Technical update

international

The International Accounting Standard Board’s (IASB) most recently published work plan provides a good indication of the exposure drafts and new International Financial Reporting Standards (IFRS) we can expect to see issued through to the end of 2006. Under the short-term convergence project with the US standard setter, the Financial Accounting Standards Board (FASB), three exposure drafts are anticipated, covering borrowing costs, income tax and joint ventures. It is also expected that, by the end of the year, we will have a new IFRS covering segment reporting. A further exposure draft covering fair value measurement guidance is currently scheduled to be issued in the third quarter of 2006. Before the end of the year we should also see a discussion paper on the important area of revenue recognition, and the long-awaited project on the application of IFRS to small and medium-sized entities will result in an exposure draft. Finally, there may be a discussion paper covering the options for insurance contract accounting.
IASB has also issued a statement of best practice, setting out how it sees its working relationship developing with other accounting standard setters around the world. In this statement, the IASB envisages the role of other standard setters as being important for both the development and adoption of IFRS. The interaction with other standard setters is seen as falling into a number of areas, as follows.
- Communication: publishing or distributing IASB consultation documents and providing feedback to the IASB both directly and by encouraging constituents to provide feedback. Other accounting standard setters will also be encouraged to identify those constituents who might be able to contribute to roundtable discussions. IASB also considers communication between standard setters to be important in order to identify issues of common interest which can be brought to the IASB’s attention.
- Its role in specific projects: the involvement of accounting bodies in specific projects is seen as important in ensuring that a wide range of views and ideas are considered. IASB hopes that by adopting this approach it will also help to enhance acceptance of its views in the wider accounting community.
- Commenting on consultative documents: the views of other standard setters are considered to be invaluable in developing IASB documents.
- Application of standards: the IASB acknowledges that when setting the application date for new standards, if it wants them adopted by other standard setters, it needs to make allowances for local factors such as translation, ensuring compliance with legislation and endorsement processes. The statement therefore deals with the extent to which other standard setters should be permitted to amend IFRS.
- Interpretation: there will inevitably be questions relating to the interpretation of IFRS, but the IASB also sees consistency of application as being of paramount importance. Where the need for interpretation arises, local accounting standard setters should be requesting that this be done by IFRIC rather than through developing their own guidance.
- Working with regulators: other accounting standard setters are seen to have an important part to play in helping to identify and promote the removal of regulatory barriers to the adoption of IFRS in a particular country or region.

Yvonne Lang, a director at Smith & Williamson, the accountancy and financial advisory group, and technical adviser to the audit committee of Nexia International, an international network of accounting and consulting firms. www.smith.williamson.co.uk

UK & Ireland

The fifth periodic revision of the Financial Reporting Standard for Smaller Entities (FRSSE) is under way. The UK Accounting Standards Board (ASB) has issued an exposure draft consulting on a number of amendments to bring the FRSSE up to date.
Since the FRSSE was last updated, eight new Financial Reporting Standards have been issued. There have also been two amendments to FRSs and two new Urgent Issues Task Force abstracts. The ASB’s exposure draft also considers recent changes in company law financial reporting requirements, as well as FRS 20 on share-based payment, which was not addressed in the last amendment to the FRSSE. This time round, the ASB has proposed applying its requirements in full.
The ASB has been advised by its specialist Committee on Accounting for Smaller Entities in developing its proposed FRSSE update. It expects that the amendments will be effective for accounting periods beginning on or after 1 January 2007.
Another consultation has now concluded, with the ASB issuing an amendment to FRS 26 (IAS 39), Financial Instruments: Measurement - Recognition and Derecognition. The amendment implements the recognition and derecognition material included in IAS 39, Financial Instruments: Recognition and Measurement. At present, the UK standard FRS 5, Reporting the Substance of Transactions, covers this area. FRS 5 will therefore be superseded for transactions that fall within the scope of the IAS 39 requirements, but will continue to apply to transactions in non-financial assets and liabilities.
In its earlier exposure draft setting out its suggested amendments, the ASB had also proposed extending the scope of FRS 26 to all entities in the UK, excluding those applying the FRSSE. However, the board decided to defer a decision on the extension of the scope until it had reached conclusions on the wider issue of convergence of UK and international standards.

Sarah Perrin, accountant and writer.

