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International
Following the pattern we have seen almost every month since the issue of the revised IAS 39, Financial Instruments: Recognition and Measurement, a further minor amendment is being proposed. An exposure draft suggests amendments to the wording for the disclosures in respect of “Day 1 profits” arising on initial recognition of financial instruments. The changes are minor and this was reflected in a very short commentary period which expired on 1 June.
IFRS 2, Share-based Payments, applies for periods beginning on or after 1 January this year and the International Financial Reporting Interpretations Committee (IFRIC) has recently issued two draft interpretations providing further clarification on the application of the standard.
D16, Scope of IFRS 2, clarifies that transactions within the scope of IFRS 2 include those in which the entity cannot specifically identify some or all of the goods received. The consensus considers that where the value of the goods or services appears to be less than the fair value of the equity instruments granted, then this is indicative of the fact that other consideration (i.e. goods or services) has been (or will be) received.
D17, IFRS 2—Group and Treasury Share Transactions, provides guidance on applying the principles of IFRS 2 to transactions involving treasury shares and to two or more entities within a group. The proposed Interpretation considers when particular types of transaction should be accounted for as cash-settled or equity-settled share-based payment transactions.
The draft consensus takes the view that where an entity receives services from its employees as consideration for equity instruments in that entity, these should be accounted for as equity-settled even where the entity acquires the shares from another party (for example another shareholder).
Where a parent company grants rights to its equity instruments to the employees of a subsidiary, these should be accounted for as equity-settled transactions in the parent and the subsidiary as well as the consolidated accounts. Where it is the subsidiary that grants options in the parent, these should be accounted for as cash-settled; in the group accounts, however, they would be accounted for as an equity-settled transaction.
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
A flurry of activity from the Auditing Practices Board reflects the considerable change taking place in UK auditing requirements.
The APB’s recent draft bulletin, Auditor’s Reports on Financial Statements, provides updated examples of auditor’s reports that reflect numerous developments. These include the introduction of International Standards on Auditing (UK and Ireland), the inclusion in auditor’s reports of “emphasis of matter” paragraphs rather than “fundamental uncertainty” paragraphs, the adoption by the European Union of International Financial Reporting Standards for the consolidated accounts of listed companies, as well as other legal and corporate governance changes in the UK.
However, as the APB notes, the specific wording to be used in the auditor’s report when describing the financial reporting framework is still under debate. The wording included in the APB’s bulletin is “those IFRS adopted for use in the European Union”, but this could change if consensus in Europe finally settles on some different form of text.
Public comment is also being sought on two draft Statements of Investment Circular Reporting Standards, SIR 3000 and SIR 4000, which establish the reporting standards applicable for accountants reporting on profit forecasts and on pro forma financial information. They reflect the requirements of the EU Prospectus Directive, under which a reporting accountant will have to express an opinion as to whether or not a profit forecast or pro forma financial information has been “properly compiled” on the basis stated by the directors.
Meanwhile, the APB has issued two finalised bulletins, both focused on audit risk and fraud, but one aimed at auditors of occupational pension schemes and the other at auditors of banks and building societies. The bulletins contain supplementary guidance and reflect the introduction of the new ISAs (UK & Ireland), which contain additional requirements compared to the Statements of Auditing Standards they replace.
Sarah Perrin, accountant and writer.
Life has become much more difficult for Irish insolvency practitioners in the last few years. While there is still no requirement to be professionally qualified or licensed, the law has changed and the regulatory environment has substantially tightened. The requirement to report to the office of the Director of Corporate Enforcement and to take, and fund, disqualification or restriction actions against directors has considerably increased both the professional risk and the cost of insolvency assignments. To assist members in dealing with such assignments, ACCA, with the Consultative Committee of Accounting Bodies in Ireland (CCABI), produces Irish Statements of Insolvency Practice (SIPs). These are similar to UK statements of a similar name but are completely rewritten to reflect the different legislation.
During the past year, the Insolvency Sub-committee of CCABI reviewed and redrafted all existing SIPs. Insolvency assignments in the UK require both a licence and monitoring, however, as an unregulated activity in Ireland; no licence is required and ACCA does not monitor Irish insolvency work in the same way that, for example, they would monitor audit work. Insolvency work does come within the ACCA definition of public practice and, to accept an appointment, a member must hold a practising certificate. The revised SIPs reflect current best practice and Irish company law, and ACCA members are expected to comply with them on all Irish insolvency assignments. SIPs should not impose any additional requirements for members accepting insolvency assignments.
The full list of SIPs is as follows:
- Preparation of Insolvency Officeholder’s Receipts and Payments Accounts
- Planning and Administration of Creditors’ Meetings
- Remuneration of Insolvency Officeholders—Republic of Ireland
- Proxy Forms
- The Handling of Funds in Formal Insolvency Appointments
- A Receiver’s Responsibility to Preferential Creditors
- Dealing with Employee Claims
- Taxation Matters of Practice
- Guidance for Members of the Committee of Inspection in Court and in Creditors’ Voluntary Liquidations
- Reporting by Liquidators to the Director of Corporate Enforcement
- Acquisition of Assets of Insolvent Companies by Directors
- A Liquidator’s Investigation into the Affairs of an Insolvent Company
- A Receiver’s Responsibility for the Company’s Records.
