Q | Following its B-BBEE Verification, ABC Traders challenged how its B-BBEE Rating Agency calculated its 2018 Net Profit After Tax (NPAT).
ABC Traders made the following appeal which was subsequently rejected. ABC Traders disagreed with the calculation of NPAT as the B-BBEE Rating Agency included two subsidiary companies from the 2018 financial results. ABC Traders paid dividends from the subsidiary companies to repay a historic loan, only to deregister them eventually. The result of the calculation incorporating the subsidiaries that ABC Traders’ B-BEE Rating Agency included, made them B-BBEE non-compliant when their B-BBEE score had improved.
ABC Traders further highlighted that the International Financial Reporting Standards (IFRS) do not hold special distinctions for items of an operational nature that occur irregularly or infrequently. Instead, the results disclose revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
The International Accounting Standards Board (IASB) ceased recognising extraordinary items under IFRS rules in 2002. The IFRS has a separate disclosure for income or expenses of abnormal size or nature. These disclosures can be on the face of the income statement or in the notes section of the report. So, in short, for accounting purposes, there is no distinction made for items that might be considered abnormal or extraordinary; these are lumped together with operating profits for reporting purposes.
The crux of the problem is that the B-BBEE definition refers to GAAP accounting statements, while financial statements are prepared in terms of the IFRS. A distinction is that dividends are shown on the face of the income statement. Under GAAP accounting standards, results would not disclose the dividend on the income statement, but as a reduction of retained income. In either case, the dividend received is not part of operating income and should not be included in NPAT.
A | The definition of NPAT appears in Schedule 1 of the B-BBEE Codes of Good Practice as "means the operating profit of measured entity after-tax". It incorporates equity, loss figures,and abnormal items, but excludes extraordinary items as determined by (GAAP) Generally Accepted Accounting Practices. The financial auditors of an organisation must do the determination of NPAT. If ABC Traders wishes to have it restated using GAAP principles, financial auditors must undertake this task, not a B-BBEE Rating Agency.
Technical Compliance Services are on hand to assist members with their NPAT calculation.