Reference no: EM13510557

QUESTION

You are Lesley Parket, an audit clerk at the firm Barkner and Co Inc. Ms Rene Roomsan, the partner to whom you report, has asked you to assist her with the preparation for a meeting with the independent chairman of Vision U Ltd, a JSE Securities Exchange South Africa listed company and an audit client of the firm.

Vision U Ltd has a year end of 31 January and Barkner and Co Inc. completed the audit fieldwork on 5 March 2004. All the requirements of South African Auditing Standards have been met, except where these are affected by the issues outlined below. Ms Roomsan is preparing the audit report on the annual financial statements for the year ended 31 January 2004. No issues other than the matters on the agenda of the meeting require attention before the audit report is issued. The agenda for the meeting is as follows:

- Discussion of the financial position of Vision U Ltd and any reporting requirements or considerations the directors may have in light of the financial position of Vision U Ltd.
- Discussion of the role of the Remuneration Committee with regard to the remuneration of the executive directors.
- Considerations that should be borne in mind arising from the Companies Act in assessing the current remuneration of the executive directors.
- Consideration of the flood damage to the grain storage facility of Vision U Ltd.

To assist you in the preparation of comment, Ms Roomsan has provided you with the following

financial information:
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1 Extract from the draft balance sheet
VISION U LTD
DRAFT BALANCE SHEET FOR THE YEAR ENDED 31 JANUARY 2004
2004 2003
R'000 R'000
ASSETS
Property, plant and equipment
Intangible assets
16 899
102 876
23 028
252 038
Goodwill
Licences and patents
62 498
40 378
135 386
116 652
Other non-current assets
Investments and loans
64 233
199 329
110 767
715 446
Investment at fair value
Long-terms loans made to other parties
190 463
8 866
680 811
34 635
Current assets 293 360 443 252
Inventory
Accounts receivable
Tax refund due
Cash
58 597
164 498
21 338
48 927
97 993
285 084
5 490
54 685
Total assets 676 697 1 544 531
EQUITY AND LIABILITIES
Capital and reserves
Issued share capital - nominal value
Share premium account
Non-distributable reserves
Distributable reserves
1 029
491 228
75 329
(481 447)
964
439 123
150 435
410 103
Outside shareholders' interests
86 139
12 107
1 000 625
67 224
Total shareholders' interests
Deferred tax liability
Long-term loan - associate company loan
98 246
754
1 058
1 067 849
8 763
108 438
Accounts payable - trade
Tax liability
Interest-bearing current loans
Non-interest-bearing current loans
100 058
150 603
21 822
260 735
143 479
1 185 050
97 848
33 824
67 934
159 875
Total equity and liabilities 676 697 1 544 531
2 Extract from the draft cash flow statement
VISION U LTD
DRAFT CASH FLOW STATEMENT FOR THE YEAR ENDED 31 JANUARY 2004
2004
R'000
2003
R'000
Operating (loss) / profit
Depreciation and non cash items
(480 246)
268 678
58 703
95 236
Cash (outflow) / inflow from operations
Decrease / (increase) in working capital
(211 568)
165 207
153 939
(100 441)
Cash (outflow) / inflow from operating activities
Less: Interest paid
Tax paid
(46 361)
(33 361)
(13 752)
53 498
(11 698)
(28 412)
Cash (utilised in) / available from operations (93 474) 13 388
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3 Details of monies paid or accrued to executive directors during the year ended
31 January 2004
3.1 The Remuneration Committee awarded the directors remuneration packages structured as
follows:
50% Basic fixed remuneration
30% Discretionary fixed remuneration
20% Personal performance fixed remuneration
In addition, a performance bonus of up to 150% of the fixed remuneration amount is payable on
achievement of the objectives set by the board of directors.
During the year this translated into remuneration received by the directors as follows:
Basic
(50%)
Discretionary
(30%)
Personal
performance
(20%)
Total
R'000 R'000 R'000 R'000
Director A: Chief Executive Officer
Director B: Chief Financial Officer
Director C: Strategic Affairs Director
Director D: Operations Director
2 500
1 500
1 500
1 500
1 500
900
900
900
1 000
600
600
600
5 000
3 000
3 000
3 000
Total executive director remuneration,
before performance bonus
14 000
Directors' proposed performance bonus 14 000
28 000
3.2 Discretionary remuneration (30%)
The directors have the discretion to have the 30% discretionary fixed income paid in any way they prefer.
- Director A requested that the amount to be paid in four equal shares to his four sons.
- Director B requested that the company convert the amount into travel vouchers for himself and his extended family.
- Directors C and D requested that the company make payments on their behalf to discretionary non-vesting trusts in the Isle of Man.
These amounts have been reflected as a component of personnel costs. They are not included in the calculation of PAYE for the directors, and will not be included in their IRP5 returns.
3.3 Performance bonus
The directors evaluated their performance at the December 2003 Executive Directors' Meeting and determined that, while certain company performance criteria had not been met, this was not under the control of the executive directors.
Furthermore, the trading conditions faced by the company where difficult. Therefore, the directors awarded themselves a 100% performance bonus.
3.4 Other remuneration
The company extends cash to the directors from time to time. These amounts are paid in respect of
- loans to acquire housing;
- contributions to household expenses and entertainment costs;
- overseas travel expenses; and
- school fees, tax payments and the like, which directors need to fund.
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During the year various amounts were advanced. At year end, after the performance bonus accrual, there were no amounts owing to the company by any director.
No share incentive scheme is in place.
4 Details of the flood damage to the grain storage facility On 4 March 2004 it was discovered that the grain storage facility in Witbank has suffered significant flood damage after unexpectedly high rainfalls. The damage was mostly caused by leaks into the facility, which had not been detected previously.

The company's internal specialists are assessing the grain facility and an insurance assessor is on site. Insurance would in any event only cover 85% of any loss.

The grain storage facility has a replacement value of R45 million, while the grain held at year end has a value of R25 million.

REQUIRED
You are required to draft an internal memorandum to Ms Roomsan, the audit partner on the Vision U Ltd audit, in which you address the following:
(a) Discuss the financial position of Vision U Ltd and any reporting requirements or considerations the directors should have in light of the company's current position. In your response, focus particularly on
(i) the requirements of South African Statements of Generally Accepted Accounting Practice relating to the financial position of the company and which are relevant to its directors;

(ii) the issues that arise from the Companies Act in relation to the financial position of the company and that the directors need to consider; and

(iii) the requirements of the Public Accountants and Auditors Act and South African Auditing Standards relating to the financial position of the company.

(b) Indicate what the ideal composition of the Remuneration Committee should be and also discuss the role the Committee should play in considering the remuneration of the executive directors. In your response consider the requirements of the King Committee on Corporate Governance.

(c) Discuss any considerations to be borne in mind arising from the Companies Act in assessing the company's response to the current remuneration of the executive directors.

(d) Provide an analysis of the accounting implications, in terms of South African Statements of Generally Accepted Accounting Practice, of the flood damage to the grain storage facility of Vision U Ltd. Based on this analysis, indicate what you consider the correct accounting treatment for this item would be in the Vision U Ltd annual financial statements. Also draft the appropriate note that should appear in the annual financial statements.