Technical update

international

Management commentaries accompanying financial statements are considered to be an important part of financial reporting, although the form and content varies widely. Many countries have developed standards on the subject and the IASB has recently published a discussion paper, Management Commentary, which seeks comments on the role the IASB might play in improving the standard of management commentary.
The paper, which was prepared for the IASB by standard setters in New Zealand, Germany and the UK, together with the Canadian Institute of Chartered Accountants, seeks comments on the following:
- confirmation that a financial report should be viewed as a package comprising the primary statements, accompanying notes and the management commentary
- the objective of the management commentary should be to provide information to investors and to help them interpret the financial statements in the context of the environment in which the company operates
- it would not be appropriate to specify the precise information that should be included within the management commentary or how it should be presented. The requirements should instead set out the principle qualitative characteristics of the information as well as the essential areas of the management commentary, and
- where within the financial report the management commentary should be placed.

The International Accounting Standards Committee has, under its education initiative, issued a guide to the standards on financial instruments. The purpose of education material is to facilitate the consistent and rigorous application of IFRS, and the guide contains extensive cross-referencing between the pronouncements within the standard and the significant volumes of accompanying material. The guide also contains an overview on the issues surrounding first-time application of these complex standards and, in particular, the material explains the various exemptions that are available from retrospective application.

The International Auditing and Assurance Standards Board (IAASB) has agreed to defer the application date of certain recently amended International Standards on Auditing.
The reasons relate to possible inconsistencies and uncertainties between some of the requirements of ISA 200, Objective and General Principles Governing an Audit of Financial Statements, ISA 210, Terms of Audit Engagements, and proposed standard ISA 701, The Independent Auditor’s Report on Other Historical Financial Information. The amendments to ISA 200 and ISA 210 were to have been effective for periods beginning on or after 15 December 2005, but ISA 701 will not be finalised by that time and it is acknowledged that uncertainty could arise in this period. The entire revised ISA 210 will therefore be deferred, and the paragraphs of ISA 200 dealing with the determination of the acceptability of the financial reporting framework have also been deferred.
As part of the IAASB’s programme to improve the clarity of ISAs over the next 18 months it has issued exposure drafts of four proposed standards in a new drafting style (ISA 240, The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements; ISA 300, Planning an Audit of Financial Statements; ISA 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement; and ISA 330, The Auditor’s Procedures in Response to Assessed Risks). In addition, a draft of proposed amendments to the Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services has also been issued. Key elements of the new drafting style include: basing the standards on objectives; use of the word “shall” to identify requirements a professional accountant is expected to perform; eliminating use of the present tense; and structural changes to make the standards more readable.

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 launching a research project into the fundamental principles of pensions accounting.
The ASB feels research is needed for a number of reasons, including changes in the UK legal and regulatory environment since FRS 17, Retirement Benefits, was developed. For example, solvent companies now have a new statutory obligation to meet their pensions obligations. In addition, the ASB believes that differences between FRS 17 and the equivalent international accounting standard also need consideration. The ASB is aware that US standard setter FASB and the IASB are both keen to improve pensions accounting, and it wants to be able to inform the international debate.
Issues to be addressed in the ASB’s research project include how best to reflect the relationship between an employer and a pension scheme in the employer’s financial statements, the appropriateness of current disclosures, and how the employer’s liability for pensions should be quantified. For example, should it reflect future salary increases? The ASB is forming a Pensions Advisory Panel to assist the project, aiming to draw in the views of actuaries, regulators, and preparers and users of financial statements. There are also plans for a European working group.
Meanwhile, the ASB has issued an amendment to FRS 26, Financial Instruments: Measurement, in order to keep the text in line with that of its international accounting standard equivalent, IAS 39. The amendment has the effect of implementing in full the FRS 26 amendments to IAS 39 that affect the transition and initial recognition of financial assets and liabilities, cashflow hedge accounting of forecast intragroup transactions, the fair value option, and financial guarantee contracts and credit insurance. The transition and initial recognition amendment applies to accounting periods beginning on or after 1 January 2005, while the other amendments apply from January 2006.

