Technical update

international

The summer has been a busy time for the International Financial Reporting Interpretations Committee (IFRIC), and a new interpretation and two draft interpretations have recently been issued.
IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, provides guidance on how to assess the limit contained in IAS 19, Employee Benefits, on the amount of surplus that can be recognised as an asset. The interpretation also explains how the pension asset or liability might be affected where there is a statutory or contractual minimum funding requirement. IFRIC 14 is likely to have the most significant effect in those countries that have a minimum funding requirement, and in situations where there are restrictions on a company’s ability to get refunds or reduce contributions. However, no additional liability need be recognised unless the contributions payable under the minimum funding requirement cannot be returned to the company. IFRIC 14 is mandatory for periods beginning on or after 1 January 2008.
The accounting policies adopted by real estate developers for the timing of revenue recognition in respect of sales ‘off plan’ (i.e. before construction is complete) has been identified by IFRIC as an area where there are inconsistencies. Some developers only record the revenue when they have handed over the completed ‘unit’, while others record revenue as construction progresses. IFRIC has therefore issued a draft interpretation D21, Real Estate Sales. The draft proposes that revenue should only be recorded as construction progresses if the developer is providing construction services rather than selling goods (namely the completed unit). The draft also includes proposals as to what constitutes construction services, and in many countries these features will not be present in typical off plan sale agreements, meaning revenue would only be recorded on completion of the unit.
A further draft interpretation D22, Hedges of a Net Investment in a Foreign Operation, seeks to clarify the circumstances that qualify as a risk in the hedge of a net investment in a foreign operation and where within a group the instrument that offsets that risk may be held.
Where the presentation currency of an entity’s accounts is different from that used by the company or its subsidiaries on a day to day basis, some companies have used hedge accounting for the translation to presentation currency. However, IFRIC is of the view that this does not constitute a risk to which hedge accounting may be applied.
IFRIC considers that the hedging instrument can be held by any subsidiary or the parent entity within a group regardless of the functional currency. In order to assess how effective the hedging instrument is in offsetting the risk, the company should calculate the change in value of the hedging instrument in the functional currency of the parent hedging its risk, and not the functional currency of the subsidiary holding the instrument.
Meanwhile, the International Ethics Standards Board for Accountants has issued an exposure draft proposing to strengthen three areas of the IFAC Code of Ethics for Professional Accountants, namely:
- clarifying the wide range of services that could comprise the provision of internal audit services
- additional safeguards to be applied in respect of the independence implications related to the relative size of fees received from one assurance client, and
- further guidance on contingent fees for services provided to assurance clients.

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 Accounting Standards Board (ASB) is proposing to replace the current UK standard on related party disclosures with one based on its international equivalent, IAS 24. Financial Reporting Exposure Draft (FRED) 41, issued in July, reflects changes to UK company law, where the definition of a related party will be aligned with that in IAS 24 as required by the European directive Company Reporting – Amending the Accounting Directives. The ASB is also proposing to incorporate amendments to IAS 24 proposed by the International Accounting Standards Board, to provide disclosure exemptions for wholly-owned subsidiaries, and to give guidance on materiality.
The FRED also requires disclosure of transactions entered into by companies with related parties if they are material and have not been concluded under normal market conditions, as required by the directive. The ASB notes that this is an addition to the disclosure requirements under IAS 24, and has asked both the UK Government and the European Commission to clarify whether this was the intention of the directive. This proposal will be reviewed in the light of the responses.
Meanwhile, the ASB has issued an interpretation for public benefit entities of its statement of principles for financial reporting. It believes this will be of interest to international work, including the conceptual framework project run by the International Public Sector Accounting Standards Board.
An amendment to FRS 3, Reporting Financial Performance, has also been issued. This clarifies the situation where the treatment of gains and losses on remeasurement and derecognition of certain instruments appear to be specified by FRS 3, as well as certain other more recent standards.
Finally, the ASB has issued a statement providing guidance for any UK or Irish entities that are required or voluntarily choose to prepare half-yearly financial reports. This updates the ASB’s 1997 statement, Interim Reports.

Sarah Perrin, accountant and writer.

