Technical update

international

The European Union’s Directive on waste electrical and electronic equipment requires that the cost of waste management for equipment sold to private households before 13 August 2005 should be borne by the producers of that equipment. There has been some uncertainty as to the accounting implications of the directive, in particular the point at which the manufacturer should recognise the liability for decommissioning such waste.
Clarity has been provided by the International Financial Reporting Interpretations Committee (IFRIC), which has recently issued a new interpretation dealing with accounting for liabilities associated with waste management costs. IFRIC 6, Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment, applies for periods beginning on or after 1 December 2005.
IFRIC 6 clarifies the circumstances in which producers of electrical goods will need to recognise a liability for the costs associated with decommissioning waste electrical and electronic equipment supplied to private households. The event that is considered to give rise to the liability and, therefore, its recognition, is participation in the market in a measurement period (i.e. a period in which market share is being determined for the purposes of allocating waste management costs). It is this date, and not the date of production of the equipment, that should be used as the trigger for the liability.
The application of the requirements of International Financial Reporting Standards (IFRS) to public sector entities is seen as an important step in bringing greater comparability to all types of accounting regimes. The International Public Sector Accounting Standards Board (IPSASB) has recently issued an exposure draft aimed at enhancing the extent of convergence between International Public Sector Accounting Standards (IPSASs) and IFRS. ED 26, Improvements to International Public Sector Accounting Standards, proposes changes to 11 accrual basis IPSASs reflecting developments in the equivalent IFRS.

The length and complexity of International Standards on Auditing (ISA) can make it difficult to determine how the requirements can be applied effectively and efficiently to the audits of smaller entities. The Small and Medium Practices Task Force of IFAC has recently issued a “request for proposal” to the member bodies of IFAC for the provision of an explanatory guide to ISAs for use in the audits of small and medium sized entities. Whilst the guidance will be welcome by many, final publication of the guide is not envisaged before March 2007.

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 UK Accounting Standards Board is proposing to amend one of its standards without issuing a formal exposure draft - a move described by ASB chairman Ian Mackintosh as “quite a dramatic step”.
Amendments to FRS 23, The Effects of Changes in Foreign Exchange Rates, are set out in a notice to constituents issued by the ASB in October. The adjustments reflect the International Accounting Standards Board’s first Draft Technical Correction (DTC1), which proposes a change to IAS 21 on which FRS 23 is based. DTC1 requires a new treatment for exchange differences arising on certain intra-group loans.
Although the ASB expects most people to welcome the proposals in DTC1, it is concerned about making such changes - and possibly creating the need for restatements - without more formal due process. Under the IASB’s draft policy, technical corrections to a standard would be made after a 30-day comment period and be generally effective immediately. The UK board has written to the IASB expressing its reservations about the limited formal due process involved. Nevertheless, it is proposing to update FRS 23 so as to avoid divergence between IASB standards and parallel UK versions.
Meanwhile, the ASB has issued FRS 28, Corresponding Amounts. The FRS builds on recent changes to company law, and largely replicates the previous legal requirements on corresponding amounts. It requires that corresponding amounts be shown for items in the primary financial statements and the notes to the financial statements; where corresponding amounts are not directly comparable with the amount to be shown for the current financial year, they should be adjusted. Most of the exemptions from showing corresponding amounts given in the Companies Act 1985 are maintained. The FRS also makes a consequential amendment to the Financial Reporting Standard for Smaller Entities (effective January 2005).

Sarah Perrin, accountant and writer.

