Technical update

international

The International Accounting Standards Board (IASB) has issued a limited amendment to IAS 21, The Effects of Changes in Foreign Exchange Rates. Before the amendment, IAS 21 required differing accounting treatment for exchange differences arising on intra-group loans to or from a foreign operation, depending on whether the loan was denominated in the functional currency of one of the parties to the loan or not. The amendment will allow such loans to be treated as part of the net investment in the foreign operation, with exchange differences being taken to equity rather than the profit and loss account. The amendment also clarifies that a loan between the foreign operation and any part of the group can be part of the net investment, rather than the previous position which only allowed this treatment for loans with the parent company.

Revised guidance on implementing IFRS 4, Insurance Contracts, has been issued to reflect the changes made to IFRS 4 following the issue of IFRS 7, Financial Instruments: Disclosures, in August 2005. The changes affect only the disclosure section of the guidance.

The IASB has issued for comment a discussion paper which is one part of a much larger project looking at the measurement bases used in financial accounting. The paper, which deals with measurement on initial recognition of an asset or liability, has been prepared by the Canadian Accounting Standards Board. Subsequent stages of the project will look at remeasurement and impairment.
The aim of the project is to try to address the inconsistencies within existing standards and practices, including the use of both historical cost and fair value.
The paper, which favours the use of fair values, proposes a four-level hierarchy for initial measurement of asset and liabilities:
- Level 1 - observable market prices
- Level 2 - accepted valuation models or techniques
- Level 3 - current cost (i.e. reproduction cost or replacement cost), with the possibility of substituting historical cost where a reliable estimate can be made and the amount is expected to be recoverable
- Level 4 - models and techniques that use entity-specific inputs only.
According to the paper, only levels 1 and 2 should be described as fair value.
The paper also recognises that this is a very substantial project and that there are a number of areas where further research will be required.

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

UK accounting has again been brought into line with international standards.
In December, the UK Accounting Standards Board published Financial Reporting Standard 29 (IFRS 7), Financial Instruments: Disclosures. FRS 29 replaces the disclosure requirements of FRS 25 (IAS 32), Financial Instruments: Disclosure and Presentation, and applies to those entities FRS 26 (IAS 39), Financial Instruments: Measurement. The new standard requires disclosure of information on the significance of financial instruments for an entity’s financial position and performance, and about its exposure to risks arising from financial instruments. The reporting entity’s objectives, policies and processes for managing capital must also be disclosed.
In December, the ASB also issued an amendment to FRS 23 (IAS 21), The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation. The move followed a recent change made by the IASB to clarify the accounting requirements relating to investments in foreign operations.
Meanwhile, in January, the ASB opened up for public discussion its strategies for convergence and for communication, including influencing the direction of International Financial Reporting Standards. The ASB has revised its convergence strategy. It is no longer planning to use a phased approach whereby a number of standards would be brought into effect each year. While it is still proposing to issue new IFRS based UK accounting standards, these would not be mandatory before a single date, currently estimated to be for financial years beginning on or after 1 January 2009.
In terms of its communication strategy, the ASB wants to ensure it maintains a real-time dialogue with its constituents, while also influencing the decision-making process of the IASB. It is keen to improve its working relationship with the IASB, as well as liaising with the US Financial Accounting Standards Board and other national and international standard setting and advisory bodies.

Sarah Perrin, accountant and writer.

The Investment Funds, Companies and Miscellaneous Provisions Act 2005 has been enacted and audit reports and financial statements should now refer to “…the Companies Acts 1963 to 2005”. This takes effect for financial statements signed off after 30 June 2005. The accounting period end is not relevant.
The Safety, Health and Welfare at Work Act 2005 has been enacted. For preparers of financial statements, this means that you will no longer be required to refer to safety statements in a directors report. This takes effect for directors reports signed after 1 September 2005.
An example set of Irish financial statements and abridged financial statements are available to download from the Practice Ireland Community. To join the community, send a blank e-mail to practice.ireland-subscribe@smartgroups.com and follow the instructions in the automatic e-mail reply.

