from the requirements in this section to have its annual financial statements audited or independently reviewed, and from the requirements of subsection (3) (d),

  11. Primary comments The exemption from preparing financial statements should only extend to owner-managed businesses owned by natural persons and not having a significant public interest element • if only natural persons, whether directly or through a trust, hold all the shares of, or have all the [every person who is a holder of, or has a] beneficial interest in, any securities issued by the company and all such natural persons are [is] also [a] directors of the company ……..

  12. Primary comments The exemption from preparing financial statements should only extend to owner-managed businesses owned by natural persons and not having a significant public interest element • (2) Private companies that are wholly owned subsidiaries of a private company as contemplated in section 30 (2A) (1), are also exempt from the requirements in this section ………

  13. Primary comments The need for establishment of the Financial Reporting Investigations Panel • Monitoring compliance with reporting standards essential • Highly skilled function requiring dedicated focus separate from Council • Access to specialist skills required • Beyond the capabilities of an already defunct CIPRO

  14. Additional comments Certain sections included in earlier drafts of the Amendment Bill have been omitted from the final Bill and have been addressed in our preceding comments and our full submission Transitional requirements imperative

  15. Transitional provisions & clarity Do companies with February year-ends still require an audit (assuming an effective date of 1 April 2011)? Compliance with Section 4 if no FRS prescribed

  16. Other comments • No provision for applying for extension of 6 month deadline for AFS (6 months inappropriate for private companies and CCs) • Maximum of 15 months for financial year extraordinary • Numerous sections have been commented on in our full submission • These comments are in many instances related to the Primary Comments and are significant in their own right • These have not been addressed today in the interests of time

  17. Closing remarks SAICA is committed to ensuring the highest quality corporate governance, which requires high quality reporting standards and the promotion of public disclosure and transparency aligned with the privilege of enjoying limited liability We encourage the Portfolio Committee of Trade and Industry to grant serious consideration and full deliberation of all comments made by us and other interested parties, with feedback provided on all points

  18. Closing remarks A high quality Companies Act is imperative to promote South Africa as a trusted international player in the business arena and to promote a vibrant economy South Africa’s rating as #1 in the world by the World Economic Forum for its “strength of auditing and reporting standards” is not something to be forfeited We respectfully request that sufficient time is provided for companies and CCs to prepare for the new Act and Regulations

  19. Thank You

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