Sarah Perrin, accountant and writer.

On 10 March 2005 the UK Accounting Standards Board (ASB) issued Urgent Issues Task Force Abstract 40 (UITF 40) which is effective for accounting periods ending on or after 22 June 2005. ASB pronouncements are applicable in the Republic of Ireland. Typically, the net effect of UITF 40 will be to bring forward unbilled revenues into the profit and loss account, and there will be a corresponding increase in the assessable profits and, hence, the tax charge.
UITF 40 will be an element of Generally Accepted Accounting Practice (GAAP) as defined in Section 4 of the Taxes Consolidation Act 1997 for companies with accounting periods ending on or after 22 June 2005. For corporation tax purposes, the changes will have effect for companies with accounts periods ending on or after 22 June 2005. For income tax purposes, the changes will affect the computation of preliminary tax for 2005 for those cases where the financial statements are made up to periods ending on or after 22 June 2005.
In Ireland, the requirement to prepare accounts to GAAP standards for tax purposes does not apply for unincorporated entities such as professional accounting partnerships. Unincorporated professional service firms are entitled to apply Revenue Statement of Practice SP-IT 02/92. This statement effectively allows cash accounting for tax purposes and is not consistent with UITF 40. However, where unincorporated businesses do prepare accounts to reflect a true and fair view under GAAP, and are therefore preparing accounts on a conventional accruals basis, UITF 40 will apply.
Section 48 of the Finance Act 2005 allowed the spreading of any tax implications of the change to IFRS over five years. The Consulting Committee of Accounting Bodies in Ireland has called on the tax authorities to allow a similar spreading of the effect of UITF 40 for both incorporated and unincorporated entities.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

Under the Bankruptcy (Amendment) Ordinance 2005, the Official Receiver’s Office may appoint insolvency practitioners in the private sector to act as trustees in bankruptcy cases where individuals file their own bankruptcy and the anticipated value of the assets does not exceed HK$200,000.
The first set of Insolvency Guidance Notes was released to provide insolvency practitioners with guidance on undertaking insolvency work. These guidance notes, developed along similar lines to the Statements of Insolvency Practice adopted by the Recognised Professional Bodies in the UK, are effective for insolvency appointments made on or after 1 October 2005.

An exposure draft on proposed Practice Note Guidance for Auditors Regarding Preliminary Announcements of Annual Results was issued for comment by 31 October.
According to the Hong Kong Listing Rules, a listed issuer has to obtain its auditors’ agreement with the preliminary announcement of its results from June 2005 year end announcements onwards. The proposed Practice Note provides guidance to auditors on their responsibilities with regard to preliminary announcements of results for the full financial year of listed issuers.

The Ministry of Finance issued exposure drafts of accounting standards on financial instruments - disclosure and presentation, financial instruments - recognition and measurement, transfer of financial instruments, and hedge accounting for public consultation.
These exposure drafts converge with IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement, in classification of financial instruments and their corresponding measurement. Derivatives are required to be reported at fair value with changes recorded as profit or loss. Hedge accounting is allowed on fulfilment of certain conditions.

The Chinese Institute of Certified Public Accountants (CICPA) issued revised auditing and related standards for public consultation. These include basic standards for assurance services provided by Chinese Certified Public Accountants, audit engagement letters, audit working papers, consideration of fraud in an audit of financial statements, communication with management, audit planning, comparatives, quality control on services, and quality control for audit of historical financial information.

The Standing Committee of the National People’s Congress approved the revised Personal Income Tax Law, which will become effective on 1 January 2006. The revised law raises the threshold for monthly personal income tax to RMB1,600 (US$198), and requires high income persons to file tax returns with tax authorities.

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

Malaysia

In October, the Malaysian Institute of Accountants (MIA) reported the issuance, by the Ministry of Finance, of amendments to the audit licensing requirements. The new requirements are as follows:
- applicants must possess three years of continuous relevant and sufficient audit experience, and
- applicants must have attended the “Public Practice Programme” (previously known as the “Commencement of Public Practice”) organised by MIA prior to the submission of the application.

