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international
Developments in international financial reporting continue to emanate primarily from the International Financial Reporting Interpretations Committee (IFRIC). In the past couple of months draft interpretations have been issued dealing both with new accounting areas (service concessions) and to clarify further aspects of IAS 39, Financial Instruments: Recognition and Measurement.
Service concessions typically arise where governments enter into arrangements to attract private participation in the development, financing and operation of infrastructure assets. IFRIC is proposing that the accounting treatment of such concessions should follow one of two models, dependent upon the specific circumstances of the contract.
Draft interpretation D12 deals with how the operator should determine which of two accounting models should be applied. The accounting requirements of the two models are then dealt with in draft interpretation D13, The Financial Asset Model, and D14, The Intangible Asset Model.
It is being proposed that service concession infrastructure should not be recognised as property, plant and equipment by the operator. It is, however, acknowledged that the operator does receive certain rights under the contract. These rights should either be accounted for as a financial asset if the grantor has primary responsibility to pay the operator for the services, or an intangible asset in all other cases (for example, where the users pay for all or part of the use of the asset).
IAS 39 continues to provide issues requiring the clarification of IFRIC. The most recent draft interpretation D15 deals with considerations surrounding whether it is appropriate to reassess the existence of embedded derivatives in a financial instrument. It is proposed that determining the existence of an embedded derivative should be made in accordance with IAS 39 on initial recognition and, thereafter, would be prohibited. When entities first apply IAS 39, the existence of an embedded derivative should be considered based on the facts at the date the related contract was first entered into.
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
What should be the future role of the UK Accounting Standards Board? The ASB has issued a consultation document on this very topic, arguing that its most significant future role will be in contributing to the development, with the International Accounting Standards Board and others, of a set of high quality global accounting standards.
It also identifies its other major activities as influencing European policy on accounting standards, achieving convergence of UK standards with International Financial Reporting Standards, improving other aspects of UK accounting standards, and improving communication between companies and investors (including developing and implementing standards for the new statutory Operating and Financial Review).
Meanwhile, the ASB has published an abstract from the Urgent Issues Task Force on Revenue Recognition and Service Contracts. The abstract explains that, as a matter of principle, there is no difference between the accounting required for long term contracts and other contracts for services. The overriding consideration is whether the seller has performed, or partially performed, its contractual obligations. A principal conclusion of the abstract is that where the substance of a contract is that the seller's contractual obligations are performed gradually over time, revenue should be recognised as contract activity progresses.
A separate draft UITF abstract has also been issued, Reassessment of Embedded Derivatives. The draft abstract clarifies when an entity should assess whether an embedded derivative meets the conditions requiring it to be accounted for separately from the host contract, under the requirements of FRS 26 (IAS 39), Financial Instruments: Measurement. The document is based on a draft interpretation issued by the IASB's International Financial Reporting Interpretations Committee.
The ASB has also issued an exposure draft on Corresponding Amounts, which reflects the Department of Trade and Industry's draft regulations removing from law the requirements to restate corresponding amounts when they are not comparable.
Sarah Perrin, accountant and writer.
For accounting periods beginning on or after 1 January 2005 all Irish listed companies, along with the rest of the listed companies in the EU, must prepare their consolidated financial statements in accordance with IFRS.
On 10 March 2005 the Irish Government confirmed that, while IFRS must be used for the consolidation, all Irish companies will have a choice of using IFRS or UK GAAP when producing their individual financial statements.
For listed companies the most crucial aspect of the change is to keep the market informed of the possible impact in year one and on an ongoing basis. Both Bank of Ireland and AIB, the two largest banks in Ireland, have given the market detailed analysis, including a predicted drop in reported profits of up to 12% next year for Bank of Ireland. Some of the smaller banks have not informed the market of the impact, and the uncertainty is now starting to adversely affect their share price.