The Irish Pensions Board, the regulator for non-state pensions in Ireland, recently published its annual report. The report noted that total membership of private sector occupational pension schemes in Ireland at the end of 2006 was 800,000, an increase of 8.5% in a year.
According to the report, 500,000 of these workers are in defined benefit (DB) schemes, of which 70% meet the minimum funding standards set down by the regulator, an increase from 57% in 2005. Around 100,000 workers have taken out Personal Retirement Savings Accounts (PRSAs) and those in defined contribution schemes account for the balance. According to the Central Statistics Office, at the end of 2005, 61.8% of all persons over the age of 30 in employment in Ireland had a pension.
The Pensions Board report also noted that employer contribution rates for defined benefit schemes have doubled over the last few years, with the average contribution rate now at 17% of salaries compared to just under 9% in 2000. Extra contributions by employees are ranging from 1% to 3% of pensionable salary. Nearly 40% of schemes are now closed to new entrants, and this is expected to rise to 60% over the next three years. Only a minority of schemes are reducing benefits for existing employees or closing down completely. Investment in bonds is increasing as employers seek to reduce risk.
The numbers above exclude public sector schemes, where there are approximately 500,000 employees, the vast majority of whom would be expected to avail of the state pension arrangements. In a reply to a Dail (parliament) question, Tánaiste (Deputy Prime Minister) and Finance Minister Brian Cowen recently estimated that the liability to pay pensions for existing and retired state employees would be 45bn euros. The assets in the National Pensions Reserve Fund (NPRF) are just 21bn euros, a deficit of 24bn euros overall. It is unclear on what basis the 45bn euros was calculated, whether it was IAS 19, FRS 17, some other actuarial method or whether the amount was discounted or not.
The Government set up the NPRF in 2000 to pay public sector pensions in future. The fund receives a sum equivalent to 1% of gross national product each year.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

DIPN 10, The Charges on Salaries Tax, was first issued in 1982, and was then revised in 1987 subsequent to the High Court decision in Commissioner of Inland Revenue v George Andrew Goepfert.
In the revised version, the Inland Revenue Department accepted that the question of Hong Kong or non-Hong Kong employment can be resolved by considering three factors: contract of employment; residence of the employer; and place of payment of remuneration. Since then, over 30 cases on the source of employment were decided by the Board of Review, with one of the cases being decided by the Court of First Instance. The Inland Revenue Department therefore further revised DIPN 10 in June 2007 to bring it up-to-date to provide clearer terms of its practice in determining the source of employment, in particular with regards to the three factors mentioned.

The Chinese State Administration of Taxation (SAT) and the Inland Revenue Authority of Singapore concluded a new Double Tax Agreement (DTA) between China and Singapore. The key changes under the new DTA include: withholding tax on dividend, interest and royalty deriving from China by Singapore residents; capital gains derived by a Singapore investor from the disposal of shares in a Chinese company; and the basis period for counting the number of days of presence in China for Singapore employees frequently visiting China.

The Standing Committee of the National People’s Congress revised the Individual Income Tax Law that the reduction and removal of income tax on deposit interests and related measures will be regulated by the State Council. The China Securities Regulatory Commission issued a revised standard on the Content and Format of Information Disclosure by Listed Companies No. 3 – Content and Format of Mid-term Report. The report should include company profile, changes in share capital and shareholdings by major shareholders, details of directors, supervisors and senior management, significant events and financial statements.

