ERP Implementation projects

ERP Implementation

Key insights of ERP Implementation

  • Use and identify key performance indicators (KPI’s) to understand and measure the success of the ERP implementation.
  • Identify the critical success factors of the project implementation.
  • Be clear about the ERP functions and how this can be translated to your business processes.
  • Look at industry expertise when searching for a Vendor.
  • Make sure you have a clearly documented data migration plan.
  • To obtain optimal efficiency from the ERP software it is important that the employees understand how to use the product.
  • Get an executive to buy into the implementation and to act as executive sponsor.
  • Many ERP projects’ success depends on the willingness of the users to adapt to the new way of doing things.
  • Ideally you would want to identify an ERP champion in your organisation who can offer post-implementation support to users.
  • It is important to align the implementation project with the business strategy and goals.

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What is Enterprise Resource Planning (ERP)

An ERP simplistically explained, is a way to plan the resources required to run the business. This is done by making use of ERP software applications. It helps companies to integrate all their business processes into one system. This gives the business an effective way of linking all the different departments like finance, manufacturing, distribution, sales, human resources, etc.

Some key considerations for your ERP implementation project

Why do you want to implement an ERP 

This should be the first step in your ERP journey. You need to know why you are going to do this. You should be able to identify the benefit(s) that the ERP system will be able to offer your business. Very often this can be translated into the Key Performance Indicators (KPI’s) of the business, either through future opportunities, cost savings, or efficiencies. KPI’s will differ from sector to sector and amongst different departments. These KPIs may be financial or non-financial indicators. It is therefore important to identify those KPIs before you start the implementation process to have a view of the real opportunity that the ERP can offer you. 

Know what you are getting into

You have to be clear in what the process of an ERP implementation entails and what the requirements on the business will be. Being unclear about the process and its requirements can lead to a failed ERP project. This means you need to be clear about the ERP functions and how this can be translated to your business processes. The best way is to map the functions and map and align it to your business processes. This will help you to understand the gaps. Also, what will you get additionally from the ERP and how will this impact your operations? Will you have to implement a new way of doing things and what is the learning curve that is involved with this?

Another important factor is the cost. This should be measured in accordance with the return on investment. Bear in mind that the cost of the ERP implementation is underestimated in ⅔ of implementations done. So do your sensitivity analysis to make sure you can run various scenarios during the implementation. The ROI should be constantly monitored against this during your implementation to understand if you are still on track. 

Vendor choice

Cheapest is not necessarily the best option here. When selecting a Vendor to assist you with your implementation there are a number of factors that you can consider. We would suggest that you firstly look at industry expertise. It is important to understand if the short-list of Vendors know how your industry operates. It makes it easier to communicate your requirements to the Vendor as they should already be familiar with some or most of the expectations.

Choose the right product

So you have mapped out your business processes by now. Now you have to choose the ERP software. The best fit option would be the product that you can best align with your business processes. Some ERP software are very industry-specific. Ideally, you want to compile a basket of products that focus on your industry. Bear in mind that it will be very difficult to find an exact fit. So, you will either have to adapt your processes or look for a product that allows you to do some customization. Customization adds to your cost so make sure to factor that into your ROI analysis. That said, bending the system to an old way of doing things may not have an effective outcome, so consider this carefully in the planning process. Also, have a look at our Scalability section below.

Data migration strategy

Make sure you have a clearly documented data migration plan. Assign an owner to this part of the implementation and make sure that you have developed the necessary controls to migrate the data from the legacy system to the new ERP. Data integrity should be maintained throughout the migration and it can be useful to have approval processes built into the migration phase. Data migration also offers a great opportunity to clean up old data to eliminate the possibility of garbage in, garbage out scenario.

Ensure enough time is budgeted for testing and training

Your new ERP system should be thoroughly tested to make sure it meets business and user requirements. This can avoid additional costs down the road. So budget for this from the start to avoid lengthy overhaul procedures after implementation. 

Training forms an essential part of the implementation project. To obtain optimal efficiency from the ERP software it is important that the employees understand how to use the product. Place emphasis on this as it will also make the adoption process easier for employees. Most projects fail because the users fail to adapt to the change in circumstances that the new ERP offers to the business.

Make sure you get buy-in on your project plan

Get an executive to buy into the implementation and act as executive sponsor. This will make adoption across the business functions easier. Develop a clear project plan that has clear buy-in from key decision-makers. The project plan should at least cover aspects of the implementation such as timelines, hardware requirements, project team, data controls, etc. The project plan should be monitored and measured against key milestones during the project to ensure deliverables are met or to readjust your goals.

Change management

Many ERP projects’ success depends on the willingness of the users to adapt to the new way of doing things.  Proactive change management can play a significant role in getting users ready for the new role. Incorporating a change management strategy into the project plan can make a significant difference. Make sure to understand the different elements of user success in an ERP implementation and mitigate risk factors with a proper change management strategy.

Scalability

It is important to align the implementation project with the business strategy and goals. You ideally want to avoid any problem down the line where the ERP cannot accommodate your business strategy. Based on your future goals will the ERP be scalable enough to grow and change with your business?

Security

ERP security plays an important role in protecting your business data. So from the start, this should be a major discussion point in terms of what your business requirements are. Ensure that your ERP can accommodate these requirements. Other considerations will be how you are planning to store your information on-premises, hybrid, or cloud and how this fits into your business security strategy.

