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					Parents Unite                                             only body that is, hopefully, independent enough
                                                          to act on behalf of preparers and users is the newly
An Analogy                                                formed IRBA. Let’s see if they are up to the
The great granddaughter of Freud (GGF)                    challenge.
developed a set of drums which, if played properly,       Here are examples of the irritants being
was supposed to realign the neurons in the minds          experienced by preparers at present. The problems
of children, thereby improving their IQs. She             are caused by flaws in the standards or by auditors
wrote a set of instructions to go with the drums          not being trained in the art of interpretation. The
which forbade tampering with their design and             issues of providing for deferred tax on the
applied for the necessary patents. This idea was          revaluation of buildings and straight lining rental
embraced by parents and governments alike and             have been dealt with in previous articles.
sales of the drums soared. They became known as
Neuron Alignment Drums, or NADs for short.                Disclosing related party transactions
SORNADS (Societies for the Regulation of                  between subsidiaries
Neuron Alignment Drums) were formed around                A holding company has 30 subsidiaries which have
the world and inspectors from SORNADS                     numerous dealings with each other.             These
instructed parents that if they stopped their             transactions and the resulting balances cancel out
children from playing these drums they would be           on consolidation. The auditors are insisting that
accused of child abuse, with possible jail                the company must disclose full details of each
sentences.                                                transaction and each balance in the company’s
The children took to this idea like fish to water.        separate financial statements.
However, because of the speed at which the idea           Consolidating borrowers
caught on, the drums were flawed causing hearing          A bank lent money to a close corporation. The
loss in children and parents alike and because            loan agreement contained the usual covenants to
children were not trained in their use, the drums         protect its investment. The auditors are insisting
became instruments of entertainment causing noise         that the lender must consolidate the financial
pollution in high density housing complexes to the        statements of the close corporation because it
annoyance of neighbours. ENT specialists became           “controls” the borrower. (Did you read this you
inundated with cases of hearing impediments.              big bank types?)
Schools, universities, commerce and industry              Taking a loss on an increase in price after
started experiencing an increase in applicants with       the sale is made
IQ’s at retard levels.
                                                          A farmer sold maize for future delivery to a co-
Parents and neighbours pleaded with the various           operative society. The price increased after the
SORNADS to do something about the problem                 sale. The auditors are insisting that the farmer take
with no success. Representations were made to             a loss because he could have got a higher price had
Government and after many years of                        he waited.
procrastination a new body was formed called the
Regulatory Body for the Use of Neuron Alignment           Taking a loss on a sale when no loss will
Drums or REBUNAB for short, which includes                be incurred
representatives from the government, children,            A farmer entered into a long term maize supply
parents, neighbours, commerce and industry and            agreement with a miller at a fixed price of R900 a
ENT specialists. REBUNAB has embarked on a                ton increasing by the CPIX each year. The cost to
twenty year project to try to solve the problem.          the farmer is R650 a ton. The advantage of this
Accounting Standards                                      agreement is that it secures the supply of the
                                                          farmer’s product for years to come. The market
If you substitute GGF with IASB, NAD with                 price at the date of the contract was R1 000. The
IFRS, SORNADS with SAICA, REBUNAB with                    auditors are insisting that the farmer take a loss of
IRBA, the children with auditors, the parents with        R100 a ton in respect of all full future sales. This
the preparers of financial statements, the                would result in a loss and a liability of more than
neighbours with financial statement users and the         the farmer’s equity. When the financiers see his
ENT specialists with people like me who spend             balance sheet, funding will be withdrawn and the
our lives trying to help the preparers and uses           farmer will be out of business.
unravel the chaos being caused by IFRS, you will
see where this is leading. And, believe me, this is       Expensing the cost of buying back an
not an exaggeration. The state of IFRS is in crises       entity’s own shares
and something needs to be done urgently. The              A company entered into a put option to buy back