The revised SIPs are applicable from 1 May 2005 and copies are available on ACCA’s website at ireland.accaglobal.com/ireland/irish_technical_resources/insolvency.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & China
A Professional Ethic Statement was issued regarding change of auditors of a listed company. For all resignations and terminations of auditors which take place on or after 1 June 2005, the outgoing auditors are required to prepare a letter to the audit committee and the board of directors setting out the circumstances leading to their resignation or termination. The outgoing auditors should also note whether the circumstances leading to their resignation or termination, as announced by the listed issuers in accordance with the Listing Rules, are materially different from the circumstances as reported by them in their Letter of Resignation or Termination, and should write to the audit committee and board of directors of the listed issuer regarding those matters.
With the new Hong Kong Financial Reporting Standards being effective from the accounting periods beginning on or after 1 January 2005, the Hong Kong Stock Exchange has issued an announcement setting out circumstances where additional disclosure requirements relating to the impact of these new standards are required—in particular, with respect to the qualitative information on the prospective changes in accounting policies in relation to the new standards, and the financial effect of the prospective changes on the net profits and net assets.
The Ministry of Finance issued Accounting for Trust Business, specifying the accounting for trustee, truster, and beneficiary. It states that a trust project, which consists of an asset or assets managed according to a trust indenture, should be regarded as an accounting entity and be accounted for separately on a going-concern basis. It sets out the codes and explanation of accounts, and formats of financial reports for trust business.
The Ministry of Finance, jointly with the State-owned Assets Supervision and Administration Commission, issued provisional regulations on MBO of state-owned assets from enterprises. These regulations set out the requirements, including audit, asset counting, employee redundancy, proof of financial resources, etc, that should be met in a MBO of state-owned assets.
Sonia Khao, head of technical services, ACCA Hong Kong.
Malaysia
The Malaysian Accounting Standards Board is finalising 21 financial reporting standards in a move that is expected to bring Malaysia closer to world convergence of financial reporting standards. The 21 standards comprise revisions to 16 existing accounting standards and five new standards, which include FRS 139, Financial Instruments: Recognition and Measurement.
The MASB aims to issue all the 21 standards by November this year. The standards are expected be effective from 1 January 2006, subject to approval by the Board.
On another note, the MASB recently released an exposure draft on exploration for and evaluation of mineral resources. The proposed standard seeks to increase transparency by requiring improved disclosures for exploration and evaluation assets.
It is identical to IFRS 6, Exploration for and Evaluation of Mineral Resources, which was issued by the IASB in December 2004. IFRS 6 offered, for the first time, guidance on accounting for exploration and evaluation expenditures.
Like the international standard, MASB’s proposed standard enables entities reporting exploration and evaluation assets to comply with international financial reporting standards while avoiding wholesale changes to their accounting policies.
The proposed standard allows entities to continue to account for exploration and evaluation assets using the existing accounting policies. However, if an entity wishes to change its accounting policy on exploration and evaluation assets, it should determine whether the change would result in the financial statements providing reliable and more relevant information. The proposed standard has made modest improvements to the recognition and measurement practices, in particular with regard to the recognition of impairment on exploration and evaluation assets.
Comments are invited by 30 August 2005. Copies of the exposure draft are available on MASB’s website www.masb.org.my.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The Singapore Exchange (SGX) plans to enhance its listing rules and processes in order to raise corporate governance standards and promote good regulatory practices. For this purpose, it has issued a public consultation paper entitled Proposed Amendment to the Listing Rules. The comment period is from
30 May to 1 July 2005.
Among the more radical proposals are Proposals 9 and 10. Proposal 10 requires a confirmation from the board of directors and chief executive officer regarding the internal controls of the company, including whether responsibilities for staffing internal control functions are explicitly assigned; whether procedures exist for assessing the effectiveness of the company’s internal controls; whether channels for reporting significant risk and internal control matters to the board and CEO are clearly specified; and whether anything has come to the attention of the board and CEO with regards to internal controls that would have a material adverse effect on the company.
Proposal 9 requires directors to provide a “negative assurance” confirmation that, to the best of their knowledge, nothing has come to the attention of the board which may render the interim financial results to be false or misleading.
CCDG issued a guide in 2004 for the operating and financial review (the OFR Guide) for listed companies. The OFR Guide helps listed companies prepare the OFR in their annual reports. To encourage issuers to adopt best practices as set out in the OFR Guide, the Exchange proposes to issue a practice note to listed companies to publish the OFR Guide in their annual reports.
Earlier in the year, the Council on Corporate Disclosure and Governance (CCDG) issued a consultation paper with a view to amending and enhancing its Code of Corporate Governance. The proposed new Corporate Governance Code, together with the above proposals by SGX, when implemented, is expected to significantly enhance corporate governance in Singapore in the near future.
