International Accounting Standards

• deadlock
• climate change
• avoiding disclosure
• ethics rule

deadlock

Failure by the European Union and the International Accounting Standards Board to agree on the accounting treatment of financial instruments has led to the EU going it alone, approving its own version of IAS 39 which does not permit certain liabilities to be recorded on balance sheets at fair value.

A meeting of the EU's Accounting Regulatory Committee endorsed IAS 39, but removed key provisions allowing financial assets and liabilities generally to be shown at fair value and portfolio hedging of core deposits. The EU has decided that member states can choose whether to apply the provisions of IAS 39 regarding portfolio hedging, but 'member states and companies will not have the option of applying the provisions of IAS 39 concerning the full fair value option'. The EU said the IASB should revise the fair value provisions before the end of this year, adding that it wants a solution in place by September next year.

However, the UK's ASB has quickly moved to confirm that UK companies are recommended to comply with the full IASB version of IAS 39 on hedge accounting, while accepting that UK companies cannot report most liabilities at fair value even if they wish to do so. The ASB made clear it feels that this is an unsatisfactory outcome and would prefer, at least, to instruct companies that they must abide by the full IAS 39 on hedge accounting.

The Department of Trade and Industry has laid before Parliament draft regulations implementing certain EU accounting directives and the IAS regulation. Listed companies - and building societies issuing securities traded on any EU regulated market - must use international standards (including the EU version of IAS 39) in their consolidated accounts for financial years beginning on or after 1 January 2005. As expected, non-listed companies and other building societies can choose to do so, on a voluntary basis.

But the ASB said that, as a result of the EU's approach, there would now be great confusion as to how UK companies should report financial instruments. It also cast doubt on the EU's suggestion that an outcome will be in place in the next year.

Ian Mackintosh, ASB chairman, said: 'The position the EU has reached on adoption of IAS 39 is unsatisfactory. The adopted standard includes seriously weakened hedge accounting requirements and may give rise to artificial volatility in reported profits and difficulties in application as a result of limiting the fair value option. There is also considerable uncertainty over the application of the adopted standard and its relationship to EU law, and those UK companies that will be applying international standards now have little time to address these difficult issues in order to implement the standard for 2005.'

ASB project director, Paul Ebling, stressed that the problems relating to hedge accounting and fair value must be addressed differently. 'There is nothing to stop people going further in the hedge accounting area,' said Ebling 'But there is something to stop people going further in the fair value area. Our strong advice is that people should move ahead in adopting the full IAS 39 on hedge accounting. In the fair value area the rules are the rules, but we are issuing guidance which helps people to understand their responsibilities better.'

ACCA supported the ASB and IASB. Professor Robin Jarvis, ACCA's head of small business, said: 'The EU's decision to amend IAS 39 will inevitably reduce the credibility of IFRS and the benefits of its adoption.'

An International Federation of Accountants report - Challenges and Success in Implementing International Standards: Achieving Convergence to IFRS and ISA, written by Peter Wong, board member of Global Reporting Initiative and retired senior partner of Deloitte Touche Tohmatsu - has endorsed the need for international convergence on standards, but argued that it is essential that standard setters make available unlimited and straightforward access to all the international standards and related guidance. ACCA has backed the Wong report.

Japan is now in discussion with the IASB about the adoption of international standards.

climate change

Climate change is set to accelerate sharply, following disclosure that greenhouse gases are accumulating in the atmosphere much more quickly than was previously thought. A 'feedback' mechanism is apparently producing a self-perpetuating accelerator impact on global warming. But this news should be of interest to accountants for more reasons than influencing what clothes to buy next season.

With the EU's emissions trading scheme going live on 1 January and last month's big increase in emissions trading on the London market, spurred by Russia's ratification of the Kyoto protocol, the emissions trading sector is on the verge of becoming big business. It now looks as if trading of emissions permits will develop into a significant part of the London commodities market, which in turn means that accountants must seriously consider how to account for emissions rights.

This perception has been boosted by the latest update from the IASB's International Financial Reporting Interpretations Committee providing revised guidance on how to account for emissions rights under IAS 36 on the impairment of assets and IAS 38 on intangible assets. IFRIC specified that emissions allowances should not in all circumstances be amortised and where allowances are traded in an active market, they should not be amortised.