The same requirements will apply for those applicants who have relevant audit experience but no longer are in the audit field at the point of submission. However, the three years of audit experience should be from the time period of four years before the submission of the application.
The existing requirements for applicants to be registered with MIA as a “chartered accountant”, and hold a valid practising certificate as a chartered accountant, will still remain. The three years of continuous relevant audit experience must be attained after the applicant has been admitted as a member of MIA. Hence, experience acquired prior to becoming a member of MIA shall not be considered.
MIA has advised that information on the Public Practice Programme will be made available in due course.
In October 2005, the Malaysian Accounting Standards Board (MASB) issued an announcement in the local newspapers on the issuance of MASB Approved Accounting Standards. All the 21 new/revised Financial Reporting Standards (FRS), except for FRS 117, Leases, FRS 124, Related Party Disclosures, and FRS 139 on recognition and measurement of financial instruments, will be applicable for an annual accounting period beginning on or after 1 January 2006. For the public listed corporations, the standards will be effective for the first quarter reporting. FRS 117, FRS 124 and FRS 139 have been approved in principle by the MASB pending the official announcement, which is anticipated before the end of 2005.
The MASB has also approved and issued 11 Interpretations to complement these standards. In line with this new wave of accounting standards, ACCA Malaysia is organising technical workshops on the new FRS as part of members’ CPD Programme. Look out for details of the workshops in the ACCA CPD Calendar 2006.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Ministry of Finance has requested the Council on Corporate Disclosure and Governance (CCDG) to review the quarterly reporting requirement and make recommendations to the Government. The review is intended to cover the following:
- to review recent international trends and experiences related to quarterly reporting
- to assess the benefits or otherwise experienced by listed companies since quarterly reporting was introduced in 2003, and recommend changes if any, and
- to evaluate the desirability and feasibility of extending the quarterly reporting requirement to smaller listed companies, i.e. companies with market capitalisation of less than $75m.

The International Accounting Standards Board (IASB) has published a discussion paper that assesses the role the IASB could play in improving the quality of the management commentary (sometimes called the Operating and Financial Review in Singapore) that accompanies financial statements.
The CCDG is inviting comments from all interested parties on the discussion paper issued by the IASB. Comments should be supported by specific reasoning, submitted in written form by 28 March 2006, and may be sent by mail, fax or e-mail to CCDG’s Secretariat. For details, please visit CCDG’s website at www.ccdg.gov.sg.

The Accounting and Corporate Regulatory Authority (ACRA) issued Practice Direction 9 (of 2005) in November which provides interpretations of Sections 201(3A) and 201(3BA) of the Companies Act.
ACRA is of the view that Section 201(3A) is the substantive provision that imposes the requirement to consolidate accounts, regardless of whether the “holding” company definition under the CA meets the accounting definition of a “parent” under the Financial Reporting Standard (FRS) on the grounds that it is a principle of law that a subsidiary legislation (i.e. the FRS) cannot override a parent statute (i.e. the CA) and must always be read subject to the primary legislation. In the scenario that a company is deemed to have no control under the FRS, but deemed to have control under the CA, the company is required to prepare consolidated accounts according to Section 201(3A). The details of the interpretation can be viewed at ACRA’s website at www.acra.gov.sg/legislation/.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Proposed modifications to auditing standards will create a very different regulatory environment for Australian company auditors, with action for breaches to now be taken by the corporate regulator.
Under new exposure drafts released for comment in late 2005, a breach of professional standards by registered company auditors could result in the corporate regulator taking action. Previously, a breach triggered action by the relevant professional accounting body, not by the Australian Securities and Investments Commission.
The reconstituted Auditing and Assurance Standards Board (AUASB) currently reviewing existing Australian auditing standards was established under the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act.
The work programme of the board over the next two years is focused on reviewing all local auditing standards and, where appropriate, redrafting them as legal instruments.
According to the chairman of the AUASB, Merran Kelsall, under the new regime auditors will only be permitted to depart from the mandatory requirements of an auditing standard if a “rare and exceptional circumstance” outside their control prevents compliance.
“It is our intention that, in the public interest, compliance with the new legally enforceable auditing standards will be required for audits. The exceptional circumstances in which there could be an inability to comply with mandatory requirements are envisaged to be rare.”
The exposure drafts being released by the AUASB cover a range of issues including the independent auditor’s report on general purpose financial reports, quality control for audits and reporting of related party transactions.
As the national auditing and assurance standards setter, the AUASB has been given the task of developing high quality standards and related guidance for auditors and providers of other assurance services as a key plank within the Australian corporate governance framework. To achieve conformity wherever possible, the AUASB is using the International Standards on Auditing as a base for its proposed auditing standards.
The proposed new auditing standards will apply to audits of financial reports for periods commencing on or after 1 July 2006.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