The Minister for Trade and Commerce has announced that he will bring forward legislation to significantly increasing the audit exemption threshold in Ireland.
The Minister announced that he would increase the turnover exemption limit from 1.5m euros to 7.3m euros and the balance sheet limit from 1.9m euros to 3.65m euros. 7.3m euros is the maximum permitted under EU law. The average audit exemption turnover limit in the EU is approximately 3.5m euros. However, the turnover limit in the UK and Northern Ireland, the Republic of Ireland’s closest trading partners, is £5.6m, and the small business community and their representative bodies argued that the lower limit put them at a competitive disadvantage.
The Minister said that he will include the provisions in the Companies, Investment Fund, Takeover and Consumer (Amendment) Bill legislation currently before the Dail (Irish Parliament). When the limits were last changed the Minister gave an extended lead-in time to allow minority shareholders an opportunity to demand an audit. If this precedent is followed again, it is likely that the new limits will only be first applicable for accounting periods ended in 2008.

A number of clarifications of the legislation governing audit exemption have been posted to “Practice Ireland”. These include availing of audit exemption post year-end and the availability of audit exemption for housing estate management companies limited by shares.
To join “Practice Ireland”, send a blank e-mail to practice.ireland-subscribe@smartgroups.com and follow the instructions in the automatic e-mail that will be sent to you.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

The duty system for horse-race betting is proposed to be reformed. Currently, betting duty is charged on the turnover of betting. Under the proposal, a single set of rates will progressively apply to gross profits of 72.5% up to HK$11bn, increasing by half a percentage point for every HK$1bn up to HK$15bn, and 75% for amounts exceeding HK$15bn.
The Hong Kong Jockey Club would guarantee that the duty payable to the Government during each of the three years after implementation would be no less than HK$8bn. Rebates would also be given to high-value betters who lose money.

The China Securities Regulatory Commission issued in April an exposure draft, Administrative Measures on IPO and Listing, for consultation. The exposure draft requires that an issuer should have established, according to relevant laws and regulations, boards of directors and supervisors, and a system of independent directors. It also addresses the requirements of accounting and finance by issuers, use of funds raised in initial public offerings (IPOs), procedures of share issuance and information disclosures.

The Ministry of Finance issued Administrative Measures on Collection of Windfall Gain Levy on Oil Exploitation Business, stipulating that, effective from 26 March 2006, enterprises exploiting and selling crude oil in China, including equity and contractual joint-venture enterprises, are subject to the Windfall Gain Levy at progressive rates, if the monthly weighted average price of the crude oil is above US$40 per barrel.

Subsequent to the enacting of the revised Company Law, the Ministry of Finance issued a circular, effective from 1 April, on treatments of non-monetary assets injected by shareholders as capital contribution, balance of statutory public welfare, and share buy-back.

Sonia Khao, head of technical services, ACCA Hong Kong.

Malaysia

The Securities Commission (SC) recently introduced enhanced guidelines for placements of securities, Greater Protection for Shareholders and Investors, aimed at promoting greater protection for shareholders and investors as part of the SC’s continued efforts to further develop a facilitative regulatory framework for raising funds.
- Guidance Note 6D sets out the revised requirements for placements of securities undertaken as part of public offerings and listings by companies seeking listing on the Main or Second Board of Bursa Malaysia (the local stock exchange).
- Guidance Note 8C sets out the revised requirements for placements and other issuance of securities for cash (other than rights issues) by listed companies. The criteria under Guidance Note 8C shall also be applicable for companies listed on the Malaysian Exchange of Securities Dealing & Automated Quotation (MESDAQ) market.
- Guidance Note 12C introduces the requirements relating to placements undertaken as a mode of securities distribution that forms an integral part of restructuring schemes and/or proposals resulting in significant changes in the business direction of listed companies. The criteria under Guidance Note 12C will also be applicable for companies listed on the MESDAQ market that undertake such corporate proposals.
- Guidance Notes 6D, 8C and 12C came into effect on 26 April, replacing existing provisions in the Policies and Guidelines on Issue/Offer of Securities (Issues Guidelines).
Further details and guidance are available on SC’s website at www.sc.com.my.