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

Malaysia

The Malaysian Institute of Accountants (MIA) has issued a consultative document, A New Framework for the Accountancy Profession – Enhancing Effectiveness of the Malaysian Institute of Accountants in Meeting Stakeholders’ Expectations. The document focuses on the challenges faced by the accountancy profession in Malaysia and how the current framework can be enhanced to ensure that the profession is transparent, accountable and effective, yet flexible enough to cater to the fast-changing financial and business environment.
The proposals in the document are aimed at protecting public interest through improving the regulation of the profession and enhancing the performance of MIA’s members and their conformance with the applicable standards and ethics in the discharge of duties as accountants.
A summary of recommendations to address regulatory and compliance effectiveness issues are as follows:
- establishment of an Accountancy Advisory Board (ADB) comprising an accountant-general and four members of the profession whose function will be to oversee the strategic direction, operation, performance and effectiveness of the Investigation Committee (IC), Disciplinary Committee (DC) and Disciplinary Appeal Board (DAB)
- improvement in the investigation process by having more than one panel for IC, DC and DAB, and members of committees need not necessarily be MIA Council members
- improvement in the effectiveness of the compliance sector, particularly the current financial statement review function within the MIA which is currently handicapped by MIA’s lack of authority to demand the production of any document other than the subject matter statements from any person in the course of such a review. It proposes to provide such authority to the Institute. Further to this, there is also a proposal to place both financial statements review and practice review units under the charge of the ADB
- the paper also seeks feedback if the ADB, as the regulatory body, should be established under a different statute, independent of the Accountants Act
- firms rendering public practice services be allowed to incorporate. By using a corporate structure, accounting practices will subject themselves to audit requirements which facilitates public scrutiny
- introduction of Competency Assessment. MIA will conduct assessment on the professional capabilities and competence of accountants before admission as members of MIA
- empowerment of MIA’s Council to determine the criteria and processes for recognition of qualifications, and to review all existing recognised qualifications from time to time
- foreign accountants be admitted to practice in Malaysia on a temporary and case by case basis.
A copy can be found at www.mia.org.my
On 13 August 2007, ACCA signed a global Mutual Recognition Agreement (MRA) with the Malaysian Institute of Certified Public Accountants (MICPA).

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

A bill was introduced in Parliament in July to enact the Accounting Standards Act 2007. The Act will establish the Accounting Standards Committee (ASC) whose role would be to issue accounting standards applicable to companies and other incorporated and unincorporated bodies, and to provide for accounting standards applicable to statutory bodies with a public function. Consequential and related amendments to the Companies Act (Chapter 50 of the 2006 Revised Edition) and certain other written laws would also be made. The ASC will replace the Council on Corporate Disclosure and Governance (CCDG). The bill can be downloaded from Parliament’s website at www.parliament.gov.sg/Publications/pub-main-bills-current.htm

The Accounting and Corporate Regulatory Authority (ACRA) issued the following documents in July for public consultation:
- Regulatory Strategy on Auditing and Corporate Reporting in Singapore, which is available for public consultation from 24 July 2007 to 24 September 2007
- Review on the Registration Framework for Public Accountants, which is available for public consultation from 24 July 2007 to 24 August 2007
- The Public Accountants Oversight Committee’s (PAOC) Ethics Sub-Committee’s proposed Code of Professional Conduct and Ethics for Public Accountants, which is available for public consultation from 24 July 2007 to 24 September 2007.
ACRA has also published its inaugural issue of the Public Report on its Practice Monitoring Programme (PMP). ACRA is considering fine-tuning the PMP by introducing ‘hot reviewers’. Hot reviewers are basically ‘peer’ reviewers or ‘mentors’. In other words, in certain situations, as directed by ACRA, public accountants will appoint another public accountant to review his/her audit files before it is reviewed by ACRA. Further details can be found on ACRA’s website at www.acra.gov.sg

The Inland Revenue Authority of Singapore (IRAS) issued an e-Tax Guide (Goods and Services Tax (GST) Compliance Assurance Programme (CAP)) in July that provides information and explains how IRAS conducts the CAP for GST-registered businesses. GST traders can also benefit from using the e-Tax Guide to conduct self-reviews of their GST accounting and control processes.
The CAP is primarily designed for large GST-registered businesses and IRAS plans to systematically introduce this programme to businesses starting with those that make annual GST supplies of S$1bn or more. The objective of the CAP is to partner large businesses in attaining the desired level of internal control relating to its systems and processes for the purpose of accurate GST accounting, record-keeping and reporting. This is achieved through a good understanding of the trader’s systems and internal controls and identification of potential compliance risks through a field visit.
After the field visit, IRAS will communicate to businesses the findings and assessment of their internal control systems in areas affecting GST compliance. Where there are gaps observed, IRAS will suggest possible good practices for addressing gaps. In the event that specific errors have been identified, IRAS would require businesses to conduct further self-review and file amended tax returns if necessary.
The MES (Major Exporter Scheme) status, if applicable, would be automatically renewed from the date of award of CAP status without businesses having to apply for the renewal.
More details can be found in the e-tax guide on IRAS’ website at www.iras.gov.sg

