The Chief Executive Officer, Mr Van de Merwe’s, behaviour and management of PPC financials have caused a few controversies. His insistence on the organisations ‘ financial advisors to complete his financial statements after a long period of consulting with them has been led us to deduce that the company has been inadequately managed as he is the sole checker of the financials and the only senior management. Knowledge that one of PPC advisors are is a member of the audit committee renders us to inspect the companies act to see if this is eligible. Overall as no control over Mr Van de Merwe is evident it can be seen that an adjustment needs to be enforced by the board to ensure proper regulation and efficiency of the company occurs.
After receiving an email from PPC’s chief executive officer during 2014, Mr Van de Merwe, we as the company’s financial advisors from PYT found some very disturbing information regarding the overall regulation of the company especially due to the fact that no mention of the Board of Committees or its members and meetings were addressed. Regulation refers to the management and control of a system or organization. It was concerning as it seemed little or no regulation occurred within the entity thereby allowing the CEO to act in a manner that is mostly noncompliant to many regulations. This report has been compiled to help assist the regulation of PPC in the future to prevent it losing its credibility to its stakeholders, its listing on the JSE and other legal consequences.
Duties and responsibilities of PYT advisors
Financial advisors are appointed by their clients in order to help them utilise their money in the most economical yet profit maximizing by mainly focusing on the products, suppliers and long term goals of the company. (Edward Jones, 2015) Their main roles and daily tasks involve setting meetings with clients and suppliers, analyzing the client’s current financial circumstances, working alongside other professionals in order to ensure that the best strategies and resolutions are reached to enable the company to fill the gap within the market. (AGCAS & Graduate Prospects Ltd, 2013). PPC uses PYT’s advisors extensively and even insists on getting their aid in completing financial statements. Financial advisors should meet with their clients almost regularly and it is obvious as stated from the email that the advisors are not independent due to them have holding of 10% in ordinary shares, one of the advisors serving on the audit committee and only conducting meetings upon Mr Van de Merwe’s request. Both parties involved have lost the essence of their positions within the workplace and what their assigned duties should consist of.
Implications and Regulations regarding PPC
Pretoria Portland Cement Limited is a public company situated within the Republic of South Africa. Company regulation and governance has become a vital part of society visioning companies on a more versatile platform and not just profit maximizing. In South Africa it is mandatory that all public companies comply with the Companies Act 72 of 2008, King III and IFRS. (D.Rossouw, n.d.) The Companies Act is the legislation which constitutes how a company and its parts- directors, shareholders etc. should act, King III is a governance regulation that mainly highlights the stakeholder theory whilst IFRS refers to the accounting standards that are prescribed from the IASB. It is evident form Mr Van de Merwe’s actions and statements that no agreement and compliance to King III or the Companies Act exist as he mainly acts in a manner that he sees fit. This is evident from no appointment of a financial manager for over 3 years which was caused from a dispute with Mr Van de Merwe. No reporting on the environmental and social levels has been included in his email, whilst purchases of new luxurious cars are stated. This indicates that Mr van de Merwe may be utilizing the company’s money for his own benefit as no internal controls are implemented to oversee this as he is the sole checker and signatory for cheques. Noncompliance to the Companies Act, King III and IFRS may result in PPC being unlisted from the JSE in the long run as they will no longer meet the listing requirements.
Duties of the Board of Directors and Committees
The Board of Directors should consist of both executive and nonexecutive directors with mostly of nonexecutive directors being independent, with executive directors being the individuals whom partake in the daily operations of the business. Section 94 of the Companies Act states that all public companies should consist of an audit committee composed of a minimum of 3 members in which the CEO cannot be part of or head and all other members have to be nonexecutive independent directors whom have not worked for the company for the previous 3 years. Approximately 1/3 of the members should be adequately qualified, though one of the advisors are qualified as their main occupation is advising PPC it is in noncompliance with the Act for them to be in the audit committee . King III states that the board of directors has to meet at least quarterly, no information is given upon whether PPC conducted such meetings as well as other committee meetings throughout the year. Analysing the company’s capacity, it should consist of the following committees: Audit, Remuneration, Risk and Nomination committee. A social ethics committee is not recommended due to the numerous employees within PPC.