All limited companies in Ireland are required to file an annual return with the Company Registration Office (CRO). Most companies are required to attach their financial statement to the annual return, and both the annual return and the financial statements are openly available to download at www.cro.ie. Up to the enactment of the Companies (Auditing and Accounting) Act 2003, unlimited and certain charitable companies (exempted companies) were exempt from the requirement to attach financial statements to their annual return. Section 47 of the 2003 Act introduced a requirement that, although full financial statements were not required, a report by the auditor confirming that they had audited the financial statements had to be attached to the annual return.
The filing requirements have been further amended by the enactment of Section 61 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005. From 1 December 2005, the auditor of an exempted company is required to prepare a special report to the directors which confirms that they audited the accounts for the relevant year and which includes within it the text of the auditor’s report as presented to the members of the company at the AGM. A copy of the special auditor’s report to the directors is required to be certified by a director and by the secretary of the company to be a true copy of that report and attached to any annual return of the company delivered to the CRO on or after 1 December 2005. Any annual return received by CRO on or after 1 December 2005 which does not have an appropriate auditor’s report attached will be rejected.
The full list of exempted companies is as follows:
- a private unlimited company (other than an unlimited company which is required to file accounts with its annual return pursuant to the EC (Accounts) Regulations 1993)
- a private company not trading for the acquisition of gain by the members
- a company not having a share capital which is formed for an object that is charitable and is under the control of a religion recognised by the State under Article 44 of the Constitution, and which exercises its functions in accordance with the laws, canons and ordinances of the religion concerned, and
- a company which is exempted by order of the Commissioners of Charitable Donations and Bequests for Ireland from the application of Section 128, being a company formed for charitable purposes not having a share capital.
Example wording for the special audit report and additional guidance is available at ireland.accaglobal.com/ireland/irish_technical_resources/auditing/.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

HK(IFRIC)-Int 6, Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment, will be effective for accounting periods beginning on or after 1 December 2005. This interpretation provides guidance on the accounting for liabilities for waste management costs under an EU Directive.
Amendments to HKAS 39, Financial Instruments: Recognition and Measurement, and HKFRS 4, Insurance Contracts - Financial Guarantee Contracts, are effective for accounting periods beginning on or after 1 January 2006.
Amendment to HKAS 1, Presentation of Financial Statements - Capital Disclosures, is effective for annual accounting periods beginning on or after 1 January 2007. Entities are required to provide information about the level of their capital and how capital is managed.
HKFRS 7, Financial Instruments: Disclosures, was issued and is effective for accounting periods beginning on or after 1 January 2007. It requires all entities to disclose risks arising from all types of financial instruments.

On 7 September, the Hong Kong Inland Revenue Department signed an agreement with Thailand on the avoidance of double taxation. Subject to the completion of ratification procedures for both sides, the agreement will take effect with respect to Hong Kong taxes from 1 April 2006 and with respect to Thai taxes from 1 January 2006.
Under the agreement, profits remitted by a branch office in Thailand to a Hong Kong head office, which are currently taxed at 10% withholding tax in Thailand, will no longer be taxed by the Thai Government. In addition, Thai withholding tax for royalties that are received from Thailand by a Hong Kong resident, and that are not attributable to a permanent establishment, will be reduced from 15% to 5% if paid for the use of, or the right to use, any copyright of literary, artistic or scientific work, and to 10% if paid for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process.

The Chinese Institute of Certified Public Accountants (CICPA) issued two exposure drafts on auditing standard for public consultation. These include Audit Considerations Relating to Entities Using Service Organisations, and Audit Report for Entities Using IFRSs. It also issued an exposure draft on Standard on Other Assurance Services - Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, and another on Standard on Related Services - Accounting Services.

The Ministry of Finance issued Provisional Regulation on Financial Instruments - Recognition and Measurement (Trial Implementation), stating that this regulation will be implemented as a trial commencing 1 January 2006 on commercial banks which are listed or are planned to be listed. The requirements stipulated in this regulation are similar to those in IAS 39.

The State Administration of Taxation issued a notice on capital adjustments for transfer pricing purposes. Capital adjustments are adjustments made to profit level indicators based on working capital (including accounts receivable, accounts payable, inventory, etc). If there are differences in working capital between the enterprise under examination and comparable companies, adjustments should be made for the effects of implicit interest expense embedded in working capital on profitability level. Such adjustment reflects profit differences resulting from differences in working capital, and enhances the comparability of profits.

