It appears that inconsistent reporting on share repurchases by South African companies, it appears that inconsistent reporting on these activities has led to the overstatement of the market capitalization by companies participating in share repurchase activities. Market capitalization is based on the share price multiplied by the number of shares. No accounting guidance exists regarding which number (company or group) should be used in the market capitalization calculation. Seventy-five percent of SA companies involved in share repurchases and choosing to disclose market capitalization, base it on the number of company shares. The JSE, when calculating market capitalization base it on the number of company shares. Users of financial statements will therefore benefit from a dual disclosure of market capitalization by companies: based on group as well as company number of shares. This will enable users to compare the figure to that of the JSE and to ascertain the true market capitalization. If the JSE decides not to change the current reporting mechanism, it needs to communicate to stakeholders that a ring fencing principle is applied when calculating market capitalization. This, however, leads to the overstatement of market capitalization of companies involved in share repurchases via subsidiaries and share trusts.
I cover I Share repurchases by companies listed on the jSE: the effect on market capitalisation T he fact that South African companies have been allowed to repurchase their own shares as from 1 July 1999, has created new challenges for financial analysts as well as company The use of the number of group shares for EPS and HEPS purposes, leads to a larger ratio (EPS and HEPS) than would have been the case if the number of company shares were used as accountants and auditors. For the financial analysts, it has the denominator, and would therefore be the preferred number introduced an additional complexity during the evaluation of of shares to be used by the company accountant. This is also in company financial performance. The accuracy of these valuations line with the relevant accounting requirements (SAICA, 2007:IAS is dependent on the manner in which repurchase activities are 33; SAICA, 2007:CC 07/02). However, when calculating market reported (in annual reports as well as by the JSE). Although nine capitalisation and net asset value, the opposite prevails: the years have passed since the inception of share repurchases by use of the number of company shares leads to a larger market South African companies, it appears that inconsistent reporting on capitalisation and net asset value and could therefore be the these activities (in annual reports as well as by the JSE) has led preferred number of shares to be used by the company accountant. to the overstatement of the market capitalisation by companies There is no accounting standard (or circular or interpretation) participating in share repurchase activities (Bester, Hamman, prescribing the number of shares to be used when calculating Brummer, Wesson and Steyn-Bruwer, 2008). the market capitalisation, and net asset value per share and the calculation thereof is therefore at the discretion of the company The Companies Amendment Act of 1999 allows companies to accountant. Market capitalisation is a reflection of a company’s 14 acquire their own shares and also allows subsidiaries to acquire size and many stock market indexes, such as the JSE Top 40 and shares in their holding company (up to a maximum of 10% of other market capitalisation based indexes, are compiled on a basis the issued shares of the holding company). The own shares of market capitalisation. There might therefore be an incentive repurchased by the company are cancelled from issued share to state a high market capitalisation in order to qualify for more capital (and re-instated as authorised share capital), whereas prestigious indexes. shares purchased by a subsidiary are not cancelled but are treated as treasury shares (therefore deducted from share capital in the Which number of shares (company or group) is used in practice consolidated financial statements) (RSA, 1999). When shares when calculating market capitalisation? A database compiled are purchased by subsidiaries, the number of shares used in the by the Graduate School of Business of the University of calculation of financial ratios is different for the company and the Stellenbosch (USB) was used to ascertain on which number of group. For example, if a company has an issued number of shares shares companies (in their annual reports) and the JSE base their of 100 and repurchases 8 of its own shares, while its subsidiary market capitalisation calculations. The sectors covered by the purchases 5 of the shares, the number of company shares is 92, USB database exclude Mining, Financials, Development Capital while the number of group shares is 87. Share trusts (through and Alternative Exchange. Although this database covers all which many employee share option schemes are conducted) need repurchases from 1999 to 2007, only data for the most complete to be consolidated (SAICA, 2007: SIC-12), and therefore also need recent calendar year (2006) for which all published annual reports to be deducted (and represent treasury shares) when calculating are available, were used. The complete database of companies the number of group shares. The difference between the number involved in share repurchase activities for the period 1999 to of shares of the company and the number of group shares may 2006 contained 127 companies (excluding companies delisted or be material: in Network Healthcare Holdings and Group Five, the suspended before they published a 2006 annual report). Of these difference amounted to 50% and 35% (relative to the number of 127 companies, only 62 chose to publish market capitalisa
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