King III and the Companies Act 72 of 2008 state the following duties for the following members and committees: (PPC Ltd, 2014)
The Chairman- responsible for leading the board in its decisions and strategies and should not be involved in the daily activities of the company
The Board- Setting the objectives and tone of the company from the top, they regularly evaluate the CEO after appointing him to ensure that correct conduct is abided to
CEO- in charge of managing and leading the company through the daily operations and is not the head the board
These positions are the ones in which we observed lack of understanding and implementation of correct duties and responsibilities as the other committees are assumed to be correctly conducted unless stated otherwise previously. From this it can be concluded that Mr Van de Merwe does not adhere to the correct protocols and that there are no stringent conditions from upper level management.
Overall Mr Van de Merwe does not comprehend his duties as the chief executive officer which has resulted him to act recklessly and presumably unethically as it can be insinuated due to him being the sole person in charge of the financial matters and enjoying the luxuries of family holidays and sports cars that he may be involved in some sort of money infringement. The main cause of this can be mainly traced to the lack of discipline from the Board of Directors who failed to reinforce the correct procedures to monitor Mr Van de Merwe and not reprimand him for decisions that may lead to the destruction of the company. In order to prevent further losses and negative implications for PPC, PYT would recommend a change to be introduced preferably one abiding to the regulating statements.
Overall it may be concluded that the improper forecasts and decisions made by Mr Van de Merwe were poor and lacked competency. The first recommendation to arrange PPC’s regulation would have to be with the resignation of the current CEO, Mr Van de Merwe. He’s lack of knowledge of IFRS, problems with SARS in respect of his personal taxes, insufficient estimates and decision making (giving bonuses whilst increasing liabilities), getting into disputes with other senior managers and failing to fill the position for a period of 3 years whilst ensuring he is the only one accountable and responsible for financial dealings indicate that he may have other intentions other than putting PPC and its shareholders first. His conduct is clearly identifiable as being noncompliant to King III, IFRS and the Companies Act.
To increase efficiency and effectiveness of the company, more senior financial managers should be appointed as well as a new CEO who are all deemed to be qualified. This will improve the accuracy of the Financial Statements and the timing in which they can be completed and audited.
The advisor from PYC has to be removed from the audit committee and a new external audit firm needs to be selected as over the last few years there may have been a conflict of interest between the parties.
The objective of this technical report is to determine the possible impact of the adoption of IFRS 15 Revenue from Contracts with Customers will have on the financial reporting systems of PPC.
If PPC chooses to adopt IFRS 15 revenue from contracts with customers, they will first have to establish whether the transaction in question falls within the scope of the standard. Leases (IAS17), insurance contracts (IAS4), financial instruments (IFRS9), consolidated financial statements (IFRS10), joint arrangements (IFRS11), separate financial statements (IAS27), investments in associates and joint ventures (IAS28) and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers have all been specifically scoped out of IFRS15 and will be dealt with in accordance with their respective standards and not IFRS15.
Thereafter PPC must apply the 5-step model as set out by IFRS 15. The 5-step model deals with the recognition, as shown by steps 1, 2 and 5, and measurement, as shown by steps 3 and 4 of revenue.
The 5-step model should be applied in the following way:
Identify the contract with the customer
In this step PPC must establish whether the transaction in question falls within the scope of IFRS 15 by proving that it is a transaction with a customer and that a contract exists. In order to prove that the transaction is with a customer, the transaction must relate to the entities ordinary activities i.e. the goods and services the entity provides. In the case of PPC their ordinary activities are the sale of fly ash, limestone, cement and aggregates. PPC must also show that there will be some form of consideration that will be received by them as a result of the transaction. In order for PPC to prove that there is a contract present they must show that there is an agreement, which creates enforceable rights and obligations. In most cases the obligation of PPC would be to transfer control of the goods and PPC’s right would be to the consideration for those goods. Likewise the customer’s right would be to the goods and their obligation would be to pass over the consideration to PPC for the goods. The contract must also have commercial substance and therefore have an effect on the cash flows of PPC. It must also be probable that PPC will receive their consideration from the customer. This can be judged by how significant the customer is and the customer’s past record. Once all the above criteria are met it means a qualifying contract with a customer exists and PPC should proceed to apply the next steps.