Post-Implementation support

Ideally, you would want to identify an ERP champion in your organization who can offer post-implementation support to users. The ERP champion can work with the ERP vendor to ensure things run smoothly and ensure any issues are addressed and resolved. Don’t neglect post-implementation support as is very often the case many unknowns can arise during this stage. Having someone who can address these unknowns ensures business continuity.

Benefits of ERP

Business flow consolidation

ERP allows all business processes to be centralized under one system. This allows greater control in the business and allows for better planning of resources. Having one consolidated and integrated workflow allows the business to save cost, address wastage and have ownership of functions within the business.

Better communication

With an integrated way of doing things employees have to communicate with each other across departments allows for more interdependence. If a workflow is disrupted on one end this will have a bearing on the other departments’ ability to complete their task.

Greater control and visibility over costs

ERP presents a birds-eye view of the commitments within the business. You gain a view right from the input process right up to the output process within one centralized workspace. This allows businesses to understand where they are spending their time and money and what the results of all of those efforts are in a measurable and visible manner. Businesses can plan or reduce costs in unwanted areas or build in more efficiencies for unproductive resources such as materials, capacity, lag times, etc.

Improved execution of tasks and increased productivity

User activity and productivity can be traced through the ERP systems. This allows organizations to assess and evaluate the success rate of task completion and focus and align people and other resources to be more productive.

Why ERP projects fail

Failure of employees to adapt or change

We have mentioned that a critical success factor in the implementation of an ERP system is the ability of users to adapt and change to the new roles and responsibilities they will have to adopt. Change management is crucial to this and is already mentioned in this text. 

Lack of commitment of key stakeholders

Key stakeholders in the organization play an important role in the motivation of other stakeholders in the implementation process. That is why we suggest that an executive sponsor joins the project team. This should be a key decision-maker in the organization as this will ensure that everyone gets on board with the new ERP system.

Completion and implementation goals are unrealistic

Be realistic about your organization’s expectations. Are the goals feasible, especially if it is the first time that you have entered into such a project? Continuously monitor and evaluate the goals and clearly communicate the current status of the project to the key stakeholders. Make sure that their expectations are managed realistically as a complex project has many unknowns up to the go-live date.

Inadequate budget

Many ERP projects underestimate the budget that is required to fully complete the project. This is due to a lack of proper planning and understanding of system requirements. Make sure that you do a sensitivity analysis based on different scenarios. Make sure you fully understand the entire life-cycle of the project and attach a cost to each component of the project life cycle. This will give you a clear view of which areas you have to build some unknowns into.

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Be aware – your Crypto holdings will be a big focus point for SARS this year

Crypto tax
Credit: Unsplash

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Key insights

SARS view Crypto as an asset of intangible nature and therefore not as a currency;

As part of the completion of your income tax return you have to disclose whether you held an investment in Crypto;

If you have not declared your tax return, or decide not to, an administrative penalty can be imposed;

If you understate your tax return, SARS will assess your understatement against six criteria to impose a penalty;

A Voluntary Disclosure Programme is available to taxpayers in respect of all taxes administered by SARS;

If you receive an income other than a salary, allowance, or advance you should register as a provisional taxpayer;

You have to differentiate whether you are earning an income from Crypto or holding it as an investment to determine how much tax you will pay;

Normal income tax consequences of Crypto would mean that you will be subject to a maximum of 45% tax rate according to the tax sliding scales for individuals;  

The consequence of CGT is that you can be subject to anything from 7.2% – 18% in taxes for capital gains.

Introduction

SARS has recently announced that they will have a specific focus on undisclosed holdings in Crypto in the upcoming tax season. Treasury and the South African Reserve Bank have increasingly put measures into place, and is still in the process of doing so, to be able to monitor Crypto activity. SARS can track Crypto activity, among other measures, through bank transfers and other digital footprints that investors and traders of Crypto leave. 

International tax reporting among tax authorities from different countries is something that has been in place for a long time. This will continue to evolve and reporting on Investors that hold significant amounts of Crypto will be more prevelant. It is however true that tax regulation has moved very slowly in comparison to the evolution of Blockchain technology. This has created tax uncertainty around the treatment of certain events when it comes to Cryptocurrency.

SARS view on Crypto

SARS view Crypto as an asset of intangible nature and therefore not as a currency. This is important as it determines the tax consequences for holding these digital assets. SARS has already started to issue audit letters to taxpayers requesting information on their Crypto investments. When you complete your Income Tax Return, you are required to disclose whether you have held an investment in Crypto. You also need to disclose whether you are a miner or if you have been paid Crypto. Non-compliance and tax evasion can have severe consequences for a taxpayer. It is, therefore, important to ensure that you have disclosed the necessary information and pay the outstanding taxes.

Treasury estimates that there are close to 2 million retail investors in Cryptocurrency in South Africa with a daily flow of around R2 billion in transaction volumes. Many of these investors invest through platforms such as Luno, Ovex, and VALR and with bundle investing in Revix. 

Consequences for non-compliance

If you have not declared your tax return, or decide not to, an administrative penalty may be imposed. An administrative penalty is a fixed amount penalty. It is based on the failure to submit a return. The amount can range from anything between R250 to R16 000 per month for as long as the non-compliance continues.

