Technical update, pt 1
| by Various 03 Feb 2004 Topic: Technical update |
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FASB FASB has issued four exposure drafts designed to improve US generally accepted accounting principles and converge US accounting guidance to existing international accounting standards. The EDs reflect the progress that FASB and the IASB has made on a first phase of a joint short-term convergence project that was initiated in 2002. The short-term project is part of a comprehensive project to converge their respective accounting standards into a common set of high-quality accounting standards. The exposure drafts propose the following accounting requirements:
An additional proposed standard on the classification of liabilities is to follow. The comment period for the exposure drafts ends on 13 April 2004. FASB has issued FASB Statement No. 132 (revised 2003), Employers� Disclosures about Pensions and Other Postretirement Benefits, aimed at improving financial statement disclosures for defined benefit plans, and which replaces existing FASB disclosure requirements for pensions. In an effort to provide the public with better and more complete information, the standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. For the first time, companies are required to provide financial statement users with a breakdown of plan assets by category, such as equity, debt and real estate. A description of investment policies and strategies and target allocation percentages, or target ranges, for these asset categories are also required in financial statements. Cash flows will include projections of future benefit payments and an estimate of contributions to be made in the next year to fund pension and other postretirement benefit plans. In addition to expanded annual disclosures, FASB is improving the information available to investors in interim financial statements. Companies are required to report the various elements of pension and other postretirement benefit costs on a quarterly basis. The guidance is effective for fiscal years ending after 15 December 2003, and for quarters beginning after 15 December 2003. The document is accessible from FASB�s website (www.fasb.org). FASB has also published a revision to Interpretation 46 (�46R�) to clarify some of the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and to exempt certain entities from its requirements. The additional guidance is being issued in response to input received from constituents regarding certain issues arising in implementing Interpretation 46. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied Interpretation 46 prior to issuance of this revised Interpretation. Otherwise, application of Interpretation 46R (or Interpretation 46) is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after 15 December 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after 15 March 2004. Application by small business issuers to variable interest entities other than special-purpose entities, and by non-public entities to all types of variable interest entities, is required at various dates in 2004 and 2005. In some instances, enterprises have the option of applying or continuing to apply Interpretation 46 for a short period of time before applying this revised Interpretation. FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, is available on FASB�s website. IASB On 18 December the IASB published 13 revised International Accounting Standards (IASs). These are:
The IASB also gave notice of the withdrawal of another standard, IAS 15, Information Reflecting the Effects of Changing Prices. The publication of the revised standards results from the IASB�s Improvements project, which addresses concerns, questions and criticisms raised by securities regulators and other interested parties about the existing set of IASs. The completion of these improved standards brings the IASB closer to its commitment to have a platform of high quality, improved standards in place by the end of March 2004. The project has drawn on best practice from around the world and removed a number of options contained in IASs, whose existence had caused uncertainty and reduced comparability. Such examples include the following:
Changes made to support convergence include the following:
Other significant changes are as follows:
The primary means of publishing International Financial Reporting Standards is now by electronic format through the IASB�s subscriber website. Those wishing to subscribe should contact IASCF Publications Department, 30 Cannon Street, London EC4M 6XH, UK. Tel: +44 (0)20 7332 2730, e-mail: publications@iasb.org. Printed copies of the Improvements to International Accounting Standards (ISBN 1-904230-32-6) are obtainable, priced £20 (32 euros/US$31), including postage, from IASCF Publications Department. The IASB also published in December revised versions of its two standards dealing with financial instruments: IAS 32, which deals with the disclosure of financial instruments and their classification as debt or equity; and IAS 39, which deals with recognition, derecognition, measurement and hedge accounting. The standards require companies to disclose their exposure to financial instruments and to account for their effects - in most cases as they happen, rather than allowing problems to be hidden away. In particular, IAS 39 requires derivatives to be reported at their �fair� or market value, rather than at cost. This overcomes the problem that the cost of a derivative is often nil or immaterial and, hence, if derivatives are measured at cost, they are often not included in the balance sheet at all and their success (or otherwise) in reducing risk is not visible. In contrast, measuring derivatives at fair value ensures that their leveraged nature and their success (or otherwise) in reducing risk are reported. In revising IAS 32 and 39, the IASB did not reconsider the fundamental approaches contained in them, because this would have resulted in delaying their publication by several years. The requirements in IAS 32 and IAS 39 are very similar to those in equivalent US standards. The improvements further converge with US GAAP by eliminating 10 differences between the two sets of standards. Printed copies of IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement (ISBN 1-904230-33-4), are obtainable, priced together as a set at £20 (32 euros/US$31), including postage, from IASCF Publications Department (address as above). IFAC IFAC has produced new guidance to assist small and medium accounting practices (SMPs) and enterprises (SMEs) in managing and operating their computer systems. They are:
Two other documents in the same series were previously released. Each of the booklets features a series of notes that provide information on specific computer control issues, including definition of key terms, costs and benefits, and risks and practicalities. A best practice checklist is also included with each note. All five documents may be downloaded at no charge from the SMP section of IFAC�s on-line bookstore (www.ifac.org/store). IFAC�s International Auditing and Assurance Standards Board (IAASB) has issued new exposure drafts (EDs) addressing issues relating to the auditor� report and group audits. These are:
