How South Africa's Blind Adoption of Global Standards Is Hurting Our Economy

Financial reporting standards like?IFRS?play a pivotal role in the global economy. But should South Africa fully adopt these international standards, or is there room for a more nuanced, locally-tailored approach??

This article explores the political dynamics behind global financial standards and makes the case for aligning South Africa’s financial reporting standards with its economic goals—namely attracting Foreign Direct Investment (FDI), growing GDP, and reducing unemployment. Essentially arguing for a South Africa-first approach, turning the world upside down, decolonising our minds and placing Africa as the true north.

The Role of the Financial Reporting Standards Council (FRSC) in South Africa

The?FRSC, established under the?Companies Act of 2008, is tasked with advising the Minister of Trade,?Industry and Competition on financial reporting standards. It’s a critical player in South Africa’s financial reporting supply chain, influencing how companies prepare financial statements that investors, lenders, and tax authorities rely on. Reliable, relevant, and comparable financial statements are key to attracting FDI, which, in turn, can drive economic growth.

The Political Nature of Financial Standards

While IFRS is widely adopted, it’s important to recognise that these standards are not immune to?political influences. Nations like China and India don’t simply adopt IFRS blindly and hence why South Africa needs a tailored approach to IFRS. Instead, they modify the standards to benefit their local economies, often through “carve-outs” or exceptions, whereas the?USA created their own financial reporting standards, albeit with a conversion approach. For instance:

• China?uses carve-outs to align IFRS with national interests, tailoring specific provisions to better support domestic industries.
• The U.S.?adheres to its own accounting standards (GAAP) but uses political clout to influence international standard-setting bodies in the name of convergence.
• India?similarly adjusts IFRS to suit its economic conditions, ensuring the country’s largest companies benefit from more flexible accounting treatments.

Why Full IFRS Adoption May Not Suit South Africa

For South Africa, our current approach of adopting IFRS wholesale could be counterproductive. The global standard-setting process is often driven by nations with vastly different economic priorities. South Africa, as an emerging market, should consider adopting a more convergent approach—one that aligns with its unique socio-economic circumstances. This involves selectively adopting IFRS where it serves national interests but carving out exceptions where it may hamper economic development.

According to?research, South Africa, New Zealand and Australia form their views on IFRS from the tone set by the UK, as an?extant power within the IASB.

The Case for Convergence as Opposed to Adoption

A convergence approach means harmonising local standards with international ones while maintaining flexibility. Research shows that countries using a convergence model—like China and India—enjoy higher FDI inflows and stronger GDP growth?than those that fully adopt IFRS. For example, the use of “historic cost accounting” in China during the 2008 financial crisis helped stabilize its economy, offering a compelling case for South Africa to consider similar strategies.

Similarly, standards such as IAS 38 may result in South Africa undervaluing its intangible assets.

A Sustainable Funding Model for the FRSC

To ensure that South Africa’s financial reporting standards are aligned with national interests, the FRSC requires a sustainable funding model. With adequate resources, the FRSC could actively engage in shaping global standards to better serve South Africa’s economy. This could include:

1. Developing carve-outs to IFRS that reflect South African market conditions.
2. Influencing international accounting standards from a position of strength, much like China and India have done.
3. Providing consultative support to the Ministry of Finance to ensure that financial reporting standards directly contribute to national goals like job creation, asset growth, and economic transformation.

Conclusion

The political nature of financial reporting standards means that South Africa should not be passive in their adoption. Instead, by empowering the FRSC with a clear national mandate and sustainable funding, South Africa can better align its financial reporting standards with its economic priorities. A tailored approach to IFRS—one that includes carve-outs and convergences—will help attract FDI, grow GDP, and reduce unemployment, ensuring that the country’s financial reporting standards truly serve its national interests (Why South Africa Needs a Tailored Approach to IFRS).?

Appendix 1: The Funding Model

Achieving IFRS independence will require a well-funded FRSC. The funding model involves the creation of a blind trust to receive donations from listed companies, ensuring a neutral and transparent process. This trust will distribute the funds to support research aligned with the Financial Reporting Standards Council (FRSC)’s goals.?

Here's how this model works:

Key Components of the Blind Trust Model

• Blind Trust Structure: The blind trust will be set up to receive donations from listed companies that have a vested interest in maintaining high-quality financial reporting standards. However, the trust ensures that the funds are distributed without direct influence from the donors. This design protects the neutrality of the FRSC and prevents any conflict of interest or allegations that companies could pay for favorable "carveouts" or adjustments to the standards.
• Distribution for Research: The primary function of the blind trust is to fund objective, Africa-first research that is focused on improving South Africa's economic outcomes—such as attracting FDI and enhancing GDP—through financial reporting standards. The research supported by this fund will explore areas such as how financial reporting standards can be adjusted to reflect local conditions without compromising on global comparability.
• Neutral and Objective Support for the FRSC: The funding model ensures that the research used to guide the FRSC's decisions is based on neutral, evidence-based insights. By directing the trust to fund research from independent sources, the model safeguards against undue influence from any single company or sector. This research will be used to support the FRSC’s ability to influence or adapt international standards (like IFRS) for the benefit of South Africa, without being swayed by corporate interests.
• Transparency and Accountability: By using a blind trust, the model maintains transparency in how funds are collected and distributed. The trust operates independently of both the donors and the FRSC, ensuring accountability in the allocation of research funds. This prevents any perception of companies "buying" their way into favorable reporting carveouts and keeps the focus on South Africa’s broader economic interests.

In essence, this funding model supports objective research to inform the FRSC’s work, while preserving the Council’s integrity and ensuring that any adaptations to financial standards are made in the best interests of South Africa’s economy, free from external pressure.