In the September 2005 edition of accounting & business, the requirements of Section 45 of the Companies (Auditing and Accounting) Act 2003 were detailed. The act introduced a new requirement for the directors of Irish companies over a certain size to prepare compliance statements, and for the company’s auditors to review and report to shareholders on how reasonable is the compliance statement. The column concluded that the requirements were unduly onerous and would be amended prior to being commenced.
The Government has now agreed to a substantially watered down compliance statement requirement in Ireland. The thresholds for coming within the scope of the requirements have been increased and there has been a reduction in the number of matters with which the directors must confirm compliance. Auditors will also no longer be required to review and report on the compliance statement.
Under the new proposals, all public companies and private companies with a turnover of more than 25m euros, and a balance sheet of more than 12.5 euros (previously this was “or” rather than “and”), must prepare a compliance statement. The compliance statement will now only confirm compliance with tax and company law. Previously, this included confirming compliance with “all other legislation material to the financial statements”. Full details can be obtained at www.clrg.org.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

HKAS 27, Consolidated and Separate Financial Statements, and HKFRS 3, Business Combinations, have been amended as a result of the implementation of the Companies (Amendment) Ordinance 2005. The meaning of a subsidiary under the Companies (Amendment) Ordinance 2005 has now been broadened by the newly added 23rd schedule. For the purpose of group accounts, the ordinance includes a true and fair overriding provision. Under Section 126, if compliance with the ordinance would be inconsistent with giving a true and fair view, the directors of the company should depart from the ordinance requirements to the extent necessary to give a true and fair view.

A new Code of Ethics for Professional Accountants was issued which adopts the IFAC Code of Ethics for Professional Accountants issued by the International Federation of Accountants (IFAC). Five fundamental principles of professional ethics, which are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour, apply under the framework. All professional accountants, both in public practice and in businesses, are required to identify threats to these principles as well as to ensure safeguards are in place to ensure these principles are not compromised. The effective date of the new code is 30 June 2006, and earlier application is encouraged.

The Revenue (Abolition of Estate Duty) Ordinance 2005 was gazetted on 11 November 2005. No estate duty will be charged on the estates of those deceased, dying on or after 11 February 2006. For those dying on or after 15 July 2005 and before 11 February 2006, estate duty will be charged at a nominal value of HK$100 if the value of their estates exceeds HK$7.5m.

The Chinese Securities Regulatory Commission issued revised Content and Format of Information Disclosure for Public Companies - Standard No 2. The revised standard specifies the disclosure requirement in the management discussion and analysis in the annual report and requires the disclosure of the remuneration of directors, supervisors, and senior management on an individual basis. Supervisors and senior management are required to provide assurance of the accuracy, completeness, and truthfulness of the information disclosed in the annual report.

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

Malaysia

The Malaysian Accounting Standards Board (MASB) has recently released exposure drafts on agriculture and insurance contracts.
MASB ED 50, the exposure draft on agriculture, is similar in all respects with IAS 41, Agriculture, issued by the International Accounting Standards Board (IASB) in February 2001. Once issued, this standard will be known as FRS 141 in Malaysia.
In a recent press release, MASB executive director Dr Nordin Mohd Zain said FRS 141 prescribes the accounting treatment, financial statement presentation and disclosures related to agricultural activity, which are not covered in other standards. Agricultural activity relates to the biological transformation of living animals or plants (biological assets) for sale into agricultural produce, or into additional biological assets.
FRS 141 prescribes the accounting treatment for biological assets during the period of growth, degeneration, production and procreation, and for the measurement of agricultural produce at the time of harvest.
The standard will require the application of fair value of biological assets up to the point of harvest, where any change in fair value less estimated point-of-sale costs of a biological asset is to be included in the net profit or loss for the period in which it arises.
ED 51 on insurance contracts is identical with IFRS 4, Insurance Contracts, which IASB issued in March 2004. Among the main features of the proposed Malaysian standard on insurance contracts are that it applies to all insurance contracts, including reinsurance contracts that an entity issues, and to reinsurance contracts that it holds.
In addition, it permits an insurer to change its accounting policies for insurance contracts only if the resulting financial statements present more relevant and reliable information.
Copies of the exposure drafts are available free of charge at the MASB office or at www.masb.org.my. The closing date to submit comments on the exposure draft is 31 March.

The Ministry of Finance recently issued procedures for the application and renewal of auditor/company liquidator and guidelines for the application and renewal of a tax agent. These procedures and guidelines are effective from 1 January 2006 and are available within the Technical Section - Guidelines/General at www.mit.org.my.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Companies (Amendment) Act 2005 will come into force with effect from 30 January. The amendments include the removal of the concept of par value and authorised capital, reform in the capital maintenance regime, introduction of treasury shares and liberalisation of the amalgamation process. For details, see ACRA’s (Accounting and Corporate Regulatory Authority) Legal Digest, downloadable at www.acra.gov.sg/legislation/index.html.
Meanwhile, Phase II of Singapore’s Competition Act takes effect on 1 January 2006. This includes the provisions on anti-competitive agreements, decisions and practices; abuse of dominance; enforcement; the appeal process; and miscellaneous areas, i.e. Sections 33-53, 61-94 and the third schedule of the Competition Act. Further details are available at app.mti.gov.sg/default.asp?id=570#9.