If you understate your tax return, SARS will assess your understatement against six criteria to impose a penalty. These six criteria are (1)  reasonable care not taken in completing a return; (2) no reasonable grounds for the tax position taken; (3) an impermissible avoidance arrangement; (4) gross negligence; (5) intentional tax evasion; (6) substantial understatement. The penalties can range from anything from 5% to 200% on the tax differential.

So what will happen if you have not disclosed your Crypto Income or profits in previous tax years?

A Voluntary Disclosure Programme is available to taxpayers in respect of all taxes administered by SARS. It aims to encourage taxpayers to come forward on a voluntary basis. You will be able to regularise your tax affairs with SARS. You will also be able to avoid the imposition of administrative penalties and understatement penalties. A taxpayer may apply to the VDP for voluntary disclosure relief. The following relief is available:

  • Sars will not pursue criminal prosecution for a tax offence arising from the ‘default’  
  • Relief in respect of understatement penalties (certain limitations may apply);  
  • 100% relief in respect of an administrative non-compliance penalty, but excluding penalty for the late submission of a return. 

What about provisional tax?

Provisional tax is not separate from your normal income tax. Provisional tax is purely paying your income tax in advance. If you receive an income other than a salary, allowance, or advance you should register as a provisional taxpayer. You have to register as a provisional taxpayer if you are receiving an income by way of Crypto. You will most likely have to register for provisional tax if your intention is to trade Crypto. If you receive Crypto for mining or rendering of services you also need to register for provisional tax. If you are a Crypto-investor, you will not be required by SARS to register for provisional tax.

You may be exempt from paying provisional tax if both the following two conditions are met:

  • Income from your additional activities does not exceed R30 000 per tax years
  • Your taxable income does not exceed the tax threshold for the year, currently R83 100

How is your Crypto taxed?

If you are a South African citizen all residency-based rules for tax purposes will apply. That means you will be taxed on your worldwide income. The major consideration is the manner in which you will be taxed. That means you have to differentiate whether you are earning an income from Crypto or holding it as an investment. If you are earning an income from Crypto you will be taxed in accordance with the normal income tax rates. If you are holding Crypto as an investment to realize potential appreciation in value, then you will be subject to Capital Gains Tax (CGT).

Normal income tax consequences of Crypto would mean that you will be subject to a maximum of 45% tax rate according to the tax sliding scales for individuals.  The consequence of CGT is that you can be subject to anything from 7.2% – 18% in taxes for capital gains. Any capital losses can be utilized against other capital gains. If you are not able to utilize the loss in the current tax year you are allowed to carry this forward.

Certain expenses can be deducted from trading income or the rendering of services. Mostly these expenses need to have been incurred in the production of the income. If you are a minder this will typically be internet costs, electricity, hardware etc. If you are an investment holder you are allowed to deduct the base cost of the Crypto from the proceeds. The base cost is essentially the cost you incurred in the acquisition of the investment.

The uncertainties of Crypto-tax

There are still some uncertainties around Cryptocurrency. There are events that taxpayers need to take caution with, as this can potentially be a tax trigger. When switching Crypto you are replacing one value for another Crypto value. SARS may see this as a disposal event. This may have a bearing on your tax liability, especially if you are an investor with a long-term view. The switching event or trigger may lead the gain to be included in your income. Therefore it will not be regarded as a capital gain, especially if switching is done quite regularly.

Certain trigger events

Miners are rewarded for verifying transactions on the blockchain network. This reward is regarded as income for tax purposes. Income is taxed at the earliest of accrual or receipt of the value and is subject to normal income tax. The miner will be taxed according to the normal tax tables. The subsequent treatment of the Crypto is then determined on the basis of the intention of the miner. This is either as holding it as an investment or trading with Crypto.

Staking also creates some uncertainty. Staking is where Crypto is lent to the network in return for interest. On interest earned, there is usually an exempted amount of R23 800 that can be applied for individuals. There is still no clarity from SARS on whether this can also be applied to Crypto.

On emigration of a South African citizen, there is usually a disposal event that occurs. This event is on the date that the taxpayers officially emigrates from South Africa. That means if you hold any Crypto on the date of emigration there will be potential tax consequences. The amount of Crypto that you hold will be deemed to be disposed of when you emigrate.

If you need tax advice please get in touch with us here.

Tether: A safe haven for Cryptocurrency volatility?

Tether: USDT

Price: $1,0006

Market Capitalization: $62,281,865,489.03

Supply: 64,476,291,004

Hong Kong-based Tether is a dominant cryptocurrency in the crypto market. Launched by Reeve Collins, Brock Pierce, and Craig Sellars in 2014, it first started out as Realcoin. Tether issues stablecoins which they peg against the U.S. Dollar. The tokens mirror the price of the U.S. Dollar by being pegged against the U.S. Dollar. Therefore by buying a token, in fiat currency, a new Tether is minted for every U.S. dollar that is deposited. The U.S. dollars are then stored in cash and cash equivalents, thereby maintaining their value.

The advantage of the Tether cryptocurrency is that investors and crypto exchanges can effectively park their money in the stablecoin without having to liquidate it to an actual fiat currency. This method is used to store value. It also protects investors from fluctuations in other cryptocurrencies which can be highly volatile.