The proposed guidance is intended to enhance current procedures and promote consistent practices by auditors worldwide. The ED on the auditor�s report proposes significant changes to the wording of the auditor�s report on a complete set of general purpose financial statements. Significant changes include:
In addition, the IAASB proposes conforming changes to: ISA 200, Objective and General Principles Governing an Audit of Financial Statements; ISA 210, Terms of Audit Engagements; ISA 560, Subsequent Events; ISA 701, Modifications to the Independent Auditor�s Report; and ISA 800, The Independent Auditor�s Report on Special Purpose Audit Engagements. Significant changes resulting from the ISA on group audits include:
The new IAPS proposed by the IAASB sets out practical assistance on how the group audit ISA, along with other ISAs, would be applied when the group auditor takes sole responsibility for the audit opinion on the group financial statements. It is proposed that the new standards be applicable for audits of financial statements for periods beginning on or after 15 December 2004. Comments on the EDs are requested by 31 March 2004. The documents may be viewed by going to www.ifac.org/EDs. IFAC has launched a wide-ranging external review of the activities of its Public Sector Committee (PSC). The PSC focuses on the accounting, auditing, and financial reporting needs of national, regional and local governments, related governmental agencies, and the constituencies they serve. The review will result in recommendations regarding how the PSC fulfils this role and meets its objectives in the long term. Specific short- and medium-term implications will also be identified. Sir Andrew Likierman, head of the UK�s Government Accountancy Service, is chairing the review process, which will be conducted by a review panel, including representatives from the World Bank, the developed and developing world, as well as the incoming and outgoing chairs of the PSC. The panel has developed a questionnaire that focuses on a number of issues relating to the PSC�s current role and governance arrangements. The questionnaire is available from John Stanford at john.stanford@cipfa.org. EFRAG The European Financial Reporting Advisory Group has published proposals marking a new phase in EFRAG�s development, which aim to maximise its effectiveness as the voice of European financial reporting. Key proposals include:
The proposals follow on from a review by EFRAG last year of its role and working methods, following its initial phase of operation. This review coincided with mounting criticism in Europe of the complexities and/or general direction of certain International Financial Reporting Standards (IFRS). EFRAG believes there is an emerging view that European concerns need to be more fully taken into consideration in the international accounting standard setting process. This view was echoed by the ECOFIN meeting of July 2003. Accordingly, the proposals to enhance the role and working process of EFRAG have been conceived with the purpose of strengthening European input to the IASB. The EFRAG document, Proposals for the Enhancement of the Role and Working Process of EFRAG, can be downloaded from the EFRAG website (www.efrag.org). EFRAG has sent its comments in response to the consultation paper issued by CESR, the forum of European Securities Commissions, on Draft Recommendation for Additional Guidance regarding the transition to IFRS. EFRAG chairman, Johan van Helleman, expresses EFRAG�s support for the general principle that information be provided as soon as it is available. However, EFRAG warns that the transition to IFRS is a particularly sensitive period and believes it will be necessary to interpret that principle with care in order to avoid misunderstandings or confusion; in particular, it says that the publication of quantitative information at too early a stage or on a selective basis, or of an insufficiently high quality, would not be helpful. EFRAF agrees that narrative information about the transition plan given in the 2003 financial statements and updated information on this basis in 2004 would be highly useful for stakeholders. However, publishing quantitative information as soon as available may put companies at risk of having to restate that information later. This would reduce the usefulness of information given and harm the reliability of the information and the credibility of companies themselves. EFRAG does not think that the information reported for 2003, 2004 and 2005 should be presented piecemeal, but should be provided in a single change giving a full picture. FEE FEE has issued advice to all stakeholders involved in setting ethical standards for market participants such as company directors, investment bankers, investment analysts and business journalists. It calls on standard setters to adopt a conceptual, principles-based approach when establishing ethical requirements for any group, such as codes for company directors. The advice is contained in a publication entitled A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence Throughout the Financial Reporting Chain. FEE�s document does not seek to impose a detailed code on others, but provides an explanation of how the conceptual framework approach can be used to develop ethical codes and, in particular, to assess objectivity in different situations. The publication is available from FEE�s website (www.fee.be). FEE has warned that the internal market benefits inherent in the Societas Europaea (SE) - the new European Company structure - risk being undermined because the taxation treatment of the SE has not been addressed. In a document called FEE Position Paper on Tax Treatment of the European Company (Societas Europaea), FEE addresses key tax issues relating to the formation and ongoing operation of SEs. It highlights dividends as a particularly troublesome area and perhaps the major ongoing obstacle to the successful growth of European-wide SEs. FEE has made a number of recommendations, including the following: dividends received by domestic individuals and corporate shareholders in a foreign SE should not suffer any tax additional to that paid on dividends received from a domestic company; dividend withholding taxes should be reduced to 0% on all dividends paid by an SE to EU resident shareholders; and consideration should be given to the development of a common tax base system for SEs. The position paper is accessible from FEE�s website. UK Financial reporting Revised International
Accounting Standards
UITF published
Views sought on IASB�s ED 6
New technical director Employment law Equal pay
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