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FASB
FASB has added two projects to its agenda designed to improve the accounting and disclosures relating to stock-based compensation and pension costs. Amongst other issues, the project on stock-based compensation will address whether to require that the cost of employee stock options be treated as an expense.
In commenting on the Board's decision, FASB chairman Robert Herz remarked: 'In the wake of the market meltdown and corporate reporting scandals, the FASB has received numerous requests from individual and institutional investors, financial analysts and many others urging the Board to mandate the expensing of the compensation cost relating to employee stock options.'
The Board also believes there is a need for one consistent approach to recognise the costs associated with employee stock options. Herz stated: 'While a number of major companies have voluntarily opted to reflect these costs as an expense in reporting their earnings, other companies continue to show these costs in the footnotes to their financial statements. In addition, a move to require an expense treatment would be consistent with the FASB's commitment to work towards convergence between US and international accounting standards. In taking all of these factors into consideration, the Board concluded that it was critical that it now revisits this important subject.'
As part of the project, the Board will also examine whether there are ways to improve the precision and consistency of measuring the cost of employee stock options, as well as whether to require additional informative disclosures. FASB said it has received extensive input on this subject in recent months, including many comment letters on its November 2002 Invitation to Comment, Accounting for Stock-based Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-based Compensation, and Its Related Interpretations, and IASB Proposed IFRS, Share-based Payment. The FASB specifically sought input on the similarities and differences between the IASB proposal and the fair value approach under FASB Statement 123. While some differences exist between Statement 123 and the IASB's proposal, both approaches would recognise stock-based compensation as an expense at grant date by using a fair-value based method.
Separately, in response to concerns raised by analysts and investors, the Board has decided to add a project to its agenda that would seek to improve disclosures relating to employer pension plans. As part of this project, the Board will address perceived deficiencies in current pension accounting by identifying ways to enhance disclosures about pension costs, plan assets, obligations and funding requirements.
The Board expects to publish an exposure draft on pension accounting in the latter half of 2003, with the goal of issuing an accounting standard in 2004.
Following a discussion on responses to the FASB proposal, Principles-based Approach to US Standard Setting, FASB has established a near-term objective of using identical style and wording in the standards issued by the FASB and IASB on joint projects. FASB has directed the FASB staff to discuss with IASB staff the changes that would need to be made to the standards to achieve that objective.
The proposal was issued in October 2002, in response to concerns about the quality and transparency of financial reporting resulting from the increasing level of detail and complexity in the standards. Having considered the responses, FASB has also directed its staff to develop a proposal for a limited-scope conceptual framework improvements project focusing on the selection of appropriate measurement attributes and related relevance/ reliability issues. It has also decided to initiate other specific improvements in connection with its ongoing internal efforts to: -
improve process effectiveness and efficiency by, among other things, continuing to increase the level of user involvement in developing the standards, reviewing its issue identification and deliberations processes to identify opportunities for improvements, focusing on the quality and timeliness of the standards, and performing post-issuance quality reviews of selected standards
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improve its process for providing interpretive and implementation guidance, and
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improve accessibility and retrievability of the accounting literature.
IASB
The International Accounting Standards Committee Foundation (IASCF) has published its annual report for 2002. The opening report by Paul A Volcker, chairman of the IASCF Trustees, stresses the importance of accounting standards that are 'consistent, comprehensive, and based on clear principles, fairly reflecting underlying economic reality'. He points to the steps taken by countries around the world towards adopting International Financial Reporting standards as providing tangible evidence of a growing consensus on the need for common accounting standards. Volcker also notes the collaboration between the IASB, FASB and other national standard setters and says that the Trustees 'enthusiastically support these efforts to work together to eliminate differences among international and national accounting standards, and to reach common conclusions on current and future projects'.
The full report is accessible via the IASB's website (www.iasb.org.uk).
IFAC
IFAC has released the 2003 edition of its Handbook of International Public Sector Accounting Standards (IPSASs). The new edition features IPSASs 1-20, along with a glossary of terms, summary of occasional papers and studies, and a selected bibliography. All guidance has been developed by IFAC's Public Sector Committee (PSC) with input from various stakeholders.
The 2003 edition includes the following new IPSASs: -
IPSAS 13, Leases
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IPSAS 14, Events after the Reporting Date
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IPSAS 15, Financial Instruments: Disclosure and Presentation
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IPSAS 16, Investment Property
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IPSAS 17, Property, Plant and Equipment
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IPSAS 18, Segment Reporting
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IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets
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IPSAS 20, Related Party Disclosures.