Market Capitalization

At the time of publication, the market capitalization of USDT stood at $62,281,865,489.03 with close to $57 Billion in trading volume of the last 24 hours. This mainly due to the high demand for Crypto exchanges. The significance of this is that it has almost doubled over the course of three months. There is an increasing demand for the use of USDT as a medium of exchange combined with its ease of use over a diversity of blockchains.

tether market capitalization

Source: CoinMarketCap

Price movement

tether price

Source: CoinMarketCap

The price for one USDT is trading over just $1 at $1.0006. The last 7 days show a low of $0.9998 and a high on price of $0.0015 and recovering to more stable levels at the time of publication. Some real criticism has developed over the last few months around the ability of Tether Inc to be able to back their claims of a 1:1 like for like value exchange. What has emerged recently is that it is claimed that the value of 1 USDT has only been secured by a 74% cash reserve. This was revealed after the state of New York banned Tether from trading in the State. If anything this has not deterred the exchanges and crypto-investors from using USDT.

Future outlook

There has been a lot of criticism around the claims made by Tether that they are able to provide a like for like U.S. Dollar exchange for every token that is minted. Their exclusion from New York also creates more negativity for the Hong Kong Incorporated entity. They have however largely stayed away from the U.S. market and focused predominantly on Asia and Europe which turned out so far to be successful for them. They also include Euro and Yen in their portfolio. Investor sentiment is largely neutral around the coin and the recent increases in trading volume do not show the impact of its sentiment tilting towards a bearish view.

The dominance of the stablecoin is also evident with the closest rival being USD Coin with a market capitalization of $23 Billion. The dust, for now, has settled around their transparency issues and avoiding being audited by auditors.

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Dogecoin News: This weeks dogecoin cryptocurrency analysis

Dogecoin cryptocurrency

Dogecoin: DOGE

Price: $0.3689

Market Capitalization: $47,908,682,024

Coins in supply: 129,881,831,420

Notable Events of the week

The Bill Markus and Jackson Palmer created Dogecoin cryptocurrency that features a Shiba Inu dog, has seen some real volatility in price movement over the last week. Tweets by Elon Musk around Bitcoin and the Tesla breakup created much of this volatility. They recently announced that Tesla will no longer be accepting Bitcoin, due to its high energy usage in mining Bitcoin. 

Further news this week was that Coinbase will make the meme inspired cryptocurrency available on the Coinbase Pro trading platform. This created much excitement and had a significant impact on the trading price.

Market capitalization

Crypto exchanges listed Dogecoin as the 6th largest cryptocurrency by market capitalization at over $U.S. 47 billion. Given that the market capitalisation at the beginning of May reached close to $U.S.95 Billion, this has been a significant decline from those levels. The China announcement created most of the decline. The announcement made by China was that they will no longer allow financial institutions to provide services related to cryptocurrencies.

Dogecoin market capitalization
Source: CoinMarketCap

Price movement

At time of writing the Dogecoin price was around 36 U.S. cents up from 31 U.S cents at the start of the week, but down over 13% from the previous day. At its high the cryptocurrency traded around 42 U.S., which was around the announcement of the Coinbase news, and at its lowest at 28 U.S. cents.

Dogecoin Price
Source: CoinMarketCap

Volumes traded

It has had a quick entry into the Top10 listed cryptocurrency exchanges with well over 129 billion coins created to date with most of its popularity amongst retail investors. Interestingly enough many of the coins traded had eastern trading times, which amounts to about 45% of volume traded. Close to $U.S 7 billion was traded in the last 24 hours. 

Other cryptocurrency comparisons

Besides various factors affecting the price of Dogecoin, various experts still consider the meme-coin to be closely correlated with Bitcoin. Compared to Bitcoin, as the number one listed coin, the market capitalization is around $U.S. 688 billion versus a dogecoin market capitalization of $U.S. 47 billion for Dogecoin.

Bitcoin, as of time of writing, was trading at $36,733.05. This is 1.91% higher from a week ago. In contrast, Dogecoin had a 15.84% growth in trade value over the same period.

Future expectations

The question is whether DOGE will be able to recover to early May levels. Sentiment is rather bearish at the moment, with many investors indicating that they believe there are further price declines to be expected in the short run. Unless that changes quite soon, by say an Elon Musk posts or social media updates, recovery may take longer than expected. 

To create some additional stimulus for trading DOGE, they announced that dogecoin will be giving away $1.2 million worth of prizes to anyone who traded $100 in DOGE by June 2021. What this will do for the trading price remains to be seen.

