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“In the event that any uncertainty in the calculation of the PI Score is likely to have a significant impact on the final PI Score, it is recommended that the company obtains expert legal advice from a commercial law firm.”

Public Interest: tips on public interest scores AND PRACTICAL ISSUES TO CONSIDER

 

The Companies Act, No. 71 of 2008 (the Act) and the Companies Regulations, 2011 (the Regulations), introduced us to the new concept of the public interest score (PI Score). Each company is required to calculate a PI Score annually. The PI Score plays a role in, inter alia: determining which Financial Reporting Standards a company must use; whether a company must be audited or independently reviewed; which persons are eligible to perform the independent review, and whether a company must appoint a Social and Ethics Committee.

How should the public interest score be calculated?
In terms of Regulation 26(2), the PI Score is calculated as the sum of the following:

  • A number of points equal to the average number of employees of the company during the financial year
  • One point for every R1 million (or portion thereof) in third party liability of the company at the financial year end
  • One point for every R1 million (or portion thereof) in turnover during the financial year
  • One point for every individual who, at the end of the financial year, is known by the company to directly or indirectly have a beneficial interest in any of the company's issued securities.

This calculation should be done for each company individually and not at a consolidated group level.

Practical issues to be considered when calculating the public interest score

1. Average number of employees
The Act provides no guidance on how the average number of employees of a company should be calculated. In doing this calculation, it is however advised that a basis is used that accurately reflects the employment base throughout the year. For example, a weighted average calculation (opening number of employees + closing number of employees/ 2), might not be representative of the employment base of a company that experiences seasonal fluctuations. It is probably most accurate to calculate an employee average over the 12 months making up the financial year, as reflected in the non-binding opinion issued by the Companies and Intellectual Property Commission (CIPC) on 30 June 2011.

When making the calculation, ‘employee' has the meaning set out in the Labour Relations Act, 1995 (Act No. 66 of 1995). In this Act, an employee is defined as:
“a) any person, excluding an independent contractor, who works for another person or for the State and who receives, or is entitled to receive, any remuneration; and
b) any other person who in any manner assists in carrying on or conducting the business of an employer,

and ‘employed' and ‘employment' have meanings corresponding to that of ‘employee'.”

2. Third party liability
‘Third party liabilities' is not defined in the Act and various current views are circulating how this should be interpreted. The more conservative view would be that one should include all liabilities in the calculation of the PI Score, i.e. including any liabilities with any related parties (such as shareholders' loans for example) and all provisions.

Another view is that one would only include liabilities of a company that are payable to an identifiable third party. In this view:

  • All liabilities (including subordinated loans) from shareholders are seen to be with a directly related party of the company and should be excluded from the public interest score calculation.
  • It has also been suggested that when calculating the PI Score, the company should be considered and not the group of companies, and therefore loans from other companies within a group should be included in the calculation of the PI Score. However, loans not provided on normal commercial terms should be excluded, as favourable terms would be deemed to compromise the ‘third-party' status of the counterparty.
  • Provisions recognised in terms of the prescribed financial reporting standards should only be included if reasonably deemed to be payable and the third party can be clearly identified.
  • If there is uncertainty as to whether a liability is a third party liability or not, one should probably err on the conservative side, or get legal advice.

3. Turnover
‘Turnover' is not defined in Regulation 26. Regulation 164 (which deals with the calculation of turnover for the purpose of determining administrative penalties) does, however, define the term ‘turnover'. The definition provided in Regulation 164 is the same as the definition provided for ‘revenue' in all the prescribed financial reporting standards (FRSs).
It is therefore recommended that the definition of ‘revenue' be considered when determining “turnover” for the purpose of calculating the PI Score.

4. Beneficial interest
The Act defines ‘beneficial interest' as:
“when used in relation to a company's securities, means the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person to—
(a) receive or participate in any distribution in respect of the company's securities;
(b) exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company's securities; or
(c) dispose or direct the disposal of the company's securities, or any part of a distribution in respect of the securities,
but does not include any interest held by a person in a unit trust or collective investment scheme in terms of the Collective Investment Schemes Act, 2002 (Act No. 45 of 2002).”

For a public company, this definition is further expanded in Section 56 of the Act.

As Regulation 26 requires one point to be allocated to each individual known to the company with a direct or indirect beneficial interest, another practical issue has developed. The reference to ‘indirect beneficial interest' could imply that a subsidiary of a holding company could be required to include the individuals with a beneficial interest in the holding company in its PI score, as these individuals could be seen as having an indirect interest through its shareholding in the subsidiary. Currently there are two views regarding this matter:
i. The first view is that the shareholders of a holding company should be included in the calculation of the public interest score of its subsidiary, as they are seen to have an indirect beneficial interest. This view appears to be supported by the CIPC in its non-binding opinion issued on 30 June 2011 and filed on the CIPC website. In that non-binding opinion the CIPC indicated that with regard to calculating the PI Score in a company whose securities are held by a trust, the individual beneficiaries of the trust should be counted as the individual beneficial interest holders and not the trust. It further indicates that the same would apply if the shares are held by another company.
ii. The second view is that the shareholders of a holding company do not ordinarily have the right or entitlement to distributions of the subsidiary, dispose or direct disposal of securities of the subsidiary, or to direct the voting in respect of those securities. Therefore they are not seen as having a beneficial interest and should be excluded from the calculation of the PI Score. One would therefore need to consider each case to determine whether the security holders do, or do not, have such a beneficial interest.

5. Timing of the calculation
Regulation 26 requires every company to calculate its PI Score at the end of each financial year. This could, however, cause a practical problem for the audit or review process applicable to the company.

For example, if the PI Score is calculated after year-end and it is determined that the company (not audited in the prior period) should be audited, the auditor would not have attended the stock take and may need to modify its audit report regarding inventory. The PI Score may also be affected by audit or review adjustments discovered during the audit or review.

Calculating a company's PI Score will involve sound judgment. In the event that any uncertainty in the calculation of the PI Score is likely to have a significant impact on the final PI Score, it is recommended that the company obtains expert legal advice from a commercial law firm. asa

Author:

Cobus Grove CA(SA) is an Associate Director: Professional Practice Group at Ernst & Young.