A new Double Tax Agreement (DTA) between Singapore and China was signed on 11 July 2007 at the Fourth Singapore-China Joint Council for Bilateral Cooperation (JCBC) meeting held in Singapore. The main improvements under the new DTA include the following:
- the rates of withholding tax on dividends and royalties will be further reduced as follows: for dividends, the rates will be reduced from the current 7% (for corporate shareholders holding at least 25% of the share capital) and 12% (others) to 5% and 10% respectively; for royalties, the rate on lease payment for industrial, commercial or scientific equipment will be reduced from the current 10% to 6%
- gains from the disposal of shares of Chinese companies will be taxed in China only if the alienator of such shares has held at least 25% of the share capital of the company at any time during the 12-month period before the date of the alienation.
The new DTA will enter into force after ratification by both countries. The provisions of the new DTA will apply to income arising in the year after its entry into force. Upon ratification of the new DTA, the provisions of the old DTA, signed on 18 April 1986 and amended by an Exchange of Notes signed on 29 July 1996, will cease to apply from then on. The full text of the new DTA is available on the website of the Inland Revenue Authority of Singapore at www.iras.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Refinement of the corporate governance and reporting procedures for listed entities continues to be a high priority in Australia, with the Australian Securities Exchange (ASX) releasing a revised version of its Corporate Governance Principles and Recommendations.
The update is the first since the document was issued in March 2003, and it represents a revision rather than a major change to the existing ‘principles-based’ corporate governance framework in Australia.
The new document was formally launched by the Parliamentary Secretary to the Treasurer, Chris Pearce, who said the revised principles took into account recent Federal Government reforms and current reporting trends.
‘By promoting the adoption of best practice governance standards across Australia’s leading companies, the principles will make a direct and significant contribution to the well-being of all Australians,’ he noted.
Key changes in the new document are:
- consolidation of the 10 existing principles into eight
- inclusion of a list of ‘relationships affecting independent status’ a company should consider when determining the independence of a director rather a definition of independence. Companies are required to disclose their reasons for considering a director independent, notwithstanding the existence of one of these relationships
- inclusion of a recommendation that companies’ trading policies should prohibit hedging unvested options and any hedging of vested options should be disclosed. This matches government proposals to amend the Corporations Act to require companies to disclose their policy on option hedging
- clarification that ‘material business risks’ includes both financial and non-financial risks. Companies are encouraged to adopt appropriate risk oversight, management policies and internal control systems rather than disclosing specific material business risks
- inclusion of a recommendation suggesting companies may wish to consult shareholders about equity-based incentive plans involving the issue of new shares to executives, other than directors, prior to implementing them.
The revised principles were released after a public consultation process that received over 100 submissions.
These submissions showed strong support for the existing approach and the ‘if not, why not’ approach for corporate governance disclosure. There was also agreement there should be no exemption from the principles for small and medium-sized entities.
According to the ASX, the review process found that there is significant interest in sustainability and corporate social responsibility issues among listed companies and their key stakeholders.
The revised principles will apply to a listed entity’s first financial year commencing on or after 1 January 2008. Where an entity’s financial year begins on 1 July, disclosure will be made in the annual report published in 2009.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

In August, the US standard setter, the Financial Accounting Standards Board (FASB), issued an invitation to comment, asking whether there was a need for a project on accounting for insurance contracts. It also asked whether FASB should undertake this project jointly with the International Accounting Standards Board. The US standard setter said its objective in any such joint project would be to develop a common, high quality standard that would address recognition, measurement, presentation and disclosure requirements for insurance contacts. The project would provide accounting and reporting guidance for both the issuer and the holder of an insurance contract.
Meanwhile, FASB has issued proposed guidance on the application of the shortcut method – a technique for determining hedge accounting. Designed to promote consistency in the determination of when an entity qualifies for the shortcut method, the proposal also provides investors and others with better information about how the shortcut method affects a company’s financial statements.
The shortcut method prescribes a set of conditions that must be met in order for a reporting entity to assume that certain hedging relationships of interest rate risk would result in no ineffectiveness and it vastly simplifies the calculations involved in hedge accounting, as it assumes that the change in value of the swap is a ‘perfect proxy’ for the change in value of the hedged item, thereby resulting in no income statement volatility (or ineffectiveness).
At the end of June FASB’s chairman, Robert Herz, applauded the Securities and Exchange Commission for establishing an advisory committee to explore ways to improve financial reporting by reducing the complexity and increasing the usefulness of reported financial information. The Board also issued a statement at the beginning of July saying it remained ‘committed to the convergence of high quality accounting standards worldwide, as demonstrated by its partnership with the IASB to improve financial statement presentation’.