The Finance Block

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Blockchain Technology: A necessary part of Audit

Audit Blockchain Technology

High-level insights

  • More and more audit engagement teams must consider Blockchain technology as part of their audit planning.
  • Projections are that the Blockchain market will reach close to US$40 billion by 2025.
  • The greatest beneficiaries will most likely be the banking and financial services sectors.
  • Blockchain is a certain type of database
  • Blockchain stores the information in structured blocks
  • When value needs to be exchanged in the Blockchain, all nodes on the Blockchain network gets involved by checking the validity of the transactions
  • There are two main types of Blockchains: permissioned and permissionless Blockchains
  • Admittedly Blockchain is not the perfect system and has its disadvantages.
  • The auditor needs to be able to obtain sufficient appropriate evidence, so the Auditor is able to express an opinion.
  • Can The Blockchain fundamentally support all the statements made by management?
  • The manner in which the transactions on the blockchain initiated, processed, authorized, and recorded are fundamental to control risk
  • Blockchain may not report on estimates that management is making about certain elements in the financial statements
  • Blockchain risks to be addressed:
    • Money Laundering
    • Related party transactions
    • Internal Controls
    • Tax treatment
    • Measurement


Introduction

The rise of the Blockchain over the last few years has created a space where many industries will most likely be completely or partially disrupted by the Blockchain. The future of audit is also fundamentally impacted by the Blockchain. This is evident from the growing popularity and use cases of the Blockchain. More and more audit engagement teams must consider this technology as part of their audit planning.

We have seen a growing number of use cases in the Financial Services industry, The Healthcare Industry, the Public Sector, and Manufacturing. Some are of the opinion that the Blockchain can ultimately erode the need for an Auditor completely. It is therefore worth having a look at the functioning of the Blockchain and the purpose of an Auditor.

What is the Blockchain?

It is useful to understand what Blockchain is before diving into the audit specifics. Simply put, Blockchain is a certain type of database. It is different in the sense that it stores the information differently than traditional databases do. A traditional database stores information in a table format whereas Blockchain stores the information in structured blocks. Each time the block is filled with information by the users, a new block is created.

The data stored on the blockchain is encrypted by using a cryptographic hash function. A cryptographic hash function is a security feature that authenticates the information on the Blockchain. Each new block created on the Blockchain contains the hash of the block header of the previous block in addition to creating its own hash. This attribute makes it therefore very difficult to hack the Blockchain.

Databases are stored on powerful computers so that it makes it easier to house a large collection of information. It can therefore be seen as a digital ledger that captures different transactions by various different parties that is on the blockchain network.

The key attribute of Blockchain is its decentralized nature. This means it needs more than one computer to store the Blockchain. These computers are spread all across the world and not owned by one single individual.

How does Blockchain work?

There are different participants on the Blockchain called “nodes” and each node maintains a digital copy of the information or ledger. Every entry into the Blockchain is a transaction. A transaction is a representation of value e.g. smart contracts, cryptocurrencies, or physical goods.

When value needs to be exchanged in the Blockchain, all nodes on the Blockchain network get involved by checking the validity of the transactions. The validity check by the nodes is called a consensus algorithm. Once all the nodes are happy, all the digital ledger copies are updated with the transaction.

In this way, the Blockchain is used in a decentralized way. It is important to note that the Blockchain keeps and entire history record off all transactions.

Types of Blockchains

There are two main types of Blockchains. They can be referred to as permissioned and permissionless Blockchains.

Permissioned Blockchains are “closed” or “private” Blockchains whereby access can only be granted upon permission. These are usually applied within a certain value chain of business like a supply chain. It has some drawbacks in that it is not completely decentralized as other “open” Blockchain” would be.

Permissionless Blockchains are “open” to the public. Therefore any potential user can access the Blockchain. An example of this is typical cryptocurrency Blockchains such as Bitcoin, Ethereum, or Dogecoin.

Growth of Blockchain

The growth of Blockchain is imminent and recent research suggests considerable growth in the Blockchain market over the next few years.

It is projected that the Blockchain market will reach close to US$40 billion by 2025. The compound annual growth rate from a 2020 base (CaGR) is projected to be close to 68% (Source: MarketsandMarkets). The greatest beneficiaries will most likely be the banking and financial services sectors. The biggest contributors can be seen below and are projected to be the United States, Europe, and the Asia Pacific. Much of the research suggests that the majority of spending on new Blockchains will take place in Permissioned Blockchains.

Use cases for Blockchain in banking and Finance.

The most recent use case in banking and finance that the Blockchain has been utilized for, is as a money transfer tool. The Blockchain uses its decentralized ledger system for peer-to-peer money transfers. This reduces the cost considerably and has no cross-border limitations, which means that the sender and receiver can be in different countries.

Financial institutions are also subject to KYC (Know Your Customer) requirements in the United States, or FICA requirements in South Africa. The Blockchain also presents an opportunity for financial institutions in this area, as identity verification can be reused for other services in a secure manner.

Another recent use case has been to use blockchain as a trading platform. Current trading platforms are time-consuming with high costs associated with this. Blockchain enables the real-time transfer of ownership of a share accompanied by much lower transaction fees.

Advantages and disadvantages of Blockchain

Admittedly Blockchain is not the perfect system and has its disadvantages. Advantages and disadvantages should be weighed up against each use case.

Disadvantages:

  • Cost. The cost of operating and implementing the blockchain can become expensive. Power usage has been the main driver in operating costs. Specialized development is required for custom permissioned Blockchain which can increase the cost of implementation.
  • Regulation. Regulation around Blockchain is still very uncertain. Central governments may oppose certain aspects of the use of blockchain technology if found that it provides a risk to a country. This is still very underdeveloped are with still many future changes expected.
  • Security. In particular security around private keys. Users have to secure their own private keys to ensure safe custody of their digital assets.

