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international
As predicted in the last column of 2004, IFRS 6, Exploration for, and Evaluation of, Mineral Resources, was issued towards the end of the year. In addition, a revised version of IAS 19, Employee Benefits, has been issued with the most significant change being an option to recognise all actuarial gains and losses in the period in which they occur, outside of the profit and loss account. The closing months of 2004 also saw significant activity from IFRIC who issued five new extracts and two draft extracts.
- IFRIC 2, Members' Shares in Co-operative Entities and Similar Instruments, applies for periods beginning on or after 1 January 2005 and gives guidance on when members' shares in co-operative entities should be classified as financial liabilities or as equity. The reporting entity will be required to consider all applicable terms and conditions, including local laws, regulations and its governing charter.
- IFRIC 3, Emission Rights, sets out the accounting treatment for 'cap and trade' emission rights schemes and applies for periods beginning on or after 1 March 2005. The consensus explains that such schemes give rise to an asset for the allowances held, a government grant in respect of the difference between the amount paid and the fair value, and a liability for the obligation to deliver allowances equal to emissions that have been made. It is not possible to represent these amounts as a net asset or liability.
- IFRIC 4, Determining Whether an Arrangement Contains a Lease, will apply for periods beginning on or after 1 January 2006 and requires reporting entities to assess the substance of an arrangement. This assessment will include consideration of whether fulfilment of the arrangement is dependent on the use of a specific asset and whether the arrangement conveys a right to use the asset.
IFRIC 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, deals with contributors to such funds where the assets are administered separately and the contributor's rights to access the assets are restricted. The contributing entity should recognise its obligation to pay decommissioning costs as a liability, and recognise its interest in the fund separately, unless the contributor is not liable to pay decommissioning costs even if the fund fails to pay. The interpretation applies for periods beginning on or after 1 January 2006.
Draft interpretation D10, Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment, provides guidance on when a liability exists under the European Union's directive on waste electrical equipment and proposes that a liability only exists when there is a relevant market share in the measurement period. Draft interpretation D11, Changes in Contributions to Employee Share Purchase Plans, deals with the accounting for certain specified changes.
The IAASB has issued one new auditing standard and two exposure drafts.
The revised ISA 700, The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements, deals with unqualified audit reports and has been issued to enhance the transparency and comparability of auditor's reports across international borders. The standard also sets out clear guidance to auditors who conduct their audits in accordance with both ISAs and the auditing standards of a specific jurisdiction.
The new wording for the auditor's report includes:
- better explanations of the respective responsibilities of management and the auditor
- an updated description of the audit process to reflect the new IAASB Audit Risk Standards, and
- clarification of the scope of the auditor's responsibilities with respect to internal control.
Acknowledging that materiality is a fundamental auditing concept and estimates are an integral and vital part in the preparation of all financial statements, the IAASB has issued two proposed revised standards. Although SAS 320, Materiality and the Identification and Evaluation of Misstatements, and SAS 540, Auditing Accounting Estimates and Related Disclosures (Other Than Those Involving Fair Value Measurements and Disclosures), are separate the IAASB also considers that they are complementary. In particular, they both tackle the difficult issue of bias in the preparation of financial statements and will help auditors assess whether management may be applying aggressive earnings management techniques to their estimating procedures.
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 published before the year end a bundle of new Financial Reporting Standards (FRSs) in line with its international convergence project. These were FRS 22 (IAS 33), Earnings per Share; FRS 23 (IAS 21), The Effects of Changes in Foreign Exchange Rates; FRS 24 (IAS 29), Financial Reporting in Hyperinflationary Economies; FRS 25 (IAS 32), Financial Instruments: Disclosure and Presentation; and FRS 26 (IAS 39), Financial Instruments: Measurement.
The ASB opted for the International Accounting Standards Board's version of IAS 39, Financial Instruments: Recognition and Measurement, rather than the 'carve out' version adopted by the European Commission that limits the financial liabilities permitted to be fair valued through profit or loss. As a result, the ASB has issued guidance for entities in the UK and the Republic of Ireland preparing their financial statements in accordance with EU-adopted IFRSs, but admits that the situation is complicated and 'sometimes unclear'.
The Board also issued FRS 2, Accounting for Subsidiary Undertakings, to reflect changes in UK company law stemming from the Modernisation Directive, and FRS 27, Life Assurance, which builds on the new regulatory capital regime for with-profits life assurance introduced by the Financial Services Authority in November 2004.
Two exposure drafts also emerged in December. Firstly, the ASB proposed updating the existing Financial Reporting Standard for Smaller Entities to include the accounting requirements of companies legislation, thus providing a 'one-stop shop' standard. Secondly, the ASB published an exposure draft of a Reporting Standard (the first of its kind) on the Operating and Financial Review.
