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Accounting for junk status


An important question that has not been addressed in the predictions of how the recent cabinet reshuffle and the ensuing down-grade of South Africa’s long-term foreign sovereign credit rating to junk status by two of the rating agencies is how this will affect companies’ financial statements.

According to Justine Combrink, partner at Mazars, the impact of South Africa’s ratings downgrade is likely to affect your company’s financial statements substantially, and dealing with the fallout will be crucial for your business.

“In this time of uncertainty, South Africa’s most important questions should also be around how these events will affect financial statements,” Combrink wrote in an article published in Cover Magazine.

“We now need to acknowledge that it cannot be business as usual. Businesses must consider what area of their business is likely to be impacted by the downgrade, as well as the current economic and political environment. Both of these issues must be acknowledged and spoken to in the financial statements.”

She notes that a lot of attention has been paid to financial statements in recent months to items that are relevant to financial statements. These include the International Accounting Standards Board initiating a financial reporting disclosure initiative, the Practice Statement on Materiality, the IAS 1 amendment becoming effective this year and the recent JSE proactive monitoring report emphasising that they would be concentrating on the application of materiality, and essentially relevance in financial statements. There is also significant focus on taking out the irrelevant information from financial statements. However, at a time like this we need to remember that it is also about including the relevant items.

The objective of financial statements and financial information about an entity is to provide useful information to the existing and potential investors, lenders and creditors that will help them make decisions about providing resources to the company.

Some of the likely impacts on businesses that should be considered by business owners, managers, and financial statement preparers are a decrease in investor confidence, a decline in various state-owned enterprises’ ability to invest and settle their liabilities, fluctuating foreign exchange rates, instability in property prices, and poor GDP growth. All these issues can impact financial statements and companies should explain the likely impact and the assumptions that it is based on.

“The financial statements must be prepared with due care and consideration. Now, more than ever, it is a priority to tell investors and funders what is happening in your business, what your risks are, and how you intend to manage those risks. Read them again and make sure that you are telling the full story to your investors, suppliers, and whoever else reads your financial statements. It is especially important that stakeholders outside of South Africa have the right story about your business in today’s political and economic environment.”