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The final word on differential accounting Hypothetical Problem Please be so kind as to spend the next few minutes pondering on the following problem: The Government, as a result of its Arrive Alive road safety campaign, decided to amend the Road Ordinance Act. During the various printings of the Act, the “0” was inadvertently eliminated from the 120 kilometres per hour. No one noticed this omission. A few years later, a member of the Arrive Alive committee questioned the meaning of “the speed of motorised vehicles should not exceed 12 kilometres p.a.” The committee decided to obtain a legal opinion, which confirmed that the Act meant what it said. The traffic department decided to do the job that it was formed to do and published a circular promulgating that it would take action against any motorists that exceeded 12 k.p.h. The motoring public was up in arms. Meetings were held and petitions were submitted to the authorities, to no avail. Various ways of improving productivity were conceived. A popular method was to buy bicycles and to cycle to and from work (average speed 20 k.p.h.). The traffic department then announced that bicycles fell into the definition of motorised vehicles (legs are equivalent to pistons). The country sank into depression, business people emigrated to countries that were friendlier to business, foreign investment dried up and the currency crashed. Riddle1: “What was the obvious solution to the problem?” Answer: “Put the 0 back into the 120!” Riddle 2: “Why was this simple solution not seen by the authorities?” This is the $60 000 question. There are various possibilities here which are best left unsaid. In case you do not know the background to the above problem, see the “glossary of terms” below. GAAP and SMEs Knowing that the simple solution of re-inserting the word “fundamental” before the word “concepts” in paragraph 5 of schedule 4 was going to fall on deaf ears, members of SAICA decided, through the medium of the annual accounting and auditing update, to try another attack. They decided to lobby for a change to be made to Statements of GAAP to facilitate SMEs, i.e. the equivalent of limiting motor vehicles of over 2 litres to a speed of 12 k.p.h. but exempting bakkies and small cars. Seven options were debated of which four were serious contenders: 1. A separate set of GAAP statements for SMEs to be developed. 2. Full Statements of GAAP to apply to SMEs but suitably disclosed deviations would be permitted. The disclosures would not require reconciliation to full GAAP. As in (2) above but the standard setters would limit the permissible deviations. A new set of GAAP for SMEs based on tax laws to be developed. Separate SME GAAP Advantages: 1. We have a precedent for this in the UK. 2. All GAAP affecting SMEs will be in one statement. Disadvantages 1. This system is not very popular in the UK. 2. The statement would have to be continuously updated – full-time standard setters dedicated to it. 3. It would take an age and some time to develop this statement (note: we can’t copy the UK standard as it is not IASC based). 4. Two systems of GAAP will have to be taught at universities. 5. Practitioners will become Big GAAP or Little GAAP experts. 6. Full GAAP with Unlimited Flexibility Advantages Glossary of terms Arrive Alive campaign = Legal backing for accounting standards Road Ordinance Act = Schedule 4, paragraph 5 of the Companies Act 120 k.p.h. = Fundamental accounting concepts 0 = Fundamental Traffic department = SAICA Bicycles = Close corporations Note In fairness to the traffic department, they subsequently retracted on the issue of bicycles!
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