For unquoted companies the choice of IFRS or UK GAAP will depend to some extent on the tax implications. The Irish tax authorities have confirmed that, subject to some specific requirements, IFRS financial statements can be used as the starting point for calculating a company's tax liability. In summary, the tax issues are:
- there is provision to avoid double taxation on the changeover
- there are anti-avoidance provisions for inter-group transactions where one company uses IFRS and another uses UK GAAP, and
- there are specific treatments for prior year restatements arising from the change to IFRS, including the spreading over five years of any excess or reduced tax payable because of the transition.
The starting point for calculating the tax charge is the profit per the financial statements. This profit figure will be different under IFRS compared to UK GAAP. The Government has made provisions to ensure that the tax implications of a number of items will not change when a company changes to IFRS. These items include share options and share-based payments, capitalised development expenditure and interest payments.
There are some other taxation issues which need to be addressed by companies prior to a change from UK GAAP to IFRS. These include:
- the 'unrealised' gains in respect of financial assets or liabilities calculated by reference to fair values (using IAS 39)
- the accounting treatment of items such as arrangement fees, and
- the re-measurement of bad debt provisions under IAS 39 compared to UK GAAP bad debt provisions.
A statement of practice from the Revenue Commissioners is expected later this year and this is expected to clarify any matters which remain unclear at that stage.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & China
On 16 March, the Financial Secretary of HKSAR delivered the 2005 Budget speech. There are no changes to profits tax, however several allowances were adjusted for salaries tax as follows:
- basic and additional allowances are introduced at HK$15,000 each for taxpayers caring for dependent parents or grandparents aged between 55 and 59
- child allowance is increased from HK$30,000 to HK$40,000 per child.
Other highlights of the Budget include:
estate duty will be abolished to promote the development of asset management business in Hong Kong
- the introduction of 'green' taxes, and
- a public consultation on broadening the tax base through a goods and services tax will be launched.
In September 2003, the Financial Services and the Treasury Bureau (FSTB) conducted a public consultation on the 'Proposals to: (a) Enhance the Oversight of the Public Interest Activities of Auditors; and (b) Establish a Financial Reporting Review Panel'. The proposal aims at enhancing the regulatory regime for the accounting profession. Most of the respondents generally supported the proposals.
Building on public support, the FSTB now proposes to set up a new statutory body, the Financial Reporting Council, to oversee an Audit Investigation Board (AIB) and Financial Reporting Review Committee(s) (FRRC). The Audit Investigation Board will carry out investigations into suspected irregularities concerning auditors of listed corporations and collective investment schemes listed in Hong Kong. The FRRC will enquire into suspected non-compliance of the accounts and financial statements for corporations and collective investment schemes listed in Hong Kong with relevant legal and accounting requirement.
While the public is now consulted on the detailed proposals, a Bill is being formulated for introduction to the Legislative Council.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Institute of Accountants (MIA) recently issued Recommended Practice Guide (RPG) 6, Update on Auditor's Report on Financial Statements, to assist practitioners in clarifying their responsibilities under the Malaysian Companies Act 1965 in relation to the auditor's report.
Referring to the Scottish judgment in Royal Bank of Scotland v Bannerman Johnstone Maclay and Others, relating to an auditor's duty of care to third parties, MIA recommends that practitioners who wish to seek to clarify their existing responsibilities adopt the following clarification wording in the statement of auditor's responsibility of the auditor's report, prepared for the purpose of satisfying the requirement in Section 174 of the Companies Act 1965: 'It is our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act 1965 and for no other purpose. We do not assume responsibility towards any other person for the content of this report.'
The RPG also clarifies that the inclusion of this recommended wording in the auditor's report does not alter the responsibilities of auditors to their clients and does not mean that auditors will never agree to take on responsibilities to third parties. Auditors are still required to carry out their duty in accordance with approved Standards on Auditing. This additional wording only clarifies that their duty is to the members of the company and that the auditors will accept only duties that are expressly agreed.
MIA also recently issued the following proposed Malaysian Approved Standards on Auditing (MASA) for comments of interested parties.
- ED 315/2005, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
- ED 330/2005, The Auditor's Procedures in Response to Assessed Risk
- ED 500(R)/2005, Audit Evidence.
These exposure drafts are drawn primarily from the International Standards on Auditing issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The deadline for comments on the above exposure drafts is 31 May 2005.
