ED and SED Proposed Changes

Original publish date – Tue, 01 Mar 2011 06:50:45 +0000, Keith

The minister has gazetted proposed changes to the B-BBEE Codes of Good Practice.

The proposals are gazetted in terms of Section 9(5) of the act, which gives interested persons the opportunity of commenting for a period of 60 days from the date of publication of his notice. (18th February 2011).

The proposals affect enterprise development (codes 600/806) and socio-economic development (codes 700/807).

1) Enterprise Development – Shorter payment periods:

Change in shorter payment periods: The existing codes state that you can earn ED points by offering shorter payment periods to suppliers. The codes say that if you pay COD,  you can claim 15/15 (i.e 100%) of the value of the payment. If you pay one day after receiving the invoice you can recognise 14/15th of the value. If you pay 5 days after receiving the invoice you can recognise 10/15th , ie. 66.6% of the payment value and so on. The old codes stated that you cannot go beyond 10 days for your payment.

The actual formula used is (15 minus number of days from date of invoice)/15

The proposed amendment allows you to take as long as 15 days to repay. It should actually be only 14 days though!

If you take 14 days to pay then you can recognise (15-14)/15 of your payment: ie 1/15th of the payment – 6.67% of the payment.

If you take 15 days to pay, the formula is (15-15)/15 = 0% which is why we stated that it can only be 14 days!

Commentary:
This is an extra dispensation given to companies and public enterprises that find it difficult to arrange payment as fast as 10 days. The extra benefit is very small though. If you take 12 days to pay an invoice to an approved beneficiary, you can only recognise 3/15th, ie 20% of your payment spend.

What is more interesting is the fact that the minister has given this dispensation on the shorter payment periods. Without doubt shorter payment periods is the most controversial ED activity. In the past many agencies used to regard only a small portion of the shorter payment as being recognisable ED spend. They use the formula of (15 – days to pay) as a percentage. so, if you paid COD, ie zero days, they saw it as (15-0)% of the payment = 15% of payment. We had asked the dti for an explanation and they gave us the interpretation as we have always used. Recently ABVA issued practice notes reverting back to the old arrangements. Fortunately only a few verification agencies are following this incorrect method.

There must be a reason for the dti emphasising shorter payment period, and maybe this is it. In our own submission, we will recommend that the dti issue a very specific explanation and worked example to ensure consistency.

2) Enterprise Development/Socio-economic development – Change from average annual spend to annual basis:

The codes state that ED and SED contributions are measured cumulatively (average annual) from date of inception of the codes, or even up to 5 years prior to the codes (which were issued in 2007.). This means that if your NPAT (net profit after tax) in 2007 was R1m and R1.5m in 2008, R1.3m in 2009 and R2m in 2010, then for your ED calculation our target is set at 3% of the cumulative profit of R5.8m = R174 000.

Your spend is also cumulative so if you spent R24 000 in 2007, R100 000 in 2008, R50 000 in 2009, then you would have reached target in 2010 by 2009 already, and would earn full points in 2010. We used to use the phrase “you can bank your overspend”, so if a company had overspent one year, the overspend would be carried forward to the next. There are good reasons to use the cumulative method: No one really knows what their net profit after tax will be until after their audit and their tax assessment. The best they can do prior to the year-end is use estimates and budgeted figures. With the new proposal, to be on the safe side, a company will have to overspend slightly just in case it turns out that their net profit after tax is higher than expected. The overspend will be lost next year.

Other considerations:

Many companies have not yet begun their empowerment journey. Some have spent no money on ED or SED, so they would have had to make up a huge amount of spend if the cumulative had applied. This could have been asking them to spend 12% of NPAT on ED and 4% on SED over the past 4 years. Since the majority of businesses are not yet compliant they will be happy with the new proposed ruling. Businesses that have overspent on their ED and SEC will be unhappy.

Transitional period: There is no direct transitional period for the proposed changes. Paragraph 5 of code 600 and code 700 does state: “The Minister may from time to time by notice in the gazette revise or substitute the Benefit Factor Matrix. Any changes will only be applicable to Compliance Reports prepared for a measured entity in respect of the first 12 month period following the gazetting of a revision or substitution.”

The benefit factor matrix  (annexe 600 (a)) lists the various types of contributions that can qualify as ED (and similar with SED). Paragraph 5 states that any changes to this annexure comes into effect only after 12 months. The Minister’s proposed changes however affect both the benefit factor matrix – the early payment periods , and the actual code 600 – the change from average annual to annual.

The shorter payment period will therefore only come into operation in 12 months time, but the change from cumulative to annual would come into effect as soon as it is gazetted.

Overall Commentary:

We do not disagree with the proposed amendments, though we will recommend that the minister allow a transitional period for those companies that have overspent on their ED and SED targets. We welcome the fact that the minister is issuing amendments, proving that B-BBEE is still top of mind. We still have huge problems with lack of standards, fronting and lack of clear interpretations of the codes. Even these proposed changes will not clear up many issues and we will be issuing our comments to the dti recommending that when they issue this amendment, they clarify some of the issues referred to.

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Issued by EconoBEE

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