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its own shares at the market price on the expiry of           to its staff. The idea was that staff would be paid
the put. The auditors forced the company to                   out the excess of the market price over the exercise
expense this “cost”.                                          price of R10 three years after entering into the
Discounting normal trade debtors and                          SAR. Before the end of the year the share price
creditors                                                     collapsed to R2 per share. Management is of the
                                                              opinion that there is no possible chance that the
A company buys and sells goods with normal
                                                              market price will recover to over R10 in the next
terms being 60 days to pay. The auditors are
                                                              two years. The auditors forced the company to
trying to force the company to discount its trade
                                                              raise a massive liability for the cost of the SAR
debtors and trade creditors!
                                                              because some “expert” arrived at a positive value
Not permitting the recognition of a sale                      for the option using an excessive standard
where a guaranteed buyback is given                           deviation. When the auditors were asked whether
It is the practice in the motor industry to issue a put       this “liability” would be paid to anyone in the
option to the financier on the sale of the vehicle to         future, they replied: “No, it will be recycled back
enhance its security value. Seldom do these puts              to profit or loss.” (Do you understand why I get so
result in a loss to the dealer as they are conditional        frustrated?)
upon the vehicle being in a condition that ensures a          Writing land and buildings down to zero
profit on resale. The auditors argue that the
                                                              A share block company was formed to house
significant risks and rewards of ownership have
                                                              extremely valuable residential property for its
not passed so refuse to allow the dealer to take the
                                                              shareholders. The shareholders have the right to
sale.
                                                              live in the property rent free. The preparer wants
Consolidating a close corporation from                        to keep things simple and leave the property in the
whom property is rented                                       books of the share block company at cost. The
A private company rents land and buildings from a             shareholders would like to see the value of the
close corporation whose only member is the major              property in the financial statements to assess their
shareholder of the company. Because the parties               true worth. The auditors are trying to force the
do not want to straight-line rental received or paid          company to write the property down to zero
there is no rental agreement between the two                  because it does not earn anything, despite the fact
parties. The auditors say that the assets and                 that the property could be sold tomorrow at its fair
liabilities of the close corporation must be                  value.
consolidated by the company as the close                      Residual Values
corporation meets the definition of a special
                                                              A mining company keeps its assets until the end of
purpose entity or, failing that, the company must
                                                              their economical lives, at which point they are
apply IFRIC 4.
                                                              scrapped.       The residual values, if any, are
Raising an embedded derivative liability on                   immaterial. The auditors insisted that the company
a sales contract                                              pretends that it can find buyers for the assets at the
A local company entered into a contract with an               end of their “useful” to arrive at their residual
overseas customer to convert imported raw                     values.
material to finished goods. The selling price of the          In Conclusion
finished product was fixed at $100 per unit. The
                                                              Standard setting is not the domain of the auditors.
cost of the raw material fluctuates but is not
                                                              Auditors are assuming this responsibility without
expected to be higher than $50 per unit in the
                                                              consulting preparers and users and enforcing their
foreseeable future. The cost of conversion is R60
                                                              will through the threat of qualification. The result
per unit. Because the contract with the customer
                                                              is that financial statements are becoming a
was signed when the rate of exchange was R10 to
                                                              meaningless representation of the financial
the dollar (the rate is presently R6) the auditors
                                                              position and performance of reporting entities. As
forced the company to raise a liability of R60m
                                                              a temporary measure and until, hopefully, things
being the difference between R10 and R6 times the
                                                              improve I am trying to encourage preparers in
contracted quantities discounted over the supply
                                                              South Africa to go the US route of presenting two
agreement! The auditors cannot explain to whom
                                                              sets of financial statements, one based on IFRS as
this R60m is owed but argue that IFRS requires
                                                              seen by the auditors and one based on substance
this embedded derivative to be raised.
                                                              and economic reality as seen by the preparers with
Share Appreciation Right                                      a reconciliation between the two. In the US users
A listed company issued share appreciation rights             analyse both sets and make up their own minds. I



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have read that analysts find management’s take on
the matter more useful to their needs. If this
approach is followed, it will either have the effect
of undermining IFRS or cause the standard setters
to reassess their standards. And it will, without
doubt, wake up the analysts to the realisation that
IFRS is not the solution they have been searching
for all these years.
I find it sad that preparers do not resist applying
accounting standards that they know are wrong.
Maybe it is the legacy of the past that has instilled
this passive acceptance of authority without
questioning it. We have become like a bunch of
sheep following a ram that has no idea where he is
going.
NOTE: I am not prepared to get involved in
technical arguments in respect of the above
examples. They were given merely to illustrate
that we need a formal independent body to resolve
the IFRS conflicts that are raging between auditors
and preparers to the detriment of users.




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