Sarah Perrin, accountant and writer.

Canada

To update accounting standards applicable to not-for-profit organisations (NFPs), the Accounting Standards Board (AcSB) has approved an exposure draft of proposed amendments to the 4400 series of Handbook sections. Since this series was issued in 1996, amendments have been made to other sections, but not to corresponding sections in the 4400 series. The proposed amendments include:
- for Section 4400, Financial Statement Presentation by Not-for-Profit Organisations, making Section 1540, Cash Flow Statements, applicable to NFPs; making the disclosure of net assets invested in capital assets optional; and limiting the reporting of certain revenues net of expenses in the statement of operations
- for Section 4430, Capital Assets Held by Not-for-profit Organisations, clarifying that the size test is intended to allow NFPs to expense rather than capitalise and amortise their capital assets; it is not intended to allow them to capitalise but not amortise their capital assets, or apply different methods of accounting for various types of capital assets
- for Section 4450, Reporting Controlled and Related Entities by Not-for-profit Organisations, clarifying the material related to the identification of control, particularly as it relates to other not-for-profit organisations.
The exposure draft also includes a proposed new section, Disclosure of Allocated Expenses by Not-for-profit Organisations, which would require NFPs to provide more detailed disclosures of their allocation of fundraising and general support expenses. Comments on the exposure draft are due by 15 November 2007; the AcSB expects to finalise the proposals in mid-2008.
After receiving comments on its exposure draft, Employee Future Benefits (Amendments to Section 3461), the AcSB has decided not to proceed with the proposed amendments. Board members decided that changing market conditions have decreased the need to implement changes to accounting for employee future benefits. Instead, the AcSB will focus on the implications of adopting IAS 19, Employee Benefits, as part of the transition to IFRS.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

A revised formula for the calculation of headline earnings was recently released by the South African Institute of Chartered Accountants (SAICA). This followed research conducted in South Africa on the application of a headline earnings in 2006.
Sue Ludolph, SAICA’s project director of accounting, explained the original headline earnings concept was based on the principle of excluding from earnings items of a ‘capital’ nature in order to reflect the operating/ trading performance of the entity.
All JSE (SA Equities Bourse) listed companies are required to disclose headline earnings in addition to earnings per share. This information has been incorporated in a price-earnings ratio (PE) database since 1995. At the JSE’s request SAICA, in consultation with the headline earnings sub-committee of the United Kingdom Society of Investment Professionals (UKSIP), revised the previous formula and realigned it with IFRS.
According to Ludolph, South Africa has been using the headline earnings formula of the UKSIP since 1995. While this formula has also been used by the the Financial Times since 1990, the publication will also update their formula to more relevant guidance from the UKSIP.
In terms of circular 8/2007, headline earnings will start with basic earnings figure (according to IFRS) and then excluding all re-measurements that have been specifically identified in the circular as being capital by nature.
The incorporation of requests from the research also resulted in more definite guidelines and prevents re-measurements of operating nature to be incorrectly excluded. According to John Burke of the JSE, more definite rules will ensure greater consistency across companies.
Headline earnings are not a departure from IFRS; it is merely a process of dividing IFRS reported earnings in a more meaningful format for analysis. The effective date for the application is for financial periods (interim or annual) ending on or after 31 August 2007. Early adoption is not allowed for companies publishing results before 1 September 2007.

Bernardt van der Linde, financial services group PSG, former chartered accountant with PwC.