The Malaysian Accounting Standards Board (MASB) has decided to defer the effective date of FRS 139, Financial Instruments: Recognition and Measurement, which was suppose to come into effect on 1 October 2006, to an alternative date to be announced by the MASB.
In addition, certain provisions in FRS 124, Related Party Disclosures, have also been amended with effect from 3 May 2006.
Further details are available on MASB’s website at www.masb.org.my.

MASB has recently released three draft IC interpretations.
- IC Interpretation 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities: This IC requires changes in the liability resulting from changes in cash flows or discount rates to be capitalised in full and depreciated prospectively over the life of the item to which they relate. It also requires the unwinding of the discount to be recognised in profit or loss as a finance cost as it occurs.
- IC Interpretation 2, Classification of Members’ Shares in Co-operative Entities: This IC is a direct response to concerns expressed by constituents that the classification of members’ shares in co-operative entities under FRS 132, Financial Instruments: Disclosure and Presentation, is unclear.
- IC Interpretation 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds: This interpretation explains how to treat expected reimbursements from funds set up to meet the costs of decommissioning plant or equipment, or in undertaking environmental restoration or rehabilitation.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

Amendments have been made to company regulations to implement the changes to the procedure of applying for a judicial management order. The mode for commencing proceedings to place a company under judicial management will no longer be by way of petition but an originating summons supported by an affidavit. The changes commenced operation on 1 April 2006.
The amendments include changes made to nine company forms (revised forms 63A-63I) under the Companies (Amendment) Regulations 2005, and two company forms under the Companies (Filing of Documents) (Amendment) Regulation. The latter are “Notice of Application for Judicial Management Order” (formerly known as “Notice of Petition for Judicial Management Order”) and “Notice of and Lodgement of Judicial Management Order”, and are available at www.bizfile.gov.sg. Further details are available on the Accounting and Corporate Regulatory Authority Singapore’s (ACRA) website at www.acra.gov.sg.

The Council on Corporate Disclosure and Governance (CCDG) has issued an exposure draft on Amendments to FRS 1, Presentation of Financial Statements: A Revised Presentation, based on the IASB’s exposure draft.
This draft is published as part of the project on performance reporting and includes proposed changes in the terminology, components and line-totals in financial statements. One of the objectives of this exposure draft is to bring FRS 1 largely into line with the US standard - Statement of Financial Accounting Standards, No. 130, Reporting Comprehensive Income.
The comment period ends on 17 June 2006.

The Institute of Certified Public Accountants of Singapore (ICPAS) has issued an exposure draft, ED/SSA 600, The Audit of Group Financial Statements, which is based on the International Auditing and Assurance Standards Board’s (IAASB/IFAC) exposure draft. Following earlier consultations, the IAASB modified the proposals in its earlier draft and reissued the current draft to enhance the clarity of IAASB pronouncements. The primary issues in this draft revolve around the extent to which the group auditor needs to be involved in the audits of components that are audited by other auditors, whether these auditors are independent of the group auditor (unrelated) or belong to the group auditor’s national or international firm or network of firms (i.e. related auditors.)
The comment period ends on 30 June 2006 for the Singapore draft.

An agreement, which was signed on 6 October 2003 between the Government of the Republic of Singapore and Government of the Sultanate of Oman for the avoidance of double taxation and prevention of fiscal evasion, with respect to taxes on income, entered into force on 7 April, following the completion of ratification formalities. The provisions of this agreement will have effect on income derived on or after 1 January 2007.
The full text of the agreement is available on the Inland Revenue Authority of Singapore’s (IRAS) website at www.iras.gov.sg.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Comments are currently being sought by the corporate regulator, the Australian Securities & Investments Commission (ASIC), on its new policy proposal paper (PPP) on auditor rotation.
The new PPP deals with the regulator’s power to give relief from the auditor rotation obligations that take effect for audits conducted in financial years beginning on or after 1 July 2006. The rotation requirements cover both lead engagement and audit review partners.
Compulsory auditor rotation is one of the new requirements relating to auditor independence requirements introduced in the Corporate Law Economic Reform Programme (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9).
CLERP 9 was part of the Australian Government’s comprehensive programme of corporate law reform and changes designed to improve corporate governance.
The legislative package also formed part of the Government’s response to recommendations contained in the Royal Commission report released after the collapse of HIH Insurance, and to international developments such as the enactment of the Sarbanes-Oxley Act and the UK’s Smith Report.
Under the CLERP 9 rules, auditors of listed companies or registered-managed investment schemes are only eligible to play a significant role in the audit of a listed company or entity for a limited period.
While Australian auditors are already planning how they will comply with the new obligations, ASIC is seeking feedback from industry participants on the relief powers it has under the legislation to extend the five-year eligibility period.
The regulator believes the new rotation rules are likely to have the greatest impact at the bottom end of the audit market among small audit firms and individual auditors.
The PPP covers issues such as:
- the regulator’s expectation that auditors will undertake self-assessment of their eligibility
- how the regulator expects to be notified of any contraventions
- when the rotation obligations will create an unreasonable burden justifying some level of relief, and
- the regulator’s expectations of what an application for relief from the rotation obligations will contain.
The PPP will provide guidance for ASIC in determining applications for relief from the rotation requirements until a finalised policy is published. This will be sometime after the industry’s comments are considered.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

