Implementation of BEE codes and Notice of Clarification

Karlien Dempsey, 20 May. 2015

Tags: bee codes, b-bee, broad based economic empowerment, bee codes, b-bee codes, bee amended codes, b-bee amended codes

Much has been said and written leading up to the implementation of the Codes of Good Practice for Broad-Based Black Economic Empowerment (“the New Codes”) on 1 May 2015.

Unfortunately, and despite the Department of Trade and Industry (“DTI”) comments to the contrary, confusion remains the order of the day regarding various aspects of the New Codes.

Read on as I dispel some of the confusion, and highlight some potential areas of concern surrounding the New Codes.

Implementation of B-BBEE Codes
The New Codes differ significantly from the Codes published in 2007 (“the Old Codes”). The introduction of the New Codes was implemented in two phases. 
Phase I
Phase I was implements on 30 April 2015 and covers about 80% of the subject matter of the New Codes:
·         Code 000 Statement 000 – General Principles;
·         Code 100 Statement 100 – Ownership Element;
·         Code 200 Statement 200 – Management Control Element;
·         Code 300 Statement 300 – Enterprise and Supplier Development Element;
·         Code 400 Statement 400 – Skills Development Element; and
·         Code 500 Statement 500 – Socio Economic Development Element.
Phase II
Phase II covers the remaining 20% of the New Codes and was gazetted on 6 May 2015.
It deals with the following:
·         Code 000 Statement 003 – Development and Gazetting of Sector Charters;
·         Code 000 Statement 004 – Scorecard for Specialised Enterprises;
·         Code 100 Statement 102 – Recognition in the Sale of Assets, Equity Instruments and Other Businesses;
·         Code 100 Statement 103 – The Recognition of Equity Equivalents for Multinationals; and
·         Code 600 Statement 600 – Measurement of Qualifying Small Enterprises.
Phase II has just been published on 8 May 2015. And it was published together with an additional schedule of amendments and clarifications.
Let’s look at the recent notice of clarification…
On 5 May this year, Mr Rob Davies - the Minister of Trade and Industry, provided a Notice of Clarification to these matters covered in Government Gazette No 38764.
This Notice of Clarification provides information on the implementation of Phase I. And it includes an unexpected limitation of the use of Broad-Based Ownership Schemes (BBOS) and Employee Share Ownership Programs (ESOP). 
It deals with:
a.    Transitional period:
·         All entities with financial years ending before 1 May 2015 can be rated using the Old Codes.
·         All entities falling outside of a Sector Code, and with financial years ending after 1 May 2015, must be rated using the New Codes. (Entities falling within Sector Codes are dealt with below).
Many entities rushed to get rated before 1 May 2015, to make sure they still qualified to be rated under the Old Codes.  This was on the prevailing view at the time that any verification performed after 1 May could only be done using the New Codes. This prevailing view has now been overturned by the Notice of Clarification.
Let me explain with an example:
If your company has a February 2015 financial year end:
o   The financial statements would probably only be available after 1 May 2015;
o   The B-BBEE rating would only take place thereafter (i.e. well after 1 May),
o   Prior to the Notice of Clarification, this rating would’ve been done using the New Codes;
o   But now that we’ve seen the wording of the Notice of Clarification, your company can now still use the Old Codes because its financial year still falls before the 1 May cutoff;
o   So your company could for example be rated in August 2015 using the Old Codes, with the rating being effective until August 2016;
o   This in effect “postpones” the implementation of the New Codes for your company.
But your company has a financial year ending any time after 1 May 2015, then you must be rated under the New Codes
b.    Sector Codes:
·         The transitional period for the alignment of the Sector Codes has now been extended to the end of October 2015.
·         So from 1 November 2015 the following happens:
                    i.    Sector Codes that are aligned with the New Codes and have been gazetted will become effective. They’ll apply to all companies covered by that Sector Code.
                   ii.    Sector Codes that aren’t aligned or haven’t yet been gazetted, shall be considered to be repealed. Companies within that sector will have to be rated under the New Codes using the Generic Scorecard.
By extending the transitional period for the alignment of Sector Codes, and taking the transitional period above into consideration, there might well be entities that are planning to be rated on their Sector Code, only to find out on 1 November that their Sector Code no longer applies.
c.    Empowering Suppliers
·         All companies with B-BBEE certificates issued under the Old Codes, all Exempt Micro Enterprises (EME) and all Start Up Companies will be treated as Empowering Suppliers.
This is a relief, as getting rated as an Empowering Supplier has stringent criteria. And as companies are being rated using historical data, they might not yet be prepared.
d.    Broad-Based Ownership Schemes (BBOS) and Employee Share Ownership Programs (ESOP)
·         Black participants in BBOS’s and ESOP’s can only score ownership points under the specific section for Economic Interest.
·         The maximum points that can be scored here is 3 points out of a total of 25 for ownership.
The Chief Director of the DTI Takalani Tambani said the idea behind the change was to  make sure that ownership by black individuals was given greater priority by the business community. 
The message is government views the ownership as important to transform the economy. 
For us to effectively do that, we want to see black people participating meaningfully in the core of the economy.  Passive shareholding won’t be able to transform this economy.  This is because they aren’t the real drivers of the business.
This has a negative effect for many companies that have implemented BBOS’s and ESOP’s. 
Companies with such structures can only score 3 points and won’t be able to score any points under the priority element in Ownership, Net Value. 
These programmes are very costly to implement, and many companies have already implemented them. 
In addition Companies will find it very difficult to terminate these structures as they provide real and legitimate benefits to the participants of such schemes.  There’ll undoubtedly be a strong response to this element of the Notice of Clarification.
Despite the assurances from the DTI that the Notice of Clarification now means there’s “no confusion regarding the implementation of the Broad-Based Black Economic Empowerment Act”, many commentators and measured entities may disagree.
Karlien Dempsey
Internal Audit Manager at RSM Betty & Dickson (Johannesburg)

Consultant: Henk Heymans: Editor in Chief, The Practical Accountancy Loose Leaf Service



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