Meanwhile, the ASB has welcomed the amendment to IAS 19, Employee Benefits, issued by the IASB. IAS 19 is more convergent with the UK pensions standard FRS 17, which came into full effect from 1 January 2005 for UK entities not subject to IFRSs.
Sarah Perrin, accountant and writer.
The Irish Financial Services Regulatory Authority (IFSRA) has issued guidance to all auditors of Irish Credit Unions in July 2004, entitled Guidance Note for the Auditors of Credit Unions. It deals with the obligations of auditors of Credit Unions under S122 of the Credit Union Act 1997 and S33 of the Investment Intermediaries Act 1995, and other issues. The guidance sets out additional responsibilities for auditors including:
- increased liaison with the regulator
- the requirement to send a copy of the management letter to IFSRA
- the requirement to send an 'annual positive statement' to IFSRA, and
- the rotation of audit partners.
The increased liaison requirement could give rise to certain legal problems for auditors in respect of information volunteered to IFSRA. Under current legislation, auditors of Credit Union don't have a statutory right to disclose information to IFSRA (other than information giving rise to a duty to report to IFSRA), but are provided with protection from legal action arising from disclosure of information on a matter related to the audit, when responding to an enquiry by IFSRA.
It is now a requirement that management letters issued by a Credit Union's auditors are copied to IFSRA at the same time, or as soon as practical after the original is provided, to the Credit Union. The external auditor should inform IFSRA if it is not their intention to issue a management letter. Prior to the auditor providing the management letter, formal prior consent will need to be obtained from the Credit Union board.
IFSRA expects auditors to provide annual confirmation that they have complied with their obligations under S122 of the Credit Union Act 1997. This does not replace the auditors' duty to report certain matters to IFSRA under S122 but is an unqualified assurance that there is no matter, not already reported in writing to IFSRA by the auditor, that has come to the attention of the auditor during the course of the audit, that has given rise to a duty to report to IFSRA.
In line with the requirement on banks, IFSRA now requires that the audit partner on Credit Union audits changes every five years. As this requirement does not come into effect until 2007 the current audit partner has some time to consider the impact on the practice. Ideally, if the auditor is to be replaced the new auditor should be appointed at the 2006 AGM to allow the incoming auditor to deal with any interim audit work prior to the 30 September 2007 year end.
Credit Unions are public interest entities and as such the audit requires careful planning and execution. Issues such as independent partner review, the provision of non audit services and the new APB ethical standards need to be addressed. As an example of the perceived high risk nature of Credit Union audits, the CEO of a large quoted Plc recently remarked that their Big Four auditors were willing to do the audit of the quoted Plc but not the audit of the staff Credit Union. It is vital for smaller firms, having carefully reviewed the relevant guidance and standards, that auditors consider their continued involvement with their Credit Union clients.
Additional information on the new guidance can be found at ireland.accaglobal.com/pdfs/international/ireland/interim_guidance.pdf.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong
From 1 January 2005, the Hong Kong Financial Reporting Standards (HKFRS), which in all material respects are fully converged with the International Financial Reporting Standards (IFRS), have become effective. However, there is a remaining exception which relates to the definition of subsidiaries in consolidated financial statements. The exception is due to a different definition adopted in the Hong Kong Companies Ordinance, which has now been addressed in a legislative Bill. Amendments were proposed in the Companies (Amendment) Bill to close the gap between the statutory requirement and the accounting standard in defining whether an entity is a subsidiary.
Apart from the convergence of the accounting standards, there will also be changes in the Hong Kong Auditing Standards to converge with the International Auditing Standards. The Hong Kong Auditing Standards now comprise:
- Hong Kong Standards on Quality Control
- Hong Kong Framework for Assurance Engagements
- Hong Kong Standards on Auditing
- Hong Kong Standards on Review Engagements
- Hong Kong Standards on Investment Circular Reporting Engagements
- Hong Kong Standards on Assurance Engagements, and
- Hong Kong Standards on Related Services.
The China Securities Regulatory Commission issued 'Regulation to Enhance the Protection of the Right of Public Shareholders', which requires listed companies to establish an independent director system. The regulation stipulates that material related party transactions and appointment/removal of auditors should be approved by the majority of independent directors before submitting to the board of directors for discussion. It also empowers independent directors to engage external audit/consultancy firms to carry out audit or consultancy in respect of specific projects with relevant costs being borne by the company. Independent directors should report to shareholders in the annual general meeting explaining the extent that they discharge their responsibilities.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Financial Reporting Foundation and the Malaysian Accounting Standards Board (MASB) recently announced their plan to change the classifications of MASB Standards. Beginning 1 January 2005, existing MASB Standards will be renamed Financial Reporting Standards (FRS) in line with global trends.