These IPSASs are to be applied when the accrual basis of accounting is adopted.
Print copies of the handbook may be ordered and electronic copies downloaded by going to www.ifac.org/store. There is no charge for the print and on-line versions.
IFAC has expanded its website to include information on corporate governance for the public. The new Internet resource centre, entitled Viewpoints: Governance, Accountability and the Public Trust, can be accessed by going to www.ifac.org/credibility/viewpoints.php. This new section on the IFAC website has been developed to support IFAC's task force on rebuilding credibility in financial reporting. The task force, chaired by John Crow, former governor of the Bank of Canada, is charged with identifying and analysing the causes of the loss of credibility in financial reporting and considering alternative courses of action to restore credibility. As part of its ongoing work, the task force has assembled numerous materials on various aspects of governance and financial reporting from around the world. This information is posted on the website as a service to IFAC member bodies and their members, those involved in governance processes, and investors and other stakeholders interested in obtaining additional information on this topic. The information, which can be downloaded free of charge, is posted in six categories: -
global perspectives
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public policy and regulation
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the governance process: roles and responsibilities
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financial reporting
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auditing issues, and
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ethics.
Individuals may submit relevant documents for posting to this site by
e-mailing them to ViewPoints@pop. ifac.org.
EFRAG
Johan van Helleman, chairman of the European Financial Reporting Advisory Group (EFRAG), has written to IASB chairman Sir David Tweedie to comment on the IASB's exposure draft ED 2, Share-based Payment.
EFRAG supports the objective of the proposed standard to recognise an expense when goods or services received or acquired under a share-based payment transaction are consumed. It says that the draft standard ensures that an entity recognises all share-based payment transactions in its financial statements, measured at fair value, so that IFRS financial statements meet the qualitative characteristics of understandability, relevance, reliability and comparability.
However, EFRAG believes the IASB needs to give further consideration to certain areas, including: -
clarification of the standard's scope
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clarification of the preferred measurement date
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clarification of the use of option pricing models
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the existence of unnecessary restrictions
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whether there are excessive disclosure requirements, and
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certain tax issues.
Full comments are accessible via EFRAG's website (www.efrag.org).
EFRAG has also written to the IASB to comment on its exposure draft ED 3, Business Combinations Proposed Amendments to IAS 36, Impairment of Assets and IAS 38, Intangible Assets.
EFRAG supports the proposal to eliminate the use of pooling of interests accounting. However, while it accepts that in most instances an acquirer can readily be identified, it is concerned that in a number of borderline cases it is difficult to decide which entity is the acquirer and which the acquired, yet very different balance sheets result from such a narrow decision. It believes therefore that an alternative accounting method - such as 'fresh start' accounting - may be more appropriate in such cases. It notes that the IASB intends to consider this only in the late part of phase II of its Business Combinations project, and stresses the need to further establish a method as soon as possible.
EFRAG also recognises the advantage of impairment testing of goodwill and intangibles with indefinite useful lives on a regular basis - that, in theory at least, it better reflects loss in value than an arbitrary amortisation process. However, EFRAG has serious concerns about the intermingling of internally generated goodwill (before and after the acquisition) as well as the reliability and complexity of the proposed impairment test. EFRAG suggests that a distinction between goodwill with definite economic life (where the application of amortisation is required) and goodwill with indefinite economic life (where the application of the impairment-only approach is required) is a conceptually sound and practical approach which reduces complexity without impairing the quality of information, as compared to the IASB's proposed impairment-only approach.
Full comments are accessible via EFRAG's website.
UK
Financial reporting
The Urgent Issues Task Force has issued Abstract 36, Contracts for Sales of Capacity, which sets out the limited circumstances under which transactions in capacity should be reported as sales. According to the Abstract, gains on capacity swaps should be recognised only in rare circumstances where the assets or services provided or received have a readily ascertainable market value. No accounting recognition should be given to transactions that are artificial or lacking in substance.
The Abstract is effective for accounting periods ending on or after 22 June 2003.
Employment law
Review of collective labour law
The Employment Relations Minister has announced that there will be no major changes to the legislation on trade union recognition at work and the rights of striking workers. Trade unions continue, nevertheless, to argue in favour of making it easier for employers to be compelled to recognise a trade union and to strengthen the protection from unfair dismissal for workers who take lawful industrial action.
