Milton Segal | Senior Executive | Corporate Reporting | South African Institute of Chartered Accountants (SAICA) | mail me |
One of the most contentious and eagerly awaited topics of 2021 is government’s vaccine roll-out plan to immunise South African citizens against COVID-19. Never in recent times has a microscopic germ had such a catastrophic impact on the world.
At the time of writing this article, South Africa had officially diagnosed 1,54 million cases and tragically had lost more than 52,000 of its citizens to this pandemic.
Not to downplay or reduce the impact of these statistics, but the dire economic situation caused by the virus cannot go unnoticed.
South Africa has been under some form of lockdown for just over a year and the economic impact has been devastating. With more than R500 billion committed by government to assist its citizens, many industries such as entertainment, hospitality and leisure have been decimated with thousands of people losing their jobs. Clearly then, the provision of a vaccine is beyond question.
The reality and potential accounting thereof
Government has begun its roll-out of the vaccine, albeit, at the time of writing in very small quantities with some 140,000 healthcare workers being the only South Africans to receive their dosage.
Government has placed itself as the sole agent of vaccines, meaning all vaccines procured will be done by government.
At this point, no private healthcare provider can procure or distribute vaccines. The president, as recent as 22 March 2021, has publicly promised that all South African citizens will be afforded the opportunity to get vaccinated, should they wish to. All this requires is one substantial commodity – funding.
Medical schemes will no doubt be partaking in this exercise. Notably, all the schemes will be ensuring that, at a minimum, their members receive their vaccinations.
From a scheme’s perspective, the cost of providing the required dosage is far less than the potential costs of its members contracting the illness and potentially landing up in hospital for weeks or potentially losing their lives.
Not only would that be extremely expensive, but in the event of loss of life, the scheme also loses one of its members and thus a source of future funding. Therefore, from a scheme’s perspective, getting the vaccine to its members is a non-negotiable.
From a business and industry perspective, the medical scheme will provide the vaccine. Furthermore, government has been in discussions with the private schemes with regards to sponsoring the government’s vaccine roll-out to citizens who don’t have private healthcare insurance.
This type of public-private partnership is already occurring globally and currently the schemes appear to be accepting this approach. Effectively, government will be procuring the vaccines and then selling them to the schemes at a mark-up. This mark-up or subsidy will then be used by government to pay for the vaccines to be used by non-health scheme members.
However, many questions remain unanswered. For example, how many vaccines will the government procure and when will they be procured? What mark-up will be applied? What will the cost for the schemes be? What will the ratio of subsidy be? For example, would a scheme have to cover 1 additional vaccine for every vaccine procured? Would this multiple be more?
IAS 10 and IAS 10
Medical schemes in South Africa have a 31 December financial year end. While the majority, if not all, the schemes are united in their willingness to provide the vaccine, interestingly, from an accounting perspective they are not.
IAS 37 defines a provision as a liability of uncertain timing or amount. Therefore, to meet the provision criteria, the liability definition needs to be met – a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (IASB Framework).
In the absence of a clear and documented roll-out strategy, there is simply too many unknowns. As we approach the end of March, the status quo remains as is – the IAS 37 provision criteria cannot be achieved as the present obligation simply cannot be estimated.
Bearing in mind at the financial year end of the medical schemes, 31 December 2020, a formal vaccine was yet to be received by the South African government, further emphasising the lack of both a present obligation as well as an inability to even measure the potential outflow.
At best, a contingent liability exists, for which the schemes would be encouraged to disclose in a narrative the likely impact that the vaccine roll-out will have on it and its stakeholders.
In terms of IAS 10, events after balance sheet date, COVID–19 would be considered a non-adjusting event, as COVID–19 was already a reality that schemes were dealing with and knew of only too well in 2020.
It is therefore unlikely that any schemes would adjust their annual financial statements after year end, but before date of the signature of the annual financial statements.
We therefore conclude with a strange scenario. All would agree that schemes will both be paying for their own members’ vaccines and subsidising others in the 2021 financial year, yet the annual financial statements will, in all likelihood, not represent this in their numbers, other than some qualitative disclosure.
Does this depict the economic reality? Indeed, COVID-19 continues to disrupt our normality, and it appears that the annual financial statements are not immune to this either.