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A Culture of compliance and financial reporting best practice

As the complexity and volatility of the business environment has increased, the demand for improvements in the quality of financial information from investors and other decision makers has risen in tandem. Unsurprisingly therefore, the topic of changes to International Financial Reporting Standards (IFRS) has become increasingly prevalent.

However, before delving into what these changes mean for an organization, it is perhaps useful to first provide an overview of the nature and purpose of IFRS. For anyone in the accounting or finance fields, this acronym has become a common phrase critical to any financial reporting undertaken by an organization.

International Financial Reporting Standards are developed and issued by the International Accounting Standards Board (IASB) and provide guidance on how financial statements should be prepared and disclosed. They provide a framework for consistent and comparable information which ultimately helps investors, regulators and other interested parties, make decisions.

In other words, as a global standard, they provide a level playing field amongst companies for reporting financial performance. This is a matter not only of compliance, but also of corporate governance, and thus an integral part of how any financial services sector business ought to be doing business.

As an indication of the pace of change, in the last three years, over twenty new or amended accounting standards have come into effect. The insurance industry is currently in the process of implementing IFRS 17, which speaks specifically to insurance contracts, replacing its predecessor, IFRS 4. The standard will come into effect from 2023 and will significantly change the accounting process for insurance contracts and investments contracts with discretionary participation features.

This new standard has been described as the single largest change in insurance accounting for almost a generation. The standard is intended to provide a more detailed and rigorous framework for the measurement and recognition of key insurance related values and will significantly change the way in which insurer’s measure and recognize insurance liabilities, revenue and profit.

It will also change the presentation of the income statement and statement of accounting position and will require a significant number of new disclosures in the financial statements. The standard requires more detailed measurement of insurance related cash flows, introduces new methodologies for measuring and recognizing insurance contact liabilities and introduces a number of new concepts such as insurance contract margin and risk margin.

All of these changes are meant to create greater visibility of the relationship between the provisions of insurance services and the recognition of revenues and expenses relating to the provision of these services and to align the recognition of revenue and profit with non-insurance businesses.

The overarching intent of the standard is to reduce the variability of results due to differencing accounting treatments employed by various insurance entities and to improve the comparability of financial results between insurance businesses as well as between insurance and non-insurance businesses.

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Business

Closed border trade conundrum; Masisi’s pragmatic headache

4th August 2020

A graphical picture or statistical publication shows that since 2018, Botswana’s trade balance has been on the lows if not fluctuating on the negatives-a bad economic health. This was shown in the latest International Merchandise Trade Statistics (IMTS), statistics which is one of the major contributing indicators of the performance of Botswana’s economy and its competitiveness in the world market.

This trade balance graphical picture is figuratively akin to that of a Covid-19 patient on life support; struggling to breathe while lying down on a sickbed gasping to salvage the last oxygen left on offer.

Botswana’s affair in foreign trade statistics -which is all about an account of all transactions of merchandise between this country’s domestic residents and the rest of the world- is on feeble health or life support status. The account measures the value and quantity of goods which add or subtract from the stock of material resources of a country, by entering (imports) or leaving (exports) its economic territory.

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Business

Enters SEZA the Game Changer

4th August 2020

By introducing special regulatory, administrative and fiscal regimes, the Special Economic Zones Authority (SEZA) intends to improve the ease of doing business and re-position Botswana as a premier investment destination of choice, thereby ushering in a new era of robust economic growth.

This was revealed by SEZA Chief Executive Officer (CEO) Lonely Mogara, who further explained that the special regulatory, administrative and fiscal regimes will be implemented at the Authority’s eight SEZs in Pandamatenga, Francistown, Selibe Phikwe, Palapye, Tuli Block, Gaborone and Lobatse.

“These special regimes will ease doing business by addressing constraints that may hinder investment in the country like work permits, residence permits, building permits, Environmental Impact Assessment (EIA) permits, and tax incentives through a dedicated One Stop Service Centre (OSSC),” said Mogara.

SEZA was established through an Act of Parliament and mandated to establish, develop, manage and regulate a portfolio of SEZs. The Authority would then attract world class investors to set up mega factories and businesses in these SEZs, thereby growing and diversifying the Botswana economy through increased Foreign Direct Investment (FDI) and export revenue.

Mogara explained that SEZA intends to develop SEZs that are integrated into the domestic, regional and international markets; facilitate clusters development; and create backward and forward linkages anchored by targeted investors. The Authority will also rollout the red carpet for SEZ investors through its robust One Stop Service Centre (OSSC).

“In order to tap into existing resources and avoid duplication, we have initiated discussions with strategic organisations that will be appointed Zone Management Companies. Some of the potential Zone Management Companies that we have identified are Local Enterprise Authority (LEA), Fairgrounds Holdings, Botswana Innovation Hub (BIH), Selibe Phikwe Economic Diversification Unit (SPEDU) and Botswana Agricultural Marketing Board (BAMB),” said Mogara.