Disclosure of criminal records
The full implementation of criminal records checks in respect of employees is being further delayed. The lowest level of check, a 'basic disclosure', was expected to become available in the first half of 2003. It has now been postponed until demand has been fully met for the two higher levels: 'standard' and 'enhanced' disclosures. These are made when the application is signed by individuals and organisations registered with the Criminal Records Bureau in respect of specific provisions. 'Basic disclosure' is more general and does not need to relate to specific kinds of job. It will only be available to individuals and will not be sent to prospective employers. However, employers will be able to insist that an individual requests 'basic disclosure'.
Unified tribunal service
The Lord Chancellor's Department announced that employment tribunals and the Employment Appeal Tribunal are to form part of a unified tribunal service which will be created over the next few years. The Government plans to publish a white paper which will set out proposals for the structure and governance of the new system. The aim is to make tribunals more accessible, to raise customer-service standards and to improve administration. In due course, cases should be processed and decided more quickly.
Adoption rights
Under relatively recent regulations, employees have a statutory right to 26 weeks' 'ordinary' adoption leave paid at the lower of £100 a week or 90% of weekly earnings. Adoptive parents will be entitled to take an 'additional' 26 weeks' unpaid adoption leave, in line with the new rights on maternity. A guide is available from the DTI as to the scope of the new rights, covering matters such as eligibility and notification requirements.
Minimum wage
The Government has accepted the recommendations of the Low Pay Commission for the national minimum wage to rise. From October 2003, the main rate will go up by 30p to £4.50 and the youth rate by 20p to £3.80. The Government has also provisionally accepted recommendations for further increases the following year, to £4.85 per hour for adults and £4.10 for young people. The Low Pay Commission has also been asked to look at the potential benefits and drawbacks of introducing a right to the national minimum wage for workers aged 16 and 17.
Disability discrimination
The Disability Discrimination (Blind and Partially Sighted Persons) Regulations 2003 came into force on 14 April 2003. They provide that people who are certified blind or partially sighted will automatically qualify for protection under the Disability Discrimination Act 1995. Both blind and partially sighted people will be protected from unjustified discrimination in employment, in relation to the supply of goods, facilities and services, in the disposal of premises and in education.
Transfer of undertakings
The DTI has announced plans to progress the reform of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). The reforms are intended to apply TUPE more comprehensively to service contracting operations involving labour-intensive services such as cleaning, catering and security. Significantly, they will introduce a requirement on the previous employer to notify the new employer of the employment liabilities that will transfer, thus increasing transparency in transfer negotiations. They will also clarify the circumstances in which employers can lawfully dismiss people for a reason related to a transfer'and also to negotiate changes to terms of employment in the context of a transfer. There are also plans to improve the operation of TUPE when insolvent businesses are sold, to help promote the 'rescue culture' and save businesses and jobs. The question of the coverage of occupational pension rights under TUPE will be considered separately as part of the general governmental review of pensions.
Taxation
Self assessment: fixed late filing penalties
Penalty notices for the £100 late filing penalty are now being issued in all cases where returns have not been submitted at the due date. Where returns subsequently submitted show a liability less than £100, penalties will be automatically reduced.
The Inland Revenue has confirmed that its guidance on incorrect penalties, which is on the website at www.inlandrevenue.gov.uk/workingtogether/sa-net-late-file-pen.htm still applies. There are three main situations.
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Cases where a return was filed on time but not logged.
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Cases where duplicate returns were issued and only one filed.
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Cases where self-employment had ceased and a stop signal had not been put in the computer, although the Inland Revenue had been told in time.
The Inland Revenue will consider claims for reasonable costs under Code of Practice 1.
Inland Revenue booklets
Two new booklets have been published: -
SA/BK6, Self Assessment'Penalties for Late Tax Returns.
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SA/BK7, Self Assessment'Surcharges for Late Payment of Tax.
ITEPA 2003
The Income Tax (Earnings and Pensions) Act 2003 received the Royal Assent on 6 March 2003. The act is a further product of the Tax Law Rewrite initiative.
Formal approval of new share schemes will be granted under the new legislation.
New checklists on company share option plans, all employee share plans and SAYE option schemes can be accessed on the Inland Revenue website at www.inlandrevenue.gov.uk.
Mansworth v Jelley
The Inland Revenue has issued yet more guidance on the treatment of options, following this case. A series of questions and answers can be viewed on the Inland Revenue website.