Advantages:

  • Traceability. The blockchain creates a trail that documents the journey of assets.
  • Efficiency. Speed can be increased through the automation of transactions, for example, by using smart contracts. Organizational processes can be enhanced through the use of Blockchains which traditionally required a high level of human input.
  • Transparency. Organizations with access to the Blockchain have a full view of the transactions on the Blockchain. This is due to the distributed ledger that the Blockchain uses

The Role of the Audit in the Blockchain

The role of the auditor is to express an opinion on the Financial Statements. Our role as Auditors is to establish if the financial statements are materially misstated, whether due to fraud or error. On the other hand, the management of a company makes certain statements about these financial statements e.g., that the transactions in the financial statements occurred and are accurate, or that certain balances are valued correctly. The auditor needs to be able to obtain sufficient appropriate evidence about these statements, so the Auditor is able to express an opinion.

Does the Blockchain eliminate the need of the Auditor then?

The first question is then, can The Blockchain fundamentally support all these statements made by management, at any particular time? In some cases, it may and in other cases, it may not. Take for example where a buyer sends a seller Bitcoin for a product purchased. We can certainly establish that the transaction occurred on the Blockchain. But do the goods pass hands? When should the company recognize the transaction? i.e., when the goods were delivered by the seller and are the value of the goods correct?

Secondly, another fundamental concept that the Auditor makes management aware of, is any weakness in their control environment. Therefore, how were the transactions on the blockchain initiated, processed, authorized, and recorded? Fraud can still very easily be perpetrated by a company. If the necessary company internal controls have not been in place or have been overridden. This has a direct impact on the financial statements.

Thirdly, much of what management reports in the financial statements are based on estimates. Once again, the Blockchain may not report on estimates that management is making about certain elements in the financial statements. Estimates are of particular importance to investors. Especially. in making their investment decision or being able to get a sense of the outlook of the business.

Potential risks of the Blockchain in the audit scope

As with any technology there a risk that has to be appropriately be addressed as part of the audit. Appropriate risk responses should therefore be developed to address these risks is seen as significant as part of the audit plan. 

Illicit trade and money laundering. This has been highlighted as one of the main areas where Blockchain has been utilized in the black market. While confidentiality is important for users on the Blockchain, this also the key attribute that allows for this type of illegal activity to take place. 

Related party transactions. In the Blockchain Audit environment, the counterparty is not necessarily known. You just have digits of who the counterparty is. This makes it extremely difficult to understand with whom a transaction took place. 

Internal control weaknesses. In the Blockchain, the control environment is spread across the entire network. All nodes there need to have the necessary controls in place to be able to rely on these controls. Controls around private keys will also be important. This presents a security threat. The private key represents ownership of the digital asset. 

Tax treatment of transactions. There is still much uncertainty around the tax treatment of many of the transactions that pass the value on the Blockchain. Are all digital assets treated similarly such as stable coins, tokens, etc. when they inherently are different? 

Measurement of digital assets. Complexities start to arise where it is difficult to determine the value of a digital asset that has to be reported in the financial statements. Not all digital assets are traded as frequently, and valuation becomes quite complex with new digital assets.  

Conclusion

There is no doubt that the use of Blockchain will increase in the future due to the many advantages it has. Blockchain will enhance efficiency and enable real-time information to be available for decision-makers. It may even eradicate much of the current reporting requirements out there due to greater transparency in the Blockchain.

The role of the Auditor will revolve around Blockchain technology, and the Auditor will have to adapt and learn new skills to meet the new demands of a Blockchain Audit. Much of the work that the Blockchain Auditor will have to do in an audit is to understand and respond to the risk associated with a particular blockchain. The advantage to the Auditor is that it may be possible for the Auditor to continuously audit a company. It also eliminates many of the manual processes and activities around performing audit procedures. These procedures can be labor-intensive and time-consuming. If anything, the Blockchain has the potential to enhance the robustness of the capital markets, a place where the Auditor plays an integral role. 

If you need audit services or advisory services, get in touch with us here.

Online company registration: What you need to know

Online company registration

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Introduction

Online company registration has become easier through enhanced processes by the Companies and Intellectual Property Commission (CIPC) and online agents delivering online company registration as a service. There are however several considerations that you need to think about before just going ahead and registering your Pty Ltd.

There are various legal forms of entities that you need to consider before your online company registration.

Perhaps to start off with – you do not necessarily have to incorporate a business. In South Africa you can trade as a Sole Proprietor or Partnership (where two or more people come together to form a business), which means you trade in your own name and not within a company structure. There are many advantages and disadvantages but can be a great way to start. Later, you can incorporate your trade. However, if you prefer to go the legal form route, you have the following options:

Private company – this is the most common type of company and is abbreviated as a “(Pty) Ltd”. It is separate from the owner/(s) in that it has its own rights and duties. Shares for this type of company is not publicly traded. There should at least be one director and one shareholder.

Public company – this form of company is similar to that of a private company. The major difference is that its shares may be traded publicly, and it must have at least three directors and seven shareholders. It is abbreviated by “Ltd”.

Personal liability company – this type of company is generally used by professional associations such as attorneys, engineers, accountants, and medical doctors. It is abbreviated by “Inc”.