Copies of RPG 6 and the above exposure drafts can be downloaded from www.mia.org.my.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The Council on Corporate Disclosure and Governance (CCDG) has issued a policy statement on Prescribing Accounting Standards in Singapore. The CCDG is empowered under the Companies Act to prescribe accounting standards for use by all companies incorporated in Singapore and by branches of foreign companies in respect of their Singapore operations.
In this statement, CCDG confirms its commitment to adopt International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs) issued by the IASB. The CCDG believes that convergence with international standards will achieve greater transparency and comparability of financial information among companies and help lower compliance costs for companies investing in Singapore, as well as companies going overseas.
The CCDG also believes it is useful to maintain good communication with the IASB by generating views on IASB's projects for the Board's attention. This will be facilitated through representation on the IASB Standards Advisory Council, participation at standard setters meetings, reviewing and commenting on relevant IASB's research and improvement projects, and working with IASB liaison representatives. The CCDG also sees the benefit of collaborating with national standard setters in the region in reviewing convergence issues, especially where there are similar concerns.
To ensure that standards prescribed are of high quality, and various constituencies are given adequate opportunities to express their views, the CCDG adopts a formal and rigorous process in prescribing Financial Reporting Standards (FRSs). The CCDG will work closely with the Accounting Standards Committee (ASC) of the Institute of Certified Public Accountants of Singapore (ICPAS) in reviewing new accounting proposals and prescribing accounting standards. To facilitate efficient and effective reviews, the ICPAS ASC sets up standing subcommittees, comprising both ASC members as well as representatives from key affected or interested industries (e.g. banking, property, manufacturing, insurance, etc). These subcommittees form the core expert groups to review and deliberate on accounting issues pertaining to their industries. A flowchart of the detailed procedures adopted by the CCDG in prescribing accounting standards in Singapore can be downloaded from CCDG's website (www.ccdg.gov.sg).
Joseph Alfred, technical manager,
ACCA Singapore.
Australia & New Zealand
The crackdown on so-called 'soft dollar commissions' occurring across the Australian financial services industry has reached the accounting profession, with an exposure draft for a new professional standard being released for the financial planning members of two of the largest professional accounting bodies.
In Australia, accountants are increasingly moving into the financial planning segment and now represent more than 10% of the local industry.
The new professional standard, APS 12, Statement of Financial Advisory Service Standards, will govern all aspects of financial advice from the initial engagement through to payment of fees and commissions, rationale and continuous disclosure. It also takes a strong stand in relation to alternative remuneration, independence and professionalism.
The new standard requires:
- mandatory provision of a terms of engagement letter outlining fees, deliverables and timeframes prior to commencement of work
- clear disclosure of fees for service, a recommendation to opt for fee-based service rather than commissions
- a ban on gifts, sponsorship and rewards such as office equipment received as a result of achieving specific sales targets (soft dollar commissions)
- prohibition of initial discounting with the intention of recovery through subsequent higher fees and commissions
- an obligation to explain in clear terms the costs of the initial and ongoing advice
- mandatory disclosure of buyer of last resort arrangements due to their links to product preferences, and
- an obligation to disclose conflicts of interest.
In several areas the requirements for accountants go further than existing industry requirements, making mandatory a number of standards currently only recommended as best practice by other professions.
Under the statement, financial advice includes: the provision of personal advice on financial products such as shares, managed funds and life insurance; the taxation aspects attaching to this advice; dealing in financial products as defined in the Corporations Act; and provision of non-licensed advice, such as mortgage or finance broking and strategic advice.
Janine Mace, Australian freelance finance and business journalist.
Americas
US
FASB has updated its technical plan for the six months to the end of September 2005. The revised plan sets FASB a number of goals, including that of issuing a due process document on its conceptual framework project in the fourth quarter of 2005. The document would address issues relating to the objectives of financial reporting and the qualitative characteristics of accounting information. The Board has also set itself the goal of publishing its preliminary views on its project on liabilities and equity in the first quarter of 2006. More immediately, an exposure draft on proposed changes to FASB Statement No 109, Accounting for Income Taxes, resulting from the Board's short term international convergence project, is expected to be issued in the third quarter of 2005.