Inland Revenue board changes
Dave Hartnett has become a deputy chairman and Helen Ghosh, who was director of government secretariat in the Cabinet Office, becomes director-general, corporate services, in place of Tim Flesher who is leaving the board.
Construction Industry Scheme
The Inland Revenue has published
IR 180 (CIS), Construction Industry Scheme: A Guide for Non-residents, and a revised version of the code of practice, Review of Employers' and Contractors' Records.
Regulations have also been published as follows:
Child benefit and Guardian's allowance regulations
The following regulations have been published: -
SI 492/2003, the Child Benefit and Guardian's Allowance (Administration) Regulations 2003
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SI 493/2003, the Child Benefit (General) Regulations 2003
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SI 494/2003, the Child Benefit (General) Regulations 2003, and
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SI 495/2003, the Guardian's Allowance (General) Regulations 2003.
Simpler Payment of IHT
Personal representatives are now able to instruct participating financial institutions to make direct payments of inheritance tax by electronic transfer.
The necessary forms and guidance will be issued with form IHT 200 (the IHT account ).
Negligible values
An updated list of shares which have now been declared as of negligible value can be viewed on the Inland Revenue website.
Stamp Taxes Bulletin
Issue 4 has now been published.
Pensions updates
A number of pensions updates have been issued as follows: -
U137, Revised Maximum Funding Basis for Small Self-administered Schemes
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U138, IR 76 Revisions on Stakeholders and Contracting Out
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U139, IR 76 Clarifications and Updating Revisions
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U140, IR 76 Revisions for PPs when the Employer is the Provider
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U141, Amendments and Corrections to Guidance
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U142, Continuous Service
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U143, Loans made by SSAS
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U144, Personal Pension Schemes'New Version of Model Rules.
European business law
The export or transfer of technology - chemical, biological or nuclear weapons
The Import, Export and Customs Powers (Defence) Act 1939 and EC Regulation 1334/2000 control the export or transfer of technology, including technical information, from the UK and the EU respectively. There is an exemption in secondary legislation covering the export or transfer of the minimum necessary information for most patent applications. That information is controlled by the provisions of section 23 of the Patents Act 1977.
Current UK export control legislation will be strengthened and replaced by the Export Control Act 2002, which received Royal Assent on 24 July 2002 and is expected to come into force around the beginning of 2004. The Patent Office has recently issued a notice on this which sets out basic information concerning the implications of forthcoming secondary legislation for the transfer of patent application information, the consultation period and where to obtain further information.
The Government has begun a
12-week public consultation on the detail of the new controls to be introduced under the Export Control Act, and the consultation document may be found at www.dti.gov.uk/expor t.control/legislation/exportcontrolconsult.htm. The Patent Office contact on this is ann.foster@patent.gov.uk.
Further information and advice about the consultation, and about existing export controls affecting patent applications, may be obtained from the DTI's Export Control Organisation. Contact details are: ECO Helpline, 4th Floor, 4 Abbey Orchard Street, London, SW1P 2HT. Tel: 020 7215 8070. Fax: 020 7215 0558. E-mail: eco.help@dti .gsi.gov.uk.
Arkin v Borchard Lines Ltd
Judgment has been given in the first action for damages for breach of EU competition law ever to come before an English court. The case arose from alleged practices by a shipping cartel against the business, BCL Shipping Lines of Mr Y Arkin and led to a 50-day trial in 2002. Judgment was given on 10 April and the court found in favour of the defendants. The writer, Susan Singleton, acted for the claimant. The claimant sued for abuse of a dominant position (breach of Article 82 of the Treaty of Rome) by a shipping 'conference', a group of shipping companies, and/or breach of Article 81 through the operation of an alleged agreement which are argued to be outside the EU competition block exemption regulation for liner shipping conferences. The case achieved publicity in part because the claimant's solicitors, Singletons, and counsel, Nicholas Green QC and Roger Masefield, and solicitors assisting the claimant's solicitor's firm, Edwin Coe, all acted on a conditional fee basis. The defendants reportedly incurred £6m in legal fees and experts' fees. Damages of many millions were claimed. The claimant's accountancy expert witness, a partner at Ernst & Young LLP, and other experts, was paid by a commercial company, Elision Ltd.
In a 600-paragraph judgment the judge found there had been no abuse of a dominant position nor breach of Article 81.