Sonia Khao, head of technical services, ACCA Hong Kong.

Malaysia

The Ministry of Housing and Local Government has recently issued an exemption order under Subsection 2A(2) of the Moneylenders Act 1951.
The exemption order, gazetted on 14 July 2005, exempts specified companies and those companies that provide loans to related companies from all the provisions of the Act. The exemption order takes effect retrospectively from 1 November 2003.

Excerpts from exemption order
2. (1) A Company shall be exempted from all the provisions of this Act if:
- the company lends a sum of money: (i) to its related corporation as defined under Section 6 of the Companies Act 1965; or (ii) to its director, officer and employee as a benefit accorded to such person under his terms of employment
- the company subscribes or purchases debts securities
- the company: (i) is a holder of licence under the Securities Industry Act 1983 [Act 280]; or (ii) is approved by the Securities Commission under the Securities Commission Act 1993 [Act 498] to carry out activities relating to unit trust schemes; or (iii) is a scheduled institution under the Banking and Financial Institutions Act 1989 [Act 372] carrying on building credit business, development finance business or factoring business; or (iv) is a holder of a licence under the Offshore Banking Act 1990 [Act 443] or the Offshore Insurance Act 1990 [Act 444]; or (v) is an issuer of a credit card or a charge card approved under the Payment System Act 2003 [Act 267].

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

Singapore banks, significant insurers and financial holding companies are now required to comply with minimum corporate governance standards after the Monetary Authority of Singapore (MAS) recently enhanced the mandatory Corporate Governance Regulations. A “significant insurer” is a direct life insurer incorporated in Singapore with assets of at least $5bn.
The MAS also encourages these businesses to adopt the new best practices guidelines, Guidelines on Corporate Governance, issued in September, which are based on the Code of Corporate Governance revised and re-issued by the Ministry of Finance in July.
The regulations will take effect immediately; however, the affected companies are given until their respective AGMs in 2007 to comply. The guidelines take effect from the respective AGM of each financial institution held on or after 1 January 2007.
The Code and the regulations can be found at MAS’ website, www.mas.gov.sg. MAS has exempted “Murabaha financing” from the restriction in the Banking Act against non-financial activities, under the Banking (Amendment) Regulations 2005. Singapore banks will now be able to offer Murabaha, an important form of Islamic finance which is often used as short term financing and in trade finance. With this exemption, banks may offer Murabaha financing by purchasing goods on behalf of a customer and selling the goods to the customer at a marked-up price to be paid at a later date. This is a non-financial trading activity.
MAS recognises that Islamic finance is gaining global importance and is an important complement to the suite of products and services that Singapore as an international financial centre can offer. It is open to introducing more refinements to banking regulations to ensure that Singapore’s framework is conducive to the development of Islamic financial services. More details are available at the MAS website, www.mas.gov.sg.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Adoption of the local equivalents of the International Financial Reporting Standards (AIFRS) will be the focus of the 2005-06 financial reporting surveillance programme undertaken by Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC).
The AIFRS apply for financial years commencing on or after 1 January 2005, and the first financial reports under the new regime must include reconciliations of information to pre-AIFRS standards.
According to ASIC’s chief accountant, Lee White, the regulator recognises that AIFRS adoption “may raise interpretation and other issues for people, and we are keen to gain a full understanding of these issues through our surveillance process and other activities. ASIC will discuss these matters with relevant parties to ensure transparency and confidence in AIFRS reporting”.
Over the past three years, the corporate regulator has examined the financial reports of around 440 listed entities each year to check their compliance with the relevant accounting standards. These assessments form part of ASIC’s ongoing surveillance program, which aims to review the financial reports of all listed entities at least once every four years.
“ASIC’s financial reporting surveillance programme is important in delivering our strategic plan goal of strengthening the integrity of Australian corporations,” White explains.
The corporate regulator is determined to ensure that the market remains properly informed and investor confidence is maintained during the changeover to the new standards.
As well as reviewing selected financial reports for the year ending 30 June 2005 for their compliance with pre-AIFRS standards, ASIC also plans to review all listed entities’ financial reports for their disclosure of information required under AASB 1047, Disclosing the Impacts of Adopting the Australian Equivalents to International Financial Reporting Standards.
Financial reports for years ending 31 December 2005 will be reviewed for their compliance with AIFRS, as will selected half year reports from 30 June 2005 onwards.
After the reviews, ASIC plans to assist preparers and users to better understand its areas of concern and will consider appropriate intervention in relation to significant non-compliance with the standards where required.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