SGX’s consultation paper can be downloaded at www.sgx.com.
Joseph Alfred, technical manager, ACCA Singapore.
Australia & New Zealand
A new draft tax ruling is creating major concern among Australian accountants utilising what has been a common business structure for professionals.
Adding service entities or trusts to a professional practice has long been an accepted method of minimising tax and protecting assets from litigious clients. But all that looks set to change following the release of a new draft ruling by the Australian Taxation Office (ATO).
For some time, the ATO has been concerned about the use of service entities by professionals and has been flagging a possible crackdown.
According to the ATO, service entities usually involve “a taxpayer incurring a deduction for fees and charges in the conduct of its business for the acquisition of staff, clerical and administrative services, premises, plant and/or equipment from an associated entity”. Profits generated within the service entity are usually distributed to the spouse and family members.
Service trust arrangements are commonly referred to as Phillips arrangements, a reference to the major Federal Court decision on this issue. Since that 1978 decision, service trusts have been used by professional partnerships as a holding vehicle for asset protection and to minimise tax through income splitting.
The problem now is that, in the ATO’s view, service trusts have strayed from the procedures found acceptable in the Phillips decision.
In announcing draft tax ruling TR 2005/D5, the tax commissioner said the ruling had been developed to address significant compliance issues identified in recent audits. These are believed to have targeted major accounting and legal firms.
The ATO’s key concerns with service trusts are that the:
- service fees or charges are often disproportionate or excessive in relation to the benefit conferred
- service entities are highly integrated with the professional practices and there is little or no clear evidence of a substantive and discrete business being conducted, and
- relevant documentation is either non-existent or does not reflect the substance of what actually occurs between the parties.
Public comment on the draft ruling closed in late June and a final ruling is expected later this year, with the new interpretation likely to be applied retrospectively.
Janine Mace, Australian freelance finance and business journalist.
Americas
US
Further fruits of the convergence effort between FASB and the IASB have appeared in the form of FASB’s new Statement No 154, Accounting Changes and Error Corrections.
The statement applies to all voluntary changes in accounting principle and requires the retrospective application of such a change to prior periods’ financial statements, unless it is impracticable. This is a different approach to that taken in the preceding guidance contained in Opinion 20, which required that most voluntary changes in accounting principle be recognised by including the cumulative effect in net income of the period of the change.
FASB believes the new approach improves financial reporting by enhancing the consistency of financial information between periods. It also replicates the requirements of the IASB in this area, which FASB recognised were better than its own.
With a view towards simplifying US GAAP, the new guidance replaces both Opinion 20 and Statement 3. Statement 154 therefore carries forward the provisions of Statement 3 that govern the reporting of accounting changes in interim financial statements. It also carries forward many of the provisions of Opinion 20 without alteration, including the provisions related to the reporting of a change in accounting estimate, a change in the reporting entity, and the correction of an error. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after 15 December 2005.
Meanwhile, FASB has continued its deliberations on the conceptual framework, a joint project with the IASB. The Board has discussed issues relating to some of the qualitative characteristics of accounting information, concluding that relevance is an essential qualitative characteristic. The widely misinterpreted term “reliability” is to be dropped, however, and replaced by “faithful representation”—a change from the current IASB and FASB frameworks. The discussions have also concluded that financial information needs to be neutral and verifiable.
Sarah Perrin, accountant and writer.
Canada
In order to provide guidance on the authority of recommendations, explanatory material, and various publications that a practitioner refers to during an assurance engagement, the Auditing and Assurance Standards Board (AASB) has established a Canadian GAAS hierarchy. It has approved, subject to written ballot, a new Handbook section on the Authority of Auditing and Assurance Standards and Other Guidance (Section 5021). The aim with the new section is to clarify the authority of different pronouncements that the Canadian Institute of Chartered Accountants (CICA) has issued. As well, the authority of italicised and non-italicised text in the Handbook has been clarified in the Introduction to Assurance and Related Services Recommendations. Amendments to individual Handbook sections may follow in order to conform to this new hierarchy.
Since Canada bases its standards on US and international standards, which have different structures and use different terminology, it has been difficult for Canadian standard setters to adopt a consistent structure and terminology. When developing Canadian assurance standards, the board and its task forces had to decide what procedures were necessary and what were only examples of possible procedures. Different approaches had been taken on different standard setting projects, which resulted in confusion as to what procedures are required. Also, the status of joint guidance produced by the CICA and AICPA was unclear because there had been no Canadian GAAS hierarchy or formal due process for this guidance.
In creating the new standard, the AASB also monitored the International Auditing and Assurance Standards Board’s Clarity Project, which worked to improve the clarity of IAASB standards.
The new AASB section will be released
in August and will be effective for financial reporting periods beginning on or after
1 September 2005.
Alison Arnot, freelance writer and editor, Ottawa. |