Going forward, SEZA will explore partnerships with these stakeholders to leverage on their strengths and optimise the country’s resources. To this end, said Mogara, SEZA has already signed agreements with BIH and Business Botswana; while negotiations with BAMB and LEA are in advanced stages.

In 2005, the Business Economic Advisory Council (BEAC) recommended the implementation of Free Zones to spur economic growth and diversification, create jobs and eradicate poverty post depletion of minerals. Free Zones were identified as suitable vehicles for introducing viable, new economic activities by providing attractive incentives for highly specific, strictly circumscribed investment ventures. Government later adopted the SEZ Policy of 2011, established the SEZA in 2016 and approved the SEZ Regulations and Incentives in 2018 and 2019 respectively.

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Business

De Beers Q2 production down 54 %, sales drop 95 %

4th August 2020
Diamonds

Rough diamond production for global mining giant, De Beers Group declined by 54% to 3.5 million carats in the second quarter of 2021. This is primarily due to the Covid-19 lockdowns across the mining producer countries.

A production report released by Anglo American, De Beers parent company recently , reveals that Debswana, Botswana’s De Beers operation spearheaded the decline, registering 68 % drop in production for the second quarter of the year 2020.

Debswana is jointly owned by both Botswana Government & De Beers Group on equal shareholding. Botswana government has 15 % direct shareholding on De Beers Group, with the remaining 85 % owned by mining conglomerate Anglo American.

Debswana, which is De Beers‘s flagship rough diamond producer has only managed to deliver to 1.8 million carats in quarter 2, principally due to a nationwide lockdown from 2 April to 18 May in Botswana. In addition De Beers says the 68 % production drop is also attributable to curtailed output in both plant and human resource as a result of Covid-19 measures implemented to safeguard the workforce. Operations restarted from mid-May, with production targeted at levels to meet the lower demand.

Since COVID-19 pandemic engulfed the world beginning of the year, demand in polished diamonds significantly dropped as a result of closure of jewelry and retail outlets in the United States.
This then disrupted the entire value chain from downstream backwards, leaving midstream businesses with full and dense inventories subsequently shrinking demand for rough goods from upstream producer entities.

In Namibia where De Beers operate a model similar to that in Botswana, production decreased significantly at NamDeb, the inland mining outfit jointly owned by Namibian Government and De Beers Group on 50-50 shareholding.

However the decrease was offset by Debmarine, a unique mining operation where De Beers recovers diamonds on the Namibian coast of Atlantic Ocean. In 2016 De Beers invested P5 billion on a new vessel of unprecedented sophistication for Debmarine to take coastal diamond mining to another level.

For the quarter under review, the magic was delivered by Mafuta crawler vessel which was under maintenance in Q2 2019. Overall production in Namibia increased by 7% to 0.4 million carats.
In South African where De Beers operates Venetia Mine in Limpopo province, production decreased by 3% to 0.6 million carats primarily due to Covid-19 measures. The production shutdown was partly offset by higher grades from the open pit material prior to transition to the underground.

Production in Canada decreased by 27% to 0.8 million carats, primarily due to Victor reaching the end of its life in Q2 2019. At Gahcho Kué, production decreased by 11% to 0.8 million carats due to Covid-19 measures.

SALES

During Q2, the demand for rough diamonds was significantly impacted by a combination of Covid-19 restrictions impacting consumer demand and access to Southern Africa, as well as severely limited midstream cutting and polishing capacity due to lockdowns, particularly in India.

Rough diamond sales totalled 0.3 million carats (0.2 million carats on a consolidated basis) compared with 9.0 million carats (8.3 million carats on a consolidated basis) in Q2 2019. The third Sight of 2020 was cancelled due to Covid-19-related travel restrictions and, in response to the unprecedented industry conditions, De Beers also offered sightholders the option to defer up to 100% of their allocations at the fourth and fifth Sights.

Rough diamond consolidated sales in Q2 2020 decreased to $56 million, signaling a catastrophic decline from $1.3 billion raked in second quarter 2019. The sharp decline was driven by lower volumes and prices.

The H1 2020 average realized rough diamond price decreased by 21% to $119/carat (H1 2019: $151/carat), driven by a higher proportion of lower value rough diamonds sold and an 8% reduction in the average rough price index.

De Beers has however maintained their production guidance at 25-27 million carats (100% basis), subject to continuous review based on the disruptions related to Covid-19 as well as the timing and scale of the recovery in demand. The guidance was in the first quarter revised from the initial 32-34 million carats forecasted beginning of the year, slashed by 20 % to the current guidance in response to declining demand.

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