For several years, companies have been able to issue equity instruments to black people or entities controlled by black people at a discount to fair value. The goods or services received from the black owned and controlled companies in return for the equity instruments may or may not be specifically identifiable. IFRS (International Financial Reporting Standards) applies to the accounting for BEE transactions where the fair value of cash and other assets received is less than the fair value of equity instruments granted to the BEE partner, i.e. to the BEE equity credentials.
The difference between the fair value of the cash and other assets received and the fair value of the equity instruments granted may arise because of specific goods or services that the BEE partner provides to the entity, or because of the BEE equity credentials that the entity has received. It does not apply to transactions where the BEE partner is issued with equity instruments for transactions that are unrelated to the entity obtaining BEE equity credentials, because the requirements of IFRS are adequate for such transactions.
As such, in alignment of the 2008 Companies Act, the Department of Trade & Industry (the DTI) has gazette the draft IFRS BEE Accounting methodology for SMEs. There are three main issues that the gazettes deals with. Namely:
- Should the difference between the fair value of the equity instruments granted and the fair value of the cash and other assets received ie. the BEE equity credentials, be recognised as an intangible asset or as an expense?
- Where BEE equity credentials are obtained as part of the net assets acquired in a business combination, how should the BEE equity credentials acquired be accounted for?
- Assuming that BEE equity credentials do not meet the criteria for recognition as an intangible asset, how should vesting conditions be interpreted in the context of a BEE transaction?
The draft gazetted has been published for a 60 day commentary and NPI Governance Consulting will be submitting its comments in the next few weeks.
For more information, contact:
Tel: (+27) 011 259 4018