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Management discussion continued
Accounting policies
and tax
AC133 – Financial Instruments:
Recognition and Measurement
ABIL has incorporated AC133 into
its final results for the 12 months
ended 30 September 2003. It is a
prospective statement, which does
not require restatement of the
comparative results.
The statement deals primarily with the
recognition and valuation of financial
instruments (referred to as the fair value
of certain assets and liabilities) as well as
prescribing the accounting treatment for
any hedges a company may hold against
any of its assets and liabilities.
The only area of potential major impact
for ABIL is the recognition, measurement
and valuation of the advances portfolio
and related provisioning. This is an area
where there is much debate around the
interpretation of the statement, and as
few banks have disclosed full results
incorporating the impact of AC133, it is
likely that such debate will continue for
some time. ABIL has used the following
principles for the adoption of the
statement:
All advances are measured at cost
and accounted for on a cost
amortisation basis (constant accrual of
the yield to maturity on a time basis);
AC133 prescribes that an impairment
test be performed on all assets or
portfolios of assets and, if positive,
then an impairment provision be
raised against the asset or portfolio.
Such impairment provision will be
based on an assessment of the
present value of all future recoveries
from the asset. In the case of
ABIL, save for credit life, all loans are
unsecured, and therefore this provision
is based purely on the anticipated
recoveries from the debtor;
African Bank Investments Limited 34
ABIL’s credit management process
uses credit risk pricing in assessing
the levels of interest rates for its
various products, such that the
inherent risk of default is covered by
the risk premium charged on the
loan. The accrual of interest
including the credit risk premium will
cover future credit losses as long as a
loan portfolio is performing. As soon
as a loan stops performing, that is
cash is not being received, this no
longer holds true and an impairment
provision should be considered;
It would follow therefore that all
performing loans, assuming the
credit risk premium still covers the
inherent risk of default, would
require no provision. The Banks Act,
however, requires that minimum
provisions be held for all loans. The
total amount of this “general” or
portfolio provision of R30,1 million
has been maintained in order to
comply with the Banks Act, but has
been separately disclosed;
For loans that are non-performing,
the specific provisions, based on
portfolio groups, default
characteristics and recovery
prospects, reflect the difference
between the present value of
expected future recoveries on these
loans and the gross outstanding
balance. This approach is largely
consistent with the previous methods
used by ABIL and consequently there
has been no material change in the
provisions as a direct result of the
statement. Any small differences
have been included in the income
statement charge for movements in
provisions;
The group does not have any
hedges or other assets that are
materially affected by the rules
regarding recognition and valuation
of these instruments.
Accounting policies
The accounting policies adopted for
purposes of this report comply with
South African Statements of Generally
Accepted Accounting Practice as well as
with applicable legislation. They are
consistent with the prior period, with the
exception of the adoption of AC133.
Secondary tax on companies
(STC)
Dividends paid by the ABIL Group
attract the full 12,5% STC charge as the
group does not earn any STC credits in
the ordinary course of its business.
AC501 states that the STC charge paid
on dividends must be disclosed in the
income statement as a tax charge and in
addition it also states that the charge
must be accrued in the year that the
dividend is accounted for. Since GAAP
requires dividends to only be accounted
for in the year that they are declared (as
opposed to the period to which they
relate) there will always be a mismatch of
the STC, that is it will reflect in the results
for the period after the year in which the
profits were made and on which the
dividend is declared.
ABIL believes that a dividend and
associated STC charges are capital
transactions and should not impact
operating results. This is especially true
for the special dividend which will accrue
a tax charge of R60 million in the first half
of 2004 in addition to the STC charge on
normal dividends. It is likely, however, that
ABIL will have to account for this as a tax
charge in the income statement for 2004.