Additionally, the numbering of MASB Standards will be changed to correspond to those of the international standards. The changes will take effect for companies preparing financial statements for annual periods beginning on or after 1 January 2005, which means that the first set of financial statements using the new classifications and numbering will appear in 2006.
MASB issues three more exposure drafts
Before the close of 2004, on 31 December, MASB published additional three exposure drafts.
- ED 44, Share-based Payment
- ED 45, Financial Instruments: Disclosure and Presentation
- ED 35 (revised), Financial Instruments: Recognition and Measurement.
ED 44 is identical to IFRS 2, Share-based Payment. The objective of ED 44 is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. Companies will now need to record their employee share options at fair value and recognise the value as an expense in the period the services are consumed.
ED 45 and ED 35 (revised) are standards on financial instruments. ED 45 is a disclosure standard and ED 35 (revised) is a recognition and measurement standard, which are identical to IAS 32 (revised), Financial Instruments: Disclosure and Presentation, and IAS 39 (revised), Financial Instruments: Recognition and Measurement.
When finalised, ED 45 will supersede the existing MASB 24. ED 45 provides additional guidance on classifying a financial instrument on the basis of its substance rather than its legal form.
ED 45 proposes that transactions conducted on the basis of Shariah precepts should be within the scope of the standard.
ED 35 (revised) requires companies to recognise all financial instruments, including all derivatives like forwards, swaps and options in their financial statements.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The Council on Corporate Disclosure and Governance (CCDG) has issued a consultation paper on 'The Proposed Revisions to Singapore's Code of Corporate Governance' to facilitate a public consultation.
Among other things, the paper contains a potentially contentious recommendation to disclose the exact remuneration of individual directors (something new in Singapore). There is also a proposal to implement a whistle-blowing mechanism - it states that the Audit Committee should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. In addition, a director may be deemed 'not independent' if he is associated with a substantial shareholder.
The closing date of consultation period is 15 February 2005. The consultation paper can be downloaded from CCDG's website at www.ccdg.gov.sg.
New Financial Reporting Standards (FRS)
The following FRS took effect on 1 January 2005:
- FRS 39, Financial Instruments - Recognition and Measurement, in its entirety.
- FRS 102, Share-based Payment, ensures that an entity recognises all share-based payment transactions (including employee stock options) in its financial statements, measured at fair value. For listed companies, FRS 102 is effective for financial statements covering periods beginning on or after 1 January 2005. For all other companies, FRS 102 is effective from 1 January 2006.
- FRS 104, Insurance Contracts, provides guidance on accounting for insurance contracts.
- FRS 105, Non-current Assets Held for Sale and Discontinued Operations, introduces new accounting methods for assets held for sale, and the presentation and disclosure of discontinued operations.
- Improvements to 14 existing FRS. Details are at www.ccdg.gov.sg/news/press_release_06042004.htm.
A full list of the standards applicable in 2005 can be found at CCDG's website.
Changes in Public Accountants' Continuing Professional Education (CPE) Requirements
The Accounting and Corporate Regulatory Authority (ACRA) has changed the CPE year to coincide with the calendar year from 2005. Furthermore, although the total number of mandatory CPE hours has remained at 40, structured hours will be increased this year to 30 hours. More details can be found at ACRA's website at www.acra.gov.sg.
Joseph Alfred, technical manager,
ACCA Singapore.
Australia
Australian auditors can now seek registration based on their professional competency rather than the amount of time they have spent on audit activities, following regulatory approval of a new audit competency standard.
Under changes introduced as part of the Australian Federal Government's Corporate Law Economic Reform Program 9 (CLERP 9), an auditor will now be able to become a registered company auditor (RCA) by demonstrating compliance with the audit competency standard.
Previously, Australian auditors were required to use a time-based approach to prove their competency. Applicants for RCA status were required to have completed at least 3,000 hours of practical auditing and 750 hours supervising audits. The experience had to be gained in the previous five years.
This time-based approach made it difficult for audit professionals working in multi-service practices to prove their competency. Under the new competency standard, they will now have a choice of pathways to becoming an RCA, removing a major restriction on access to this area of professional activity.
Registration of Australian auditors is approved by the Australian Securities and Investments Commission (ASIC) and access to RCA status is important, as some audits require an RCA. In some Australian states, for example, specific state legislation requires auditors undertaking audits to be an RCA.
