PORTFOLIO COMMITTEE ON TRADE AND INDUSTRYComments on the Companies

Amendment Bill 30 November 2010

Ewald MüllerEwald MüllerSenior Executive – StandardsSenior Executive – Standards

SAICASAICA

General commentWe commend the dti on issuing the Companies Amendment Bill:We commend the dti on issuing the Companies Amendment Bill:•Most of the legal-technical and grammatical amendments required were madeMost 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 Purpose and effect of the Bill are maintained and, for the most part, remain clear and unambiguousand unambiguousWe are concerned at the short period provided for comment and the apparent 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 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 submissioncomments are included in this presentation but not our original submission

General comment

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

Primary commentsDefinitionsDefinitions•Asset, creditor, distribution, group of companies, holding company and liabilityAsset, creditor, distribution, group of companies, holding company and liability

• Extensively defined in various IFRS and subject to ongoing debate Extensively defined in various IFRS and subject to ongoing debate (financial crisis)(financial crisis)

• Distribution’s definition could severely impact the functioning of a group of Distribution’s definition could severely impact the functioning of a group of companiescompanies

• Define with reference to FRS applicable to the entity in questionDefine with reference to FRS applicable to the entity in question

Primary commentsDefinitionsDefinitions•Financial StatementsFinancial Statements

• Inclusion of “interim or preliminary reports” and “Inclusion of “interim or preliminary reports” and “circular, circular, prospectus or provisional announcement” has serious prospectus or provisional announcement” has serious and unintended audit implications for public companiesand unintended audit implications for public companies

• Restrict the definition to annual financial statementsRestrict the definition to annual financial statements

Primary commentsDefinitionsDefinitions•Private companyPrivate company

• A circular reference has been created in conjunction with the definition of A circular reference has been created in conjunction with the definition of public companypublic company

• The definition of a private company must be amended to state that a 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 “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 and does not permit its securities to be offered to the public in its Memorandum of IncorporationMemorandum of Incorporation

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

Primary commentsSection 4Section 4The solvency and liquidity tests should not refer to the “fair value” The solvency and liquidity tests should not refer to the “fair value” of liabilitiesof liabilities

• Fairly valuing liabilities creates the anomaly that the value of Fairly valuing liabilities creates the anomaly that the value of liabilities in an insolvent or financially distressed position liabilities in an insolvent or financially distressed position would be less than the legally recoverable amountwould be less than the legally recoverable amount

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

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

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

Primary comments

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

Primary commentsThe need for establishment of the Financial Reporting Investigations The need for establishment of the Financial Reporting Investigations PanelPanel•Monitoring compliance with reporting standards essentialMonitoring compliance with reporting standards essential•Highly skilled function requiring dedicated focus separate from CouncilHighly skilled function requiring dedicated focus separate from Council•Access to specialist skills requiredAccess to specialist skills required•Beyond the capabilities of an already defunct CIPROBeyond the capabilities of an already defunct CIPRO

Additional comments

Certain sections included in earlier drafts of the Amendment Certain sections included in earlier drafts of the Amendment Bill have been omitted from the final Bill and have been Bill have been omitted from the final Bill and have been addressed in our preceding comments and our full submissionaddressed in our preceding comments and our full submissionTransitional requirements imperativeTransitional requirements imperative

Transitional provisions & clarity• Do companies with February year-ends still require an Do companies with February year-ends still require an

audit (assuming an effective date of 1 April 2011)?audit (assuming an effective date of 1 April 2011)?• Compliance with Section 4 if no FRS prescribedCompliance with Section 4 if no FRS prescribed

Other comments• No provision for applying for extension of 6 month deadline for AFS (6 No provision for applying for extension of 6 month deadline for AFS (6

months inappropriate for private companies and CCs)months inappropriate for private companies and CCs)• Maximum of 15 months for financial year extraordinaryMaximum of 15 months for financial year extraordinary• Numerous sections have been commented on in our full submissionNumerous sections have been commented on in our full submission• These comments are in many instances related to the Primary These comments are in many instances related to the Primary

Comments and are significant in their own rightComments and are significant in their own right• These have not been addressed today in the interests of timeThese have not been addressed today in the interests of time

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

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

Thank You