Although the United States has refused under George Bush to ratify Kyoto, Russia's support for the protocol is highly significant. First, it means that the agreement is now almost certain to take effect. And that would create a market in trading emissions permits which could reach the value of 1.8bn euros annually by the end of the decade, according to a report from Reuters.

Emissions trading is a central element of the Kyoto protocol. Countries - and, in turn, companies - are permitted an allowance of greenhouse gas emissions, based on a 5% to 8% reduction on their emissions in 1990 in the case of developed countries and permissions above historic emissions levels for some non-industrialised nations. Countries (and companies) which have not fully used their permits can sell these, while nations that are emitting more than they are permitted can purchase unused credits. Additional credits can be obtained through activities absorbing carbon, such as tree planting.

While reactions to the emissions trading system have been mixed, the move towards it can no longer be ignored. 'It has been apparent for some time that climate change and the introduction of emissions trading regimes are going to have material impacts on some industries and some companies,' says Roger Adams, ACCA's executive director - technical. 'So the issue of the IFRIC is both timely and logical. ACCA would still, however, prefer the IASB to have gone one step further and issued wider guidance covering environmental taxes, costs and liabilities and related risk management issues, as well as emissions trading accounting.

'This was why ACCA issued in 2003 our report The Big Picture - How Environmental Issues Affect Corporate Profits. We wanted to show the full extent of the accounting implications of environmental issues. Though welcome, the IFRIC is little more than a glimpse - it is certainly not the Big Picture.'

There are also concerns at the lack of clarity over tax treatment of emissions trading, particularly involving cross-border transactions. The view of the European Commission is that emissions trading does constitute taxable transactions. But while the corporation tax treatment seems relatively straightforward, VAT treatment of the transactions has yet to be resolved. A European Commission working party is continuing to meet to reach agreement on how VAT should be applied on emissions trading.

'There are two issues under discussion,' explains Robert Casamento, a partner in Deloitte & Touche's energy markets practice. 'Under which jurisdiction will you be charged VAT? The rules on this are that it depends on where you are domiciled or where the transaction takes place. The second issue is at what rate is it going to be charged by the relevant government. A government might say it is zero rate, but this is more of a policy question. At the moment I am not aware of any government saying what rate they will charge VAT on cross-border transactions. Within the UK it is proposed at 17.5%, but this is not yet finalised.'

avoiding disclosure

Accountants will not receive the same legal waiver from client information disclosure as solicitors, the UK Government confirmed in announcing new regulations extending solicitors' legal professional privilege to cases where they have sold clients tax avoidance schemes.

Instead, accountants must notify the Inland Revenue of any tax avoidance schemes they are promoting, under regulations coming into effect on 19 November. The original legislation also covered solicitors, but this was met by a strong and ultimately successful campaign from the Law Society. Under an agreement forged between the Inland Revenue and the Law Society, solicitors will not after all have to advise the Revenue of tax avoidance schemes operated by their clients under their guidance. Instead, it will be the clients themselves who have a duty to report the schemes.

'These changes put beyond doubt that all promoters, including the legal profession, are able to comply with their obligations without revealing privileged information,' said the Inland Revenue. 'The amended rules will require clients to make a disclosure in place of a promoter where the promoter believes the relevant information is covered by Legal Professional Privilege.' If clients are unwilling to make the disclosure, they can alternatively waive the privilege to allow their lawyer to make the disclosure, pointed out the Revenue. 'The effect of these changes is to ensure the rules operate as intended and apply fairly to everyone in the business of promoting or advising on tax avoidance schemes, including accountants, financial institutions and lawyers.'

Law Society President, Edward Nally, said: 'As we made clear in our guidance to the profession, legal professional privilege has been recognised by the House of Lords as a fundamental human right and is a privilege which must be protected by the client's solicitor. This amendment is acceptable as it protects this fundamental right. We also agree that, in principle, putting the disclosure obligation on the client does not necessarily infringe privilege and that, therefore, the regulations would probably be workable on this basis.'

