The appendix to IFRS 10 defines consolidated financial statements as the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. In simpler terms, a set of consolidated Annual Financial Statements (AFS) portrays the results of the entire group as if it were only one entity with one or more divisions, writes Milton Segal, SAICA Senior Executive: Corporate Reporting.
To this end, any transactions that are deemed intercompany are eliminated upon consolidation. These include intercompany loans, sales, purchase of assets, settlement of debt, etc. The methodology behind this, as noted above, is to allow only external transactions (those outside the group) to be portrayed within the consolidated financial results.
An interesting conversation ensued after the release of the Eskom financial statements during the week of 25 May 2021. The Eskom debt had decreased substantially by over R80 billion as compared to the prior period. There was praise in this regard, and indeed some good work has occurred. However, there were two main reasons why the debt had decreased.
- The stronger rand had a favourable impact on its foreign borrowings, creating a foreign exchange gain because of the loan, being a monetary financial instrument being restated to its closing rate.
- Eskom had received ‘funding’ in the region of R50 billion from government during the period. It used this funding towards reducing its loans. So the majority of Eskom’s debt reduction was not from cash generated through operations being utilised to offset debt, but rather shifting its debt from one organ of state to another.
Inherently then, some of Eskom’s debt was merely transferred to the taxpayer, as ultimately the revenue that government receives is through collection of taxes, a significant percentage of which comes from the South African taxpayer. The purpose of this is not to single out Eskom, but rather to use it as an example of an SOE.
Essentially then, from a state perspective, the above transaction was merely an ‘intergroup’ transaction if one considered the South African treasury as the ‘parent’ or controlling company. If South Africa was required to prepare a set of consolidated South African accounts, where treasury was the parent, all these interdepartmental, inter-state owned entities (SOEs) and reapportioning of budgets would simply be eliminated to depict the results as if South Africa was one entity as described in the opening paragraph.
If this was to occur, then we would get a very clear picture of how much pure revenue (read tax collections) the state earns versus how much it is expending and would produce a clearer ‘state’ income statement. Perhaps more relevant, and of more use to rating agencies and potential investors, would be the consolidated cash flow statement that would to all intents and purposes reverse the accounting entries and rather focus purely on the actual cash flows for the year, starting with the opening balance, ending with the closing balance and therefore reconciling the opening to closing balance, i.e. the cash movement for the year.
It is the author’s view that that would present a very meaningful representation of how the state’s cash flow was managed, and ‘users’ of these theoretical consolidated annual financial statements, which would include us taxpayers as stakeholders, could begin to unpack the true reality of genuine money collected by the state and paid outside of the state.
It is of course a theoretical discussion, as the various methods of accounting (Grap vs IFRS vs modified cash basis) would require significant adjustments to allow for one overall method of accounting that could be consolidated, and the exercise would be intense and the cost versus benefit analogy may just win the argument.
Yet, at the highest level, the state controls all its SOEs as it has power over the SOEs, it has exposure or rights to the variable returns and the ability to use its power to affect the amount of its (the investors’) return.
Could the theoretical application of IFRS 10 be the tool required to allow for deep analysis of the state’s genuine cash flows and financial performance and position?
With the poor financial position the South African Government finds itself in, with single-digit growth forecasts and spiralling debt, it could very well be the accountants who need to have the courage to lead the recovery process by producing international standards of reporting and analysis to promote strategic decisions and enable greater transparency.
Article published by Accounting Today | 31 May 2021