The Council on Corporate Disclosure and Governance invites comments on the IASB’s discussion paper on Measurement Bases for Financial Accounting - Measurement on Initial Recognition. Comments to be submitted to CCDG in written form, supported by specific reasoning, by 19 April. The paper can be downloaded at www.iasb.org/current/dp_pv.asp.

The Institute of Certified Public Accountants of Singapore has issued a revised SSA 230 on Audit Documentation. Significant revisions include the need to establish clear responsibilities for the auditor to assemble the final audit file on a timely basis, and sets out specific rules regarding deletions, modifications or additions to audit documentation after the date of the auditor’s report. This is effective for audits of financial information for periods beginning on or after 15 June.
In addition, Singapore Standard on Review Engagements (SSRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, has been issued, outlining the general principles of a review of interim financial information, providing guidance on the inquiries, analytical and other review procedures to be performed by the auditor, and prescribing the content of the review report. It is effective for reviews of interim financial information for periods beginning on or after 15 December 2006. Earlier adoption is permissible.
Further details can be obtained from www.accountants.org.sg, via “Technical”.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

The Australian Government has released the exposure draft of its anti-money laundering and counter-terrorism financing (AML/CTF) legislation. The impact on accountants’ client relationships is likely to be significant.
A key component of the local response to money laundering and terrorist financing risks, it is designed to address issues raised in the evaluation report on Australia released by the Financial Action Task Force on Money Laundering (FATF).
Australian implementation of the FATF recommendations will come in two tranches, with the first batch of legislation covering services provided by the financial services sector, gambling service providers and bullion dealers. It also covers lawyers and accountants when they provide services in direct competition with the financial sector.
The draft legislation requires businesses providing “designated services” to verify customer identity, conduct ongoing risk based customer due diligence, report suspicious matters, keep appropriate records and maintain a rigorous internal AML/CTF programme.
Following implementation of the first tranche of reforms, the Government plans to consider a second tranche that will extend the AML/CTF obligations to real estate agents, jewellers and professionals (e.g. accountants and lawyers) when they provide specified non-financial services.
While many traditional accountancy services such as preparation of taxation returns will not be designated services, other financial services identified as being at material risk of misuse by criminals and terrorists are covered in the draft legislation.
Examples of designated services include:
- acquiring or disposing of a security, promissory note or bill of exchange on behalf of a person
- providing a safe deposit box or similar facility, and
- providing advice on the acquisition or disposal of securities, derivatives, life insurance or sinking fund policies and superannuation.
New requirements for initial verification of client identity prior to providing designated services, and an obligation to identify the beneficial owners of funds and take reasonable measures to understand the ownership and control structure of legal entities and arrangement such as trusts and companies, are likely to create a significant workload for Australian accountants.
Public consultation on the new regime closes on 13 April, with the Senate’s Legal and Constitutional Legislation Committee also currently reviewing the exposure draft.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

FASB chairman Robert H Herz has highlighted FASB’s keenness to develop accounting standards that are based on principles rather than rules.
Speaking at a conference hosted by the American Institute of Certified Public Accountants in December 2005, Herz highlighted a number of “important and difficult” challenges facing the financial reporting system in the US. The most pressing of these, he suggested, was the need to reduce complexity and improve the transparency and overall usefulness of reported financial information. He said: “Long touted as a strength of our reporting system, the detail and volume of accounting, auditing, and reporting guidance now pose a major challenge to maintaining and enhancing the quality and transparency of financial reporting to investors and the capital markets. Many, including some members of FASB, believe that the current system has engendered a check-the-box, form-over-substance approach to accounting, auditing, and reporting by preparers, auditors and regulators, sapping professionalism and increasingly necessitating the involvement of technical experts to ensure compliance.” The results included increased costs and efforts involved in financial reporting, lack of transparency for investors, and an increasing number of restatements of financial reports by public companies.
The causes of the current complexity included resistance to change, outdated rules-based legacy accounting standards, and a continuing focus on short term earnings, Herz said. He noted that FASB was trying to address these issues by means of a three-pronged effort. First, it was systematically readdressing accounting standards in major areas where existing rules were complex and failed to provide relevant and transparent information. Secondly, it was aiming to improve the usability of accounting literature, developing new standards more consistent with a “principles- based” or “objectives-oriented” system. Thirdly, FASB had begun a project to strengthen its conceptual framework to provide a more solid and consistent foundation for the development of principles-based standards in future.