US standard setter, the Financial Accounting Standards Board (FASB), has been pushing ahead with work on a number of projects, including the conceptual framework, business combinations and earnings per share (EPS), the latter being part of its short-term convergence work programme with the IASB. FASB has considered comments on its own exposure draft relating to EPS treatment, as well as the IASB’s tentative conclusions relating to proposed amendments to the international EPS standard. Unfortunately, some differences of opinion remain between FASB and the IASB, and these are to be analysed further in future.
Work is also under way on FASB’s performance-reporting project, which now has a new project name of “financial statement presentation”. The objective of the project is to improve how information is presented in the financial statements to help investors, creditors and others fully understand an entity’s financial position and changes in that position, as well as helping them use that information to assess future cash flows. The project will address the organisation and presentation of financial information on the face of the financial statements, but will not include a comprehensive review of the notes to the accounts. Management discussion and analysis are also excluded from the scope of the project, as are forecasts and non-financial information. The board hopes to be able to publish its preliminary views in the first quarter of 2007.
Meanwhile, FASB has issued for comment three draft abstracts developed by the Emerging Issues Task Force. One addresses how the conversion of an instrument that became convertible upon the issuer’s exercise of a call option should be accounted for. Another deals with particular situations where employees have the right to a compensated absence, such as sabbatical leave. The third looks at issues related to the presentation in the income statement of taxes collected from customers and remitted to governmental authorities.

Sarah Perrin, accountant and writer.

Canada

The Auditing and Assurance Standards Board (AASB) and the Accounting Standards Board (AcSB) are continuing their efforts to harmonise Canadian accounting and assurance standards with international standards.
The AASB approved an exposure draft to replace Section 6820, Reliance on Another Auditor, with a new section that harmonises with the revised ISA 600, The Audit of Group Financial Statements. The new section will require more work when a group auditor relies on another auditor’s work to obtain audit evidence to support the content of his or her report. It deals with the definition of group auditors, their involvement in the work of other auditors, access to information, the distinction of various components and their significance, and the responsibilities of other auditors. The deadline for comments is 30 June 2006. The AASB plans to approve the final handbook material in late 2007, after the IAASB issues the final version of ISA 600 in early 2007.

The AcSB has issued an exposure draft of three new standards, two relating to the disclosure and presentation of financial instruments and one relating to disclosures about capital. These are in response to the IASB issuing of IFRS 7, Financial Instruments: Disclosures, in August 2005 to replace the disclosure provisions of IAS 32, Financial Instruments: Disclosure and Presentation, as well as its amendments to IAS 1, Presentation of Financial Statements, addressing capital disclosures. The first of AcSB’s new standards harmonises with IFRS 7, replacing the disclosure requirements of Section 3861, Financial Instruments - Disclosure and Presentation. It places increased emphasis on disclosures about risks associated with both recognised and unrecognised financial instruments and how these risks are managed. It also removes any duplicative disclosures and simplifies those about concentrations of risk, credit risk, liquidity risk and price risk. The second standard carries forward the presentation requirements of Section 3861. The third harmonises with the amendment to IAS 1, requiring disclosures of information about an entity’s objectives, policies and processes for managing capital.
The deadline for comments is 30 June 2006. The AcSB plans to issue the final standards at the end of 2006.

Alison Arnot, freelance writer and editor, Ottawa.