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Tips: exchange control & local borrowing restrictions

31 Aug 2009

Michael Heath

Many companies are finalising their financial statements for the year ended 28 February 2009, while previous exchange control approvals for local borrowings by ‘affected persons’ expire on 31 August 2009. Here are some tips.

When preparing and finalising annual financial statements, companies and their auditors should:

  • check that the balances of loans due to any non-residents correspond exactly with the approvals granted by the South African Reserve Bank,
  • ensure that the amounts in the financial statements are all on record as ‘draw-downs’ on the Reserve Bank loan database, and
  • ensure that the necessary exchange control approvals are obtained where relevant.

Quoting all the approval reference details in the appropriate note to financial statements saves many a headache.

A major mistake by companies is assuming that because the funds flowed to South Africa and/or their bankers knew about the transaction, everything is in order. Not true! Generally speaking, bankers simply aim to meet the minimum legal requirements to settle a transaction. They do not act as accountants or record-keepers.

In addition to the above, a company classified as an ‘affected person’ per Exchange Control Regulation 1, is also subject to the local borrowing restrictions. The Reserve Bank is becoming increasingly vigilant about compliance with the various exchange control directives and penalties can be imposed even where breaches are simply technical in nature. The more common impact is that material transactions are substantially delayed in the case of late applications for approval.

Journal entries, accounting adjustments, foreign exchange losses and profits, the capitalisation of interest and the incorrect cross-border balance-of-payments reporting all result in loan balances of financial statements not corresponding with Reserve Bank records. The Reserve Bank’s approach is that all these adjustments need their prior approval. Where the approvals in place don’t fully cover the foreign loan amounts, they can usually be obtained afterwards. However, it is far better, cheaper and faster to manage loan account activity pro-actively and obtain approvals upfront.

XConsult, who is working in association with Exceed Trust, is able to assist clients with obtaining the necessary approvals and removing the ‘to-and-fro’ inefficiency. A guideline document on Regulations 1, 3(1).e and 3(1).f is available on request from michael@xconsult.co.za.

For further information, please contact Michael Heath on tel. 082 326 8480 or 021 873 1128.

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