FASB is seeking feedback to help with the analysis of issues relating to the role of probability and uncertainty in defining, recognising, and measuring assets and liabilities. As FASB notes, that role currently varies among its standards and other publications, as well as between FASB and the IASB. As a result, the US board has issued an invitation to comment, Selected Issues Relating to Assets and Liabilities with Uncertainties, requesting input from interested parties.
Responses to the invitation to comment will feed into the next phase of work in the IASB and FASB’s joint conceptual framework project. This phase will focus on definitions of financial statement elements (assets, liabilities, revenues, expenses, and others), concepts for recognising and derecognising items that meet the definition of an element, and attributes for measuring recognised items. Consideration of probability and uncertainty will play a part in the debate.
Meanwhile, FASB has revised its December 2003 proposed statement, Earnings per Share, so as to eliminate differences with comparable international standards. The proposals would update the existing FASB Statement 128 (issued in 1997) and increase international harmonisation. The revised exposure draft also aims to simplify the existing guidance on the reporting of earnings per share. It clarifies earnings per share computations involving certain instruments, such as mandatorily convertible instruments and contractual obligations that may be settled with cash or by issuing shares.
FASB has also announced the launch of its Investor Task Force (ITF), an advisory resource that includes the US’ largest institutional asset managers and which is designed to provide the board with sector specific insight and expertise from the professional investment community. The FASB’s establishment of the ITF represents the latest in a series of steps aimed at enhancing participation of investors and other users of financial information in the standard setting process.

Sarah Perrin, accountant and writer.

Canada

In light of new civil liability provisions in securities legislation, the Auditing and Assurance Standards Board (AASB) has provided guidance to auditors who have been asked to provide written consent to the use of the audit report.
The AASB approved a new Assurance and Related Services Guideline in response to proposed amendments to the Ontario Securities Act, as well as similar provisions in the British Columbia Securities Act and a Uniform Securities Act proposed for adoption in other provinces or territories. This legislation includes provisions for civil liabilities if a reporting issuer, its directors, officers, or certain other individuals - including auditors who have consented in writing to the use of their report - issue a document or make an oral statement that contains a misrepresentation. In the past, civil liability provisions have been limited to misrepresentations contained in securities offering documents, such as prospectuses. These amendments will likely increase requests for the auditor to consent in writing to the use of the audit report, when the financial statements and audit report are posted on SEDAR and when the annual report is mailed to shareholders. Under the new legislation, auditors would be potentially liable for any misrepresentation contained in the financial statements and/or audit report, if they provide this written consent. The guideline outlines the work the auditor would complete before providing this consent, including performing review and subsequent event procedures, and determining whether the continuous disclosure document has been approved by appropriate officials.
The AASB has also approved revisions to Handbook Section 5145, Documentation, establishing standards and providing guidance on audit documentation; and to Section 6550, Subsequent Events, incorporating procedures adopted in the December 2004 reissuance of ISA 560, Subsequent Events. Approved new projects include revisions to Section 6930, Reliance on Another Auditor; Section 4500, The Auditor’s Standard Report; and Section 5305, Audit of Accounting Estimates.

Alison Arnot, freelance writer and editor, Ottawa.