Non-profit company – as the name suggest, this type of company does not have a profit motive. It is established for the benefit of the public or for a social objective. It is abbreviated by “NPC”. To incorporate this type of entity there should at least be three directors.

What will the company name be?

Not any business name can be chosen for your incorporated business. A name search should first be done to ensure that it is not in conflict with current business trading names in South Africa. If your name is available, it can be reserved, or filed with the business registration.

How many authorized and issued shares will the entity have.

This is something that can be changed later but to save you the effort, it is useful to think about this early on. A share is the right of ownership that a shareholder holds in a business. The more shares, the greater the claim to ownership. So, if you are thinking about bringing in other shareholders later it may be worth issuing less shares than what is authorized in the Memorandum of Incorporation. This may be for various reason such as bringing in more funding or acquiring more specialized skills.

How will the shareholder structure look?

The way the shares are held my have an impact on the Founders exit strategy. This must be planned from the very beginning. The tax consequences may be different for having shares in your personal name, a holding company or trust. Selling shares carries capital gains tax consequences and this may impact your liability to the Receiver of Revenue.

Be aware of other regulatory requirements.

Various industries have specific requirement before you can start trading, for example, if you are starting a security company, you also need to register with The Private Security Industry Regulatory Authority (PSIRA). There are also various state level registrations that apply to all business that you will need to consider, for example, If you are an employer, you will be required to register for payroll taxes and Unemployment Insurance (UIF). Make sure you know what these industry and state level requirements are before your online company registration.

If you need assistance online company registrations, get in touch with us here.

The benefits of outsourced accounting services

Outsourced accounting services

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Introduction to outsourced accounting services

Outsourced accounting services are a popular method used by companies. Companies contract with an accountant to offer similar services as the day-to-day accounting department. Outsourced accounting services hold many benefits. Especially to new start-ups, businesses in an upward growth trajectory, or just simply businesses that want to be leaner and focus on their core functions. Below we list our top 5 benefits of outsourced accounting services.

Benefit #1: Cost savings

Outsourced accounting services provide cost savings. There are no lengthy contracts, additional benefits, leave payouts, and other overheads associated with employing someone on a full-time basis. You will only be paying a fraction of what you would normally by employing a full-time accountant.

Benefit#2: Access to financial experts

Such services provide small business access to qualified and experienced professional accountants that can guide you in your business journey. The expertise of these professionals can assist you in making sound financial decisions to enable your business to grow.

Benefit#3: Release of capacity and resources

Many times, the onus of tax and other statutory compliance falls on the small business owner or other individuals. These individuals are actively involved with the core functions of the business. These services release and creates more capacity and resources so that these individuals can focus on their core functions.

Benefit#4: Compliance requirements

South Africa has an ever-changing compliance environment with tax law changes and amendments, Companies Act requirements, Labour Act requirements, etc. These services provide the small business with a pathway of success when it comes to meeting your small business compliance obligations. Outsources accountants stay up to date with the recent changes and requirements as part of their continuous professional development.

Benefit#5: Access to best-in-class systems

Outsourced accounting services provide businesses with the best accounting tools and systems available to streamline and automate processes. Access to cloud accounting software, data-entry automation, and inventory management tools, reduces the burden of implementing expensive software. You also won’t be incurring additional costs by employing additional resources.

If you want to hire an outsourced accountant, het in touch here.

The Blockchain and the future of audit

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Introduction

The rise of the Blockchain over the last few years has created a space where many industries will most likely be completely or partially disrupted by the Blockchain. The future of audit is also fundamentally impacted by the Blockchain. This is evident from the growing popularity and use cases of the Blockchain. More and more audit engagement teams must consider this technology as part of their audit planning.

We have seen a growing number of use cases in the Financial Services industry, The Healthcare Industry, the Public Sector, and Manufacturing. Some are of the opinion that the Blockchain can ultimately erode the need for an Auditor completely. It is therefore worth having a look at the functioning of the Blockchain and the purpose of an Auditor.

The Role of the Audit in the Blockchain

The role of the auditor is to express an opinion on the Financial Statements. Our role as Auditors is to establish if the financial statements are materially misstated, whether due to fraud or error. On the other hand, the management of a company makes certain statements about these financial statements e.g., that the transactions in the financial statements occurred and are accurate, or that certain balances are valued correctly. The auditor needs to be able to obtain sufficient appropriate evidence about these statements, so the Auditor is able to express an opinion.

Some considerations

The first question is then, can The Blockchain fundamentally support all these statements made by management, at any particular time? In some cases, it may and in other cases it may not. Take for example where a buyer sends a seller Bitcoin for a product purchased. We can certainly establish that the transaction occurred on the Blockchain. But do the goods pass hands? When should the company recognize the transaction? i.e., when the goods were delivered by the seller, and is the value of the goods correct?

Secondly, another fundamental concept that the Auditor makes management aware of, is any weakness in their control environment. Therefore, how were the transactions on the blockchain initiated, processed, authorised, and recorded. Fraud can still very easily be perpetrated by a company. If the necessary company internal controls have not been in place or have been overridden. This has a direct impact on the financial statements.

Thirdly, much of what management reports in the financial statements are based on estimates. Once again, the Blockchain may not report on estimates that management is making about certain elements in the financial statements. Estimates are of particular importance to investors. Especially. in making their investment decision or being able to get a sense of the outlook of the business.