Following the introduction of the CLERP 9 reforms, the Corporations Act 2001 was amended and accountants will now be able to become RCAs by satisfying the requirements of the ASIC audit competency standard. The new standard applies to both public practitioners and employees who work as auditors.
Under the competency standard, applicants for RCA status can use either the existing time-based approach or the new competency-based approach.
The competency standard describes the specific tasks required to competently perform the audit function, listing 20 detailed tasks in which applicants are required to prove their proficiency.
ASIC's new competency standard also requires compliance with specific educational requirements, practical experience, capability to perform the duties of an auditor and that the applicant is a 'fit and proper person'.
Janine Mace, Australian freelance finance and business journalist.
Americas
US
The end of 2004 saw a flurry of publications from the Financial Accounting Standards Board, notably Statement No 123 (revised 2004), Share-based Payment, in December. Statement 123(R) requires that the compensation cost relating to share-based payment transactions be recognised in financial statements, the measurement of that cost being based on the fair value of the equity or liability instruments issued. Such costs were not previously required to be included in the income statement. Public entities (other than those filing as small business issuers) will be required to apply the statement in their first interim or annual reporting periods beginning after 15 June 2005. The statement is the result of a two-year effort by FASB, which conducted extensive consultation on the new standard, including 60 public meetings.
FASB also issued Statement No 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No 29, Accounting for Nonmonetary Transactions. The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. They also eliminate the narrow exception for nonmonetary exchanges of similar productive assets, replacing it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance.
Inventory accounting also received attention, with the publication of Statement No 151, Inventory Costs. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognised as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities.
In addition, FASB issued Statement No 152, Accounting for Real Estate Time-Sharing Transactions, which amends FASB Statements No 66, Accounting for the Sales of Real Estate, and No 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects.
Sarah Perrin, accountant and writer.
Canada
The Accounting Standards Board (AcSB) plans to issue early this year three new Handbook sections - section 1530, Comprehensive Income, 3855, Financial Instruments - Recognition and Measurement, and 3865, Hedges. The sections apply to all entities, including not-for-profits, and would be effective for interim and annual financial statements for fiscal years beginning on or after 1 October 2006; earlier adoption is permitted only for fiscal years ending on or after 31 December 2004. The AcSB launched its Financial Instruments project in January 2002 in order to develop standards that would be harmonised with those of FASB. However, since the AcSB emphasises principles rather than rules, the Canadian standards will not be as detailed as the US ones. The intent is to allow enterprises to report in accordance with Canadian GAAP as well as US GAAP. The Canadian standards are modelled on the new version of IAS 39, Financial Instruments - Recognition and Measurement, which had been developed from FAS 115, Accounting for Certain Investments in Debt and Equity Securities, and FAS 133, Accounting for Derivative Instruments and Hedging Activities. Ultimately, the AcSB would support a single, globally harmonised standard for recognition and measurement of financial instruments.
The AcSB has addressed the accounting implications of a recent Supreme Court of Canada decision by making an addition (Q&A 98.2) to the Supplement to the Employee Future Benefits Implementation Guide for Section 3461, Employee Future Benefits. The Province of Ontario's Pension Benefits Act requires that plan participants affected by a partial wind-up of a defined benefit pension plan be granted the same entitlements as if the plan were completely wound up on the date of the partial wind-up. In Monsanto Canada Inc v Ontario (Superintendent of Financial Services), July 2004, the Supreme Court decided that the plan must pay out the actuarial surplus related to the portion of the plan being wound up. While the decision directly affects Ontario plans, it may also have an impact in other jurisdictions that have similar rules for partial wind-ups.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
South African banking has had to cope with so many regulatory changes in 2004, but these changes have not affected the banking industry alone.
The new Financial Advisers and Intermediary Services (FAIS) Act, which took effect in October last year, now makes it illegal for anyone, including auditors, to give investment advice to the public without a licence. Penalties include a fine of up to R1m or a 10-year jail sentence.
The Act requires auditors to inform the Registrar of Financial Services Providers of any irregularity or suspected irregularity which the auditor sees as material in the conduct or affairs of a financial services provider. This law goes further than the auditing standard requiring auditors to report on 'an irregularity which has caused or is likely to cause financial loss to the enterprise or to any of its members or creditors' as it does not limit the irregularity to one that causes financial loss. So where a financial provider does not comply with regulations even if it does not cause financial loss, the breach must be reported.
New anti-money laundering legislation and the adoption of IAS 39 will also have an impact on the auditing of financial institutions. IAS 39 will result in the adoption of more sophisticated and complex models, processes and data requirements at financial institutions to account for hedge accounting and loan loss provisions.
Irene Christopher, head of policy
development, ACCA South Africa . |