The Enterprise Act 2002 in force from 20 June 2003 will make such damages actions easier where a prior finding of infringement against defendants has been made by the OFT or European Commission, which can then be relied upon in bringing a damages claim before the new Competition Appeals Tribunal, a special competition court. In the Arkin case the European Commission had issued a statement of objections about the activities of the conference but had not reached a decision following an oral hearing. In 2003, law firm Class Law recovered damages for UK individuals who had sold art works at Sothebys and Christies, where a cartel was found to have operated by recovering compensation set aside in a similar US damages action.
Community designs
The EU has adopted a regulation for the fees payable for Community designs from 1 April 2003. A basic fee is e230. Registrations must be renewed every five years.
Radical change to EU
competition law
In May 2004, major changes to EU competition law take effect including an abolition to the system, whereby agreements may be notified to the European Commission for clearance. In the light of that it is necessary to make changes to the UK competition laws to reflect this new EU Regulation 1/2003. The OFT issued a consultation in April on those proposed changes. The paper asks for comments by 27 June and is at www.dti.gov.uk/ccp/consultpdf/com pmodcon.pdf.
European Judicial Network
The European Judicial Network in Civil and Commercial Matters, which helps judicial co-operation between EU countries, has gone on-line with a website with civil, family and commercial law systems in all EU member states. It also shows how to apply for legal aid abroad and how to start a civil action in each EU state. www.europa.eu.int/ comm/justice_home/ejn.
Genzyme fined £6.8m for
excluding competition
When the Competition Act came into force in March 2000 it seemed likely most fines would be for cartels, the most pernicious form of anti-trust infringement. Instead, the first two fines were for abuses of a dominant position - first against Napp Pharmaceuticals which was fined £2m for predatory and excessive pricing of pharmaceuticals. Then Aberdeen Journals was fined £1m for driving a competitor out of the market for local newspapers in Aberdeen. Cartel fines have however followed. In the latest case in March, another company has been fined for abuse, the more complicated area of competition law. This has implications for any company which has a 'dominant position' (usually a 40% or more market share). Dominant companies need to ensure their pricing policies do not infringe competition law otherwise fines of up to 10% of turnover per year, for up to three years (i.e. 30%), can be imposed.
Genzyme Limited was fined £6.8m by the OFT for exclusionary pricing behaviour in breach of the Chapter II prohibition of the Competition Act 1998. Genzyme supplies a drug called Cerezyme, which has been until recently the only treatment for the rare inherited disorder Gaucher disease. Genzyme holds a dominant position in the market for the supply of drugs for the treatment of Gaucher disease. Genzyme had abused its dominant position, the OFT found, by: -
charging the NHS a price for Cerezyme which includes the price of home delivery of Cerezyme and provision of homecare services, thereby effectively ensuring only Genzyme (or an undertaking acting under contract for Genzyme) can provide such services (so this is not a classic obvious infringement at all)
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precluding viable competition by charging independent third party homecare service providers a price for Cerezyme that allows them no possible margin (similar cases arise all the time - BT has been criticised in April 2003 for charging so little to direct customers for broadband access that its resellers can hardly make any margin as they buy from BT at much the same price).
The OFT found that Genzyme's behaviour:-
prevents existing competitors in the home delivery of Cerezyme and provision of homecare services from operating viably, and ensures that no new competitors can begin to offer such services viably
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deprives the NHS and patients of a choice of delivery/homecare services provider, and
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raises barriers to entry into the market for the supply of drugs for the treatment of Gaucher disease.
In addition to the fine, the OFT has also issued directions requiring that Genzyme:-
ends its exclusionary pricing and subsequently refrains from repeating the infringement
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thereafter refrains from adopting any measures having an equivalent effect
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offers to supply Cerezyme to the NHS at a stand-alone price for the drug only, i.e. exclusive of any home delivery of Cerezyme and homecare services that may be provided, and
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supplies Cerezyme to third parties at a price no higher than the stand-alone price for the drug only, as agreed between Genzyme and the Department of Health.
John Vickers, director-general of Fair Trading, said: 'Genzyme's abuse of its dominant market position has prevented viable competition and choice. This constitutes a serious infringement of the Competition Act and this is reflected in the level of the financial penalty.' The decision should cause dominant suppliers to consider whether they are engaged in any similar practices and, given the level of these fines, perhaps take steps to change the way they operate.
This decision was issued in the same month as a more straightforward case for price fixing. Under the Competition Act 1998 it is illegal to impose resale prices on a distributor. |