Conclusion

There is no doubt that the Blockchain will enhance efficiency and enable real-time information to be available for decision makers. It may even eradicate much of the current reporting requirements out there. The role of the Auditor will evolve around the Blockchain system and the Auditor will have to adapt and learn new skills. If anything, the Blockchain has the potential to enhance the robustness of the capital markets, a place where the Auditor plays an integral role. 

If you need audit services, get in touch with us here

Trusts as an estate planning tool

Monthly Accounting & Tax Compliance

Introduction

Wealthy individuals and families sometimes use trusts as an estate planning tool. Trust founders establish trusts for a specific purpose, like for a social welfare project, or for the benefit of a beneficiary.

General functioning of a trust

A trust founder creates a trust and then appoints trustees to act in a fiduciary capacity. The trustees play an important role in the administration and management of trust capital and funds. The assets held in the trusts generate income and capital for the trust. The trustees may distribute this then to the trust beneficiary or towards a specific purpose. 

Trusts function as their own legal “person” and any taxable income that is attributable to the trust will be taxed at the income tax rate set out for trust. Any income or capital that the trust, therefore, does not distribute. will be taxed in the trust.

Different types of trusts

Inter vivos-trust

An Inter Vivos trust is created during the lifetime of a trust founder and also is the mechanism most commonly used as an estate planning tool. In many instances, the trust will receive a donation, and specific tax consequences apply to this donation.

Mortis causa-trust

Creating a trust according to a will after the death of a person is called a Mortis causa-trust. The purpose of this type of trust is to be a mechanism to look after the family of the deceased. Assets are usually bequeathed, in line with the will of the deceased, to the trust. 

Trust from a tax perspective

A special trust

In brief, the tax rates that apply to a special trust will be based on the progressive tax scale that is applicable to individuals, the lowest tax rate of which is currently 18%. There are two categories of special trusts and they are trusts that are:

  1. In accordance with the will of a deceased, a trust should be formed – given that specific conditions have been met
  2. For a person with a disability with the sole purpose of providing for that person, also with specific conditions attached.

A general trust

Trusts are regarded as a general trust if the trust does not fall within the definition of a special trust as described in s1 of the Income Tax Act 58 of 1962. The current tax rate for general trusts is 45%.

Conclusion:

You will have to give specific attention to the tax consequences of the donor and founder of the trust. It may be that the trust income and capital distributed to the beneficiaries will be taxable in the donor’s hands in accordance with s7. S7C has been implemented as an anti-avoidance measure to reduce the impact of specific circumvention of estate and/or donations taxes and should be carefully considered.

If you need tax advice on trusts, get in touch with us here.

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Investment in a new manufacturing machine: important considerations

Virtual CFO Services
Introduction

Here we explore the question of whether it is as easy as buying a new manufacturing machine because the old one has served its purpose or it is time for expansion and new manufacturing machinery may be required. Investment in a new machine comes with challenges. A new purchase should be made in line with the strategic view of a manufacturing company. From the outset, the distinction should be made between an expansion or replacement of manufacturing machinery. Both options carry different risk profiles and may make estimating cash flow harder.

Ultimately what you are trying to determine is whether your new machine will bring about the maximum profitable results. On the other hand, there may be an alternative option that suits you better. Alternatives may for e.g. be, selecting machine A over machine B or buying vs leasing.

Factors to consider when making an investment decision in a new manufacturing machine include

Cash flow considerations

To be more specific, which cash implications (both inflow and outflows) will the investment in a new machine bring about.

Some considerations may be:

  • The purchase cost of a new machine
  • The selling price proceeds of a machine you are replacing
  • The tax effect of selling an old machine
  • Incremental operating cash flows
  • The additional working capital commitments and or returns that the new machine will lock-in
  • End of investment cash flows such as selling the new asset at the end of its useful life
Taxation considerations

Manufacturing assets are allowed to deduct manufacturing tax allowances in terms of section 12C. There is a normal allowance that caters for a 20% deduction per year. Alternatively, an accelerated tax allowance that caters for a 40% first year and 20% for the next three years

Recoupmens in terms of section 8(4)(a) and or scrapping allowances in terms of section 11(0) bears a cash flow implication and should be modelled into the investment decision.

Capital Gains Tax implications may arise in situations where the asset was disposed of for more than its cost price. This will trigger the inclusion of 80% for manufacturing companies of the capital gain made into its taxable income.

Opportunity cost considerations

The opportunity forgone should also be included as a cost in the investment of new machinery. Opportunity cost is associated with choosing one alternative over another e.g. in the event that a new expansion would decrease demand on an existing production process. The cost of loss in demand should be included in the model.

Time value of money considerations

The value of a manufacturer’s investment in new equipment will be determined by both the size of the future cash flows generated by the new investment and the timing of those cash flows. It’s more favourable to receive cash flows sooner rather than later and therefore a higher premium can be placed on an investment that generates a greater return in a shorter period.

Conclusion

Investment in a new manufacturing machine requires careful consideration between alternative and financial analysis as the wrong investment decision may end up costing the company. Information is key in making decisions and being able to gather the correct information from reliable sources will be as important as the analysis itself.

If you need CFO services, get in touch with us here.

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