Sarah Perrin, accountant and writer.

Canada

The Canadian Institute of Chartered Accountants (CICA) has provided its forensic accountants with a set of standards to follow when conducting investigative or forensic accounting engagements. The CICA Alliance for Excellence in Investigative and Forensic Accounting released the draft standards for public comment in December. The process for developing standards for IFA engagements began in 2001. After issuing a number of documents for comment and holding several discussions with forensic accountants, the IFA Alliance Standards Committee developed a framework, rather than a rule based system, for conducting IFA assignments. The aim is to ensure a consistent standard of practice. The CICA believes the standards will be of interest to litigation lawyers, the primary users of IFA services, since the intent of the standards is to enhance the usefulness of the expert evidence provided by forensic accountants. CICA is accepting comments on the exposure draft from chartered accountants, members of the legal profession, and other interested parties until 28 February 2006.
In its draft strategic plan issued in March 2005, the Accounting Standards Board (AcSB) proposed separate strategies for public and private entities. As part of its private company strategy, it is examining the needs of private company financial statement users in order to determine the most appropriate financial model to meet those needs. The first step in the project - identifying the users of private company financial statements - was done in November and December 2005 through a survey of chief financial officers and owner-managers of private businesses on who uses their financial statements. The next step - collecting information on financial statement users’ financial needs through interviews and meetings - will be done in the first half of 2006. Based on the results it obtains, the AcSB will decide whether it should further explore a separate GAAP for private companies and, if so, continue work on this.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

The Public Hearings on the Auditing Profession Bill were conducted in Parliament by the Portfolio Committee on Finance in October 2005.
During their presentation, the audit firms appealed for the relaxation of certain provisions contained in the Bill.
Section 45 of the proposed act requires auditors to report in writing, without delay, to the regulatory board where there is a suspicion that a matter “is fraudulent or amounts to theft or is otherwise dishonest”. The audit firms argued that making auditors financially liable for failing to report irregularities was unreasonable and that the definition of reportable irregularity should be amended. The definition of a reportable irregularity does not refer to materiality at all, implying that even the slightest circumstance needs to be reported. Furthermore, auditors will not be given the opportunity to discuss potential reportable irregularities with clients before reporting to the regulatory board. This could mean potential legal action being raised against the audit firms.
The Bill states that where a registered auditor fails to report a reportable irregularity in accordance with Section 45, the auditor shall be guilty of an offence. The penalty for this offence is a fine and/or imprisonment for a term not exceeding 10 years. The audit firms argued that imprisonment for non-compliance in these circumstances is extreme as the auditor may not have had a criminal intent but may have made an unintentional mistake.
The two-year conflict of interest clause was also considered to be unreasonable and impractical. Section 44(5) states that a registered auditor may not become the auditor of an entity if, at any time during the two years prior to the commencement of the financial period to be audited, the registered auditor had a conflict of interest in respect of that entity. In reality, this could mean that an auditor cannot have a financial interest in any entity because there may be a requirement to audit that entity in the future. It was proposed by the audit firms that it would be more practical to require an auditor to dispose of any financial interest in an entity or to cease any other activity which could affect an auditor’s independence before being able to accept the appointment as auditor of that entity.
The establishment of multidisciplinary firms was encouraged. With business becoming more complex, there is a need for audit firms to diversify their skills to include specialist fields such as taxation, legal, actuarial and information technology. As a consequence, audit firms are now employing “partner-equivalent” persons to enable them to audit such entities. It was proposed that a safeguard be set to include a requirement that the majority of the partners are registered auditors.
The Bill does not provide for limitation of liability of statutory audits. This system imposes a burden on auditors which can prove to be entirely disproportionate. While auditors should be responsible for their actions, it was considered unfair that claimants can choose to pursue the auditor for the whole of their claimed loss, not necessarily because they think that the auditor is primarily responsible for that loss but because they estimate that the auditor, or their insurers, are most likely to be able to pay. It was also argued that this adds to the problem of attracting suitably qualified auditors. The audit firms support the introduction of limited liability partnerships. This type of a partnership protects partners personally from sequestration where they were not responsible for the failed audit.
The Bill was passed into law on 16 November 2005 and will soon be gazetted.

Irene Christopher, head of policy development, ACCA South Africa.