Identify the separate performance obligations
A performance obligation as per IFRS 15 is a promise in the contract to transfer to the customer either: a distinct good or a series of distinct goods that are substantially the same and that have the same pattern of transfer to the customer. The concept of ‘distinct’ is crucial. In order to establish if goods or services are distinct PPC will have to apply two tests. Both these tests need to be satisfied. PPC must test whether the customer can benefit from the good or service alone or in combination with other goods and services and test whether the promise is separately identifiable from the other performance obligations in the contract. If the goods are not distinct they will be treated as one performance obligation. It is important to note that admin tasks are not performance obligations as it is part of the cost of day to day running of the entity and not specific to a particular contract. The goods that PPC offer being limestone, cement, fly ash and aggregates are distinct goods. The customer is able to benefit from these products alone or in combination with other goods and the promise of these goods will be separately identifiable in the contract. The two tests are therefore satisfied making the products distinct.
Determine the transaction price
The transaction price is the amount the entity expects to receive in exchange for the transfer of the promised goods or services as per the contract agreed on by the parties. The transaction price can include fixed and variable consideration. Variable considerations will be estimated by PPC. Variable consideration must only be included it is more likely than not that PPC will not have do a reversal. When there is a non-cash consideration it should be measured at fair value. PPC should ensure that the significant finance component is taken into consideration if the contract is for the duration of more than 12 months. If the contract is for a duration of less than 12 months the finance component is insignificant. PPC should ensure that amounts collected on behalf of third parties are excluded from the transaction price. This means that PPC should ensure not to include VAT into the transaction price. Once the transaction price has been determined this is the price at which revenue will be measured.
Allocate the transaction price
If the contract entered into by PPC with a customer has more than one performance obligation the transaction price be allocated using the respective stand-alone selling prices (how much the goods are worth alone) for each performance obligation. If the price is not observable then an estimate must be made by PPC. PPC may do this by using the methods set out in IFRS 15 namely, the adjusted market assessment, cost plus margin or the residual approach. The residual approach is only permissible in limited circumstances. It is important to note that the transaction price and the stand-alone selling price are not the same thing as the transaction price refers to the price in the contract.
Recognize revenue when PPC has satisfied their performance obligation
PPC can only recognize revenue once control has passed from them to the customer either at a point in time or over time. Controls is linked with the transfer of goods which is PPC’s performance obligation. Control refers to the ability of the party to directly use the asset and to obtain substantially all the remaining benefits from the asset. If PPC is unable to prove that the performance obligation was satisfied at a point in time then it happened over time. If the performance obligation is satisfied at a point in time then revenue will be recognized at that point i.e. the point when PPC transfers the control of the goods to their customers. If the performance obligation is satisfied over time then the revenue must be recognized over time as PPC transfers control of the goods to the customers. PPC will therefore have to monitor the progress towards complete satisfaction as set out by the methods in IFRS 15. PPC will also have to take into account factors such as the time value of money if the contract is longer than 12 months. PPC must also note that when there is more than one performance obligation in the contract each performance obligation should be treated separately as control is passed to the customer.
In applying the disclosure objective as set out by IFRS 15, PPC must disclose necessary information to the users of the financial statements about the nature, amount, timing and uncertainty of their revenue. This will enable the users to achieve a greater understanding of the revenue made by PPC. There are many disclosure requirements as set out by IFRS 15 to ensure that the entity will meet the disclosure standard, which PPC should apply. PPC will have to determine the amount of detail they will require to disclose to meet the disclosure objective and may aggregate or disaggregate disclosures to ensure that the information is not concealed in any way.
Revenue that will be recognized for the specific period will be shown in the statement of profit and loss and other comprehensive income. If the money for the good was already received by PPC before PPC has fully fulfilled their obligation (income received in advance), the portion of which PPC has not fulfilled must be recorded under current liabilities in the statement of financial position as a contract liability. If PPC has fulfilled their performance obligation but is still awaiting consideration from their customer this will be shown under current assets in the statement of financial position as a contract asset. If any difference between the amount of the contract asset and the amount of revenue actually realized arises, this should be treated as an expense in the statement of profit and loss and other comprehensive income