The Board has also decided to add a project to its agenda to reconsider the disclosure requirements of Statement No 133, Accounting for Derivative Instruments and Hedging Activities. FASB will consider requiring enhanced disclosures following criticism that the statement lacks sufficiently transparent disclosures to allow a user of the financial statements to assess the overall risk of derivatives on a reporting entity from both a quantitative and qualitative perspective.
Meanwhile, FASB has issued a final interpretation (No 47) on Accounting for Conditional Asset Retirement Obligations. The interpretation is intended to result in more consistent recognition of liabilities relating to asset retirement obligations, more information about expected future cash outflows associated with those obligations, and more information about investments in long-lived assets. This is because additional asset retirement costs will be recognised as part of the carrying amounts of the assets. The term 'conditional asset retirement obligation' refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may not be within the entity's control.
Sarah Perrin, accountant and writer.
Canada
Recognising that 'one size does not necessarily fit all', the Accounting Standards Board (AcSB) has drafted a new five-year strategic plan for 2006'2007 that incorporates different strategies for different categories of reporting entities - public companies, private businesses, and not-for-profit organisations (NFPOs). In its invitation to comment, Accounting Standards in Canada: Future Directions - Draft Strategic Plan, issued on 31 March 2005, the AcSB said: 'It is not possible to address the divergent needs of different categories of reporting entities properly within a single strategy.'
The AcSB's strategy for public companies is to participate in the movement towards global convergence of accounting standards by converging Canadian GAAP with International Financial Reporting Standards (IFRS) over a period of about five years. After that, a separate Canadian GAAP for public companies will cease to exist.
For private companies, the Board will investigate who the users of these businesses' financial statements are and what their information needs are, and then determine what would be the most appropriate financial reporting model to meet those needs.
NFPOs will continue to apply those elements of GAAP that are applicable to their circumstances, while the Board consults with this sector. The Board needs to determine whether all NFPOs should base their accounting on standards for public companies, or whether some should use standards for Canadian private businesses, or be exempted from accounting standards altogether.
Canada will continue to maintain its own standard setting capability in order to carry out this strategic plan, which is the result of a series of consultations and comments received after an earlier invitation to comment issued last May. The AcSB will receive another round of input through letters and consultations until 31 July. It expects to approve its final plan next March, with implementation on 1 April 2006.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
New audit risk standards have been introduced by the International Assurance and Advisory Standards Board and have been adopted in South Africa as South African Auditing Standards effective for audits of financial statements for periods beginning on or after 15 December 2004.
The audit risk standards, which include ISA 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, ISA 330 and ISA 500 (Revised), Audit Evidence, gave rise to amendments to ISA 200, Objectives and General Principles Governing an Audit of Financial Statements.
Auditors are now required to comply with minimum risk standards in the consideration and planning of an audit. This requires an auditor to gain an understanding of the presence of risk within a client entity when designing an audit.
In the past, auditors would develop an understanding of a potential client's entity to decide whether to accept the engagement and for planning the audit. But now the assessment of material risk, whether due to fraud or error, is given a higher priority in the understanding phase. The understanding of the entity should also be thorough enough to enable the auditor to design and implement further audit procedures.
According to ISA 315, risk assessment procedures may be used by the auditor as audit evidence to support the auditor's evaluation of the risk of material misstatements. In addition, in performing risk assessment procedures, the auditor may obtain audit evidence about classes of transactions, account balances, or disclosures and related assertions, and about the operating effectiveness of controls, even though such audit procedures were not specifically planned as substantive procedures or tests of controls. The extent of testing depends on what degree there is a significant increase in the risk of misstatement.
The increased emphasis on risk analysis will mean that an audit will take a lot longer to perform than it did in the past. The concern is that the new standards could increase audit costs considerably, but this will be justified by the added value to clients, not to mention improving the public perception of the profession.
Irene Christopher, head of policy
development, ACCA South Africa. |
