South Africa

What happens to your B-BBEE Compliance Targets if you make a financial loss?

Three elements on the B-BBEE Scorecard use Net Profit After Tax (NPAT) to calculate the Compliance Targets: Enterprise Development (ED) (1% of NPAT), Supplier Development (SD) (2% of NPAT) and Socio-Economic Development (SED) (1% of NPAT). These three elements constitute 20 points (excluding 2 bonus points) on the Generic Scorecard.

In the event that a Measured Entity does not make a profit during their financial period, or if the profit is less than a quarter of the industry norm, the Amended Codes of Good Practice (Codes), together with recommendations from SANAS, dictate the steps required in order for the Measured Entity to determine its NPAT Compliance Targets for ED, SD and SED.

As per the Codes, the following is stated:

The Net Profit After Tax (NPAT) or average target applies unless:

  • the company did not make a profit in the last year or on average over the last five years
  • the net profit margin is less than a quarter of the industry norm.

If the Turnover is to be used, the Compliance Target will be set at:

  •  1% (ED), or 2% (SD) or 1% (SED) x Indicative Profit Margin (NPAT/Turnover) x Turnover

Indicative Profit Margin is the profit margin in the last year where the company’s profit margin equals to or exceeds one quarter of the industry norm.

A fatal error often made by the Measured Entity, is not investigating whether or not its NPAT is above the industry norm, or when making a loss, if its profit in the last 5 years is above or below the industry norm. Verification Agencies are now required to request the Measured Entity’s last 5-years annual financial statements in order to calculate its ED, SD and SED Compliance Targets.

Any contributions towards ED, SD and SED must be paid within the Measured Entity’s financial period (i.e. prior to the financial year end).

ED and SD are priority elements, meaning that the Measured Entity is required to meet the 40% sub-minimum, of the Compliance Target in order to avoid being discounted one B-BBEE Level.  As such, it is strategically important for the Measured Entity to determine its NPAT Compliance Targets (or adjusted NPAT Compliance Targets) prior to financial year end. This will give the Measured Entity sufficient time to identify and implement suitable and meaningful initiatives for its chosen beneficiaries.  The failure to do so, could result in the Measured Entity being penalised by one B-BBEE Level or being non-compliant.

Please note that the above requirements and Compliance Targets may differ if a specific Sector Code regulates the Measured Entity. If the Measured Entity is verified under a specific Sector Code, the Measured Entity should refer to the specific requirements of the Sector Code. 

A detailed report on the industry norms is published on a quarterly basis by STATS SA. The report summarises the overall industry performance per sector. If the Measured Entity is uncertain how to calculate the Compliance Targets, or whether the Codes or a Sector Code applies, the Measured Entity should reach out to Jackie or Zahn so that they can provide the necessary assistance.

In practice, we are finding that there are a number of different ways in which the SANAS recommendations are being interpreted and applied by the various Verification Agencies.  If the Measured Entity has made a financial loss or has failed to achieve a profit which equals to or exceeds one quarter of the industry norm, some Verification Agencies will apply a 5-year average in order to determine the NPAT, whilst other Verification Agencies will apply the Indicative Profit Margin (being the last time in the 5-year period that the Measured Entity made a profit in excess of the one quarter of the industry norm), in order to calculate the NPAT Compliance Targets.

This uncertainty on the interpretation of the Codes, particularly where the Measured Entity does not make a profit during any financial period, makes it extremely difficult for the Measured Entity to determine its required targets for ED, SD and SED and to achieve its required B-BBEE status in terms of its roadmap.

We would strongly recommend that the Measured Entity engage with its chosen Verification Agency to obtain clarity on this aspect. In addition, as the B-BBEE community, we intend to engage with the DTIC and SANAS to obtain consensus on this issue.

Jackie Kitching

B-BBEE Director: [email protected]

Zahn Abreu

B-BBEE Manager: [email protected]

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