A spokesman for the Law Society added that under the agreement reached with the Revenue, a solicitor would also have no duty to disclose to the Revenue where a client had failed to comply with their legal obligation to notify a tax avoidance scheme.

The favourable treatment of lawyers regarding tax avoidance scheme disclosure follows the embarrassment the Government suffered over its contrasting treatment of the professions on money laundering disclosure. Initially, the Home Office excluded lawyers from the requirement on professionals to comply with the money laundering directive - an error in implementing the directive, which specified that the professions should be treated equally.

However, Chas Roy-Chowdhury, head of tax at ACCA, is unhappy at the solution agreed between the Revenue and the Law Society. For one thing, he is not convinced that the regulations will work. 'The reality is that a lot of [lawyers'] clients will not understand their duty,' said Roy-Chowdhury. 'It's a flaw to get round legal privilege.' Roy-Chowdhury is also not convinced that the Revenue's use of a new statutory instrument rather than changing primary legislation is legally watertight.

Further, ACCA is unhappy that lawyers doing similar tax advisory work to accountants will be subject to different legal duties. 'We believe that the whole issue of legal privilege needs to be looked at,' suggested Roy-Chowdhury. 'This is not the only example. Either accountants need to be brought up to the same level as lawyers where doing tax work, or lawyers need to be brought down to the same level as accountants.'

Meanwhile, it has been revealed that the new Revenue & Customs body will not conduct its own prosecutions. Instead a new prosecuting authority will be established, known as the Revenue & Customs Prosecutions Office (RCPO). The Attorney-General, Lord Goldsmith, said: 'The creation of RCPO is an important step which will ensure that we have an effective and fully independent prosecuting authority, dealing with many of the most important cases in the criminal justice system.'

Mike Warburton, tax partner at Grant Thornton, has previously expressed fears that Revenue & Customs will 'by default' inherit the strong investigative powers of Customs. 'I think it would be unhelpful if the Revenue powers were strengthened - they are quite strong enough,' he said. Warburton argued that the creation of an independent prosecutions body did not resolve his concerns at Revenue officials obtaining stronger investigative powers and, for example, a right of entry. 'This is not a complete answer.'

ethics rule

New rules on ethics for auditors will be in place in the UK from 15 December, following the publication of five ethical standards by the Auditing Practices Board, revised from drafts previously consulted upon. The requirements could have a major impact on the working practices of many auditors and replace rules issued by ACCA and other professional accountancy bodies.

The five new standards provide detailed instruction to auditors on how to deal with issues relating to integrity, objectivity, independence, business and other relationships, long audit engagements, fees, gifts and the provision of non-audit services to audit clients.

APB chairman, Richard Fleck, said: 'These standards represent a comprehensive revision of the ethical guidance that currently governs the auditing profession, and are designed to enhance public confidence in the quality of the audit process. In my view, they are rigorous, clear and therefore likely to be consistently applied and effective in practice.'

But at variance from the original proposals, auditors of small firms will be exempted from some of the rules. Instead, a new consultation paper has been issued in which the APB responds to comments made on the exposure drafts published last year.

Fleck explained: 'The consultation identified some concerns on the application of the ethical standards to audits of smaller entities. The APB proposes to address these particular concerns through a further standard, which we have issued as an exposure draft for consultation.'

However, ACCA and the Consultative Committee of Accountancy Bodies remain unhappy with the proposals, warning that while small businesses may no longer have to employ two accountancy firms to conduct their audit and provide business advice, audit costs for small firms will still have to rise for auditors to comply with the new rules. ACCA added that the small firms exemption was of little value, given that most small businesses eligible have opted-out of being audited.

John Brace, ACCA's President, said: 'We are pleased that accounting firms will now be able to go on acting as a one-stop source of business advice to their small business clients. This is a victory for common sense. But the new standards will still limit the ability of auditors to act for clients: in particular, they will no longer be able to represent their clients in front of tax tribunals. The new standards go well beyond the international consensus which is developing in this area. The problem is that they treat small business as an afterthought - designing rules for Stock Exchange companies and imposing them on the high street. The APB needs to think small first.'