FASB is launching a new project reconsidering its guidance on accounting for pensions and other post retirement benefits.
The project will be managed in two phases. The first aims to require that the funded or unfunded status of postretirement benefit plans, measured as the difference between the fair value of plan assets and the benefit obligation, be recognised on the balance sheet. At present this information is only reported in footnotes. This first phase is expected to be finalised by the end of 2006. The second phase would address remaining issues, such as how best to recognise and display in earnings and other comprehensive income the various elements that affect the cost of providing postretirement benefits.
Meanwhile, FASB has released the results of the 2005 annual Financial Accounting Standards Advisory Council (FASAC) survey, which sought views about FASB’s work. For the fourth consecutive year, revenue recognition topped the list of issues that Council members believe should be the Board’s priority. FASAC members also believe that fair value issues, lease accounting, and stock compensation arrangements will require the Board’s attention in future. FASAC members had many suggestions for the Board on how to address simplification, including field testing proposed standards more aggressively. Views varied on whether FASB provided the right amount of implementation guidance, some respondents believing it did, some wanting more and some less.
Finally, FASB has issued a working draft of a final statement on fair value measurement. The statement provides a single definition of fair value, together with a framework for measuring fair value, which FASB believes should result in increased consistency and comparability in fair value estimates. It also requires expanded disclosures about the use of fair value to remeasure assets and liabilities recognised in the statement of financial position. The standard would be effective for financial statements beginning after 15 December 2006.

Sarah Perrin, accountant and writer.

Canada

The Auditing and Assurance Standards Board (AASB) has proposed a new standard setting approach for the next three years, from 1 April 2006 to 31 March 2009.
The AASB presented this approach, which would see Canadian auditing and assurance standards converge with International Standards on Auditing (ISAs), in an invitation to comment issued last November.
The AASB currently develops a separate set of Canadian auditing standards, which attempt to harmonise with ISAs, while also eliminating significant differences between Canadian standards and those of the US Public Company Accounting Oversight Board (PCAOB). This results in standards that may not be appropriate for all stakeholders, since only auditors of reporting issuers in the US use PCAOB standards. Maintaining a separate set of Canadian standards also involves increased effort and cost when ISAs are increasingly recognised as global auditing standards.
The AASB believes converging with ISAs is the best approach because the IAASB is beginning a major project to clarify and restructure standards to improve the quality of audits, and ISAs address the needs of a broad range of stakeholders, including practitioners from smaller firms and the public sector. The AASB would amend adopted ISAs only when necessary to reflect Canadian circumstances, and will continue to develop Canadian standards for which there are no corresponding ISAs. It will also devote resources to the development of interpretative guidance materials for the application of ISAs in the Canadian context. The result will be a Canadian GAAS equivalent to ISAs, but which may diverge significantly from US auditing standards. However, Canadian registrants with the US Securities Exchange Commission may still have their audits done according to PCAOB standards.
The AASB will be holding a series of roundtable meetings across the country, and will receive comments until 14 March 2006. It will then modify its draft approach based on the comments received, and expects to publish its finalised approach in the second half of 2006.

Alison Arnot, freelance writer and editor, Ottawa.