| Message from the CEO – It’s never too late to fall in love with financial instruments |
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When it comes to accounting topics, there are two that have me running for the hills – financial instruments and VAT. In a cruel twist of fate, I have either led or been involved in five financial instruments projects for the ASB and IPSASB over my professional career. And, when we started our most recent project on financial instruments, the first question we had to deal with was whether VAT is a financial instrument or not.
I am sure that many of you have the same feelings about financial instruments as I do. Admittedly, it is more complex than it should be because of tongue-tying terms (like fungible?) and that most complex transactions are not common to all public sector entities. However, instruments that all entities have in common are a bank account, payables, receivables, and perhaps and investment or two. So, financial instruments should be something that all public sector preparers and users understand on some level.
Financial instruments are “sector-neutral” transactions, which means that the nature and characteristics of the underlying transactions are the same in the public and private sector. Financial instruments are significant for many public sector entities, for example, municipalities that have large debtors books, investments and loans; and public entities that provide development finance.
The international standard applied in the private sector – IFRS 9 on Financial Instruments – was revised to respond to shortcomings in the financial statements during the financial crisis. As financial instruments are sector neutral transactions, the ASB Board adopted many of the changes in IFRS 9 when revising the Standard of GRAP on Financial Instruments (GRAP 104) in 2019.
The key changes to GRAP 104 are: - Changes in the classification of instruments for subsequent measurement – financial assets are measured at either amortised cost or fair value based on the reason why they are held and their economic characteristics. Specific liabilities are measured at fair value, and all others are measured at amortised cost.
- The approach to impairing financial assets changed from an incurred loss to an expected loss model. As indicated in the name, expected losses estimate the expected default of financial assets over a period of time rather than only recognising an impairment loss when an event occurs.
- Loan commitments and financial guarantee contracts are recognised and measured differently. They are no longer in the scope of GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets. When entering into these transactions there is an economic consequence that exposes an entity to risk. Accounting for them as financial instruments best captures this risk exposure.
- With the changes in the classification of instruments and impairment approach, there is new information that GRAP 104 requires entities to disclose.
The revised Standard will be effective for financial years commencing on or after 1 April 2025. The requirements of the Standard should be applied retrospectively, although some measurement principles and disclosure requirements should be applied prospectively.
Both the ASB Board and staff acknowledge the complexity of financial instruments. We will facilitate the adoption of GRAP 104 as far as our mandate allows by publishing helpful, easy to read information in Fact Sheets and FAQs. The objective of the Fact Sheets and FAQs is to make the principles in the Standard more accessible and simpler, particularly for entities with limited financial instrument transactions.
We also started a Financial Instrument Reference Group last year which is a group of technical experts and preparers that discuss potential application and implementation issues. The work of this group may result in new or amended Fact Sheets and FAQs being developed. Both the Auditor-General South Africa and National Treasury are part of this Group. As the work of the group progresses, we will communicate through our website, Newsletter and social media.
While 2025 might seem far away, it is not when aspects of the Standard need to be applied retrospectively. Retrospective application means that, where comparative information is required by the transitional provisions, opening balances or comparative data will be required for 1 April or 1 July 2024. This is only months away! Do not wait until 2025 to act – it will be too late!
“A difficult task can be done immediately, an impossible task requires a bit more time.” George Santayana
PS: “Fungile” means replaceable by an identical item; typically used for commodities. |
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