Technical update

international

Since last month there has been little activity with respect to new standards, but the issue of the 2005 Annual Report from the International Accounting Standards Committee Foundation (IASCF) gives us a chance to both reflect on the significant events of the past year and to consider what is likely to happen in the future.
The exposure draft of proposed changes to IFRS 3, issued in June 2005, attracted some 280 comment letters and led to five roundtable discussions. The International Accounting Standards Board (IASB) currently envisages making a decision on the publication of a standard by the end of 2006. The new standard might therefore be issued in 2007, but is unlikely to have an implementation date before at least 2008.
An exposure draft of proposed amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets (to be renamed “Non-financial liabilities”) was issued at the same time as the suggestions for revision to IFRS 3. The proposed changes have proved to be controversial, not least the suggestion that an unconditional obligation would be recognised even where there is uncertainty as to the amount or timing of the economic benefits required to settle it. All major proposed changes will be discussed during the remainder of the year and, as a consequence, any revised standard will again not be applicable until 2008 or later.
The use of fair value is widespread in International Financial Reporting Standards (IFRS) but guidance on its determination is found in a number of different standards. The US accounting standard setter, the Financial Accounting Standards Board (FASB), is nearing completion of a project to develop a standard on the measurement of fair value, and the IASB is proposing to issue this as an exposure draft, probably by the end of the year.
In the important area of revenue recognition, a discussion paper from a joint IASB/FASB project in the second half of the year will probably propose a model based on changes in assets and liabilities.
Convergence work will also continue to be a major focus, particularly in relation to the standards of the US, Japan and China. The removal of the current Securities and Exchange Commission (SEC) reconciliation requirement between IFRS and US GAAP could happen sooner than some anticipated, given the SEC’s willingness to recommend mutual recognition of IFRS and US GAAP, so long as there is a robust convergence process in place and measurable progress has been made. Future convergence work will therefore follow two tracks.
First, there are a few areas in which major differences exist and a conclusion as to whether these should be addressed through new or revised standards will be reached by 2008. Changes are being considered to six international standards: borrowing costs, income tax, segment reporting, government grants, impairment and joint ventures. An exposure draft of possible changes to IAS 23, Borrowing Costs, has been issued very recently. FASB will also consider the need for changes to six of its standards.
More substantially, by 2008 it is intended to make significant progress on a number of areas where US GAAP and IFRS are considered outdated. These include consolidations, pensions, leasing, revenue recognition and financial instruments. Discussion papers or exposure drafts may be issued by 2008, but the work is unlikely to be completed before 2011.

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

Pensions disclosures are the subject of the latest exposure draft issued by the UK’s Accounting Standards Board (ASB). The standard setter is proposing amendments to Financial Reporting Standard (FRS) 17, Retirement Benefits, and the issuing of a new Reporting Statement, Retirement Benefits - Disclosures.
The ASB proposes replacing the disclosures required by FRS 17 with those of International Accounting Standard (IAS) 19, thus achieving convergence in the area of disclosures. Its review has noted concern that current financial statements do not contain sufficient information to allow users to assess adequately the risks arising from defined benefit schemes.
The accompanying draft Reporting Statement aims to complement the disclosures proposed in the amendment to FRS 17. It sets out six principles to be considered when providing disclosures for defined-benefit schemes, addressing issues such as the principal assumptions used to measure scheme liabilities, and the future funding requirements for the defined-benefit scheme. The ASB believes that such principles, rather than specific requirements, should provide entities with the flexibility to make disclosures appropriate to the risks and rewards related to their defined-benefit schemes.
In another project, the ASB is seeking further views on the convergence of UK standards with International Financial Reporting Standards (IFRS). It currently thinks that all UK public quoted and other publicly accountable companies should be required to apply full IFRS, irrespective of turnover and whether they present group accounts, bringing another 1,000-1,500 companies into the IFRS net. UK subsidiaries of group companies that apply full IFRS would also be required to apply full IFRS in respect of measurement and recognition, but with reduced disclosure requirements. The Financial Reporting Standard for Smaller Entities would be extended to include medium-sized entities, making it available to another 30,000 companies. The ASB is still unsure of the best approach for companies not falling into any of these categories.

Sarah Perrin, accountant and writer.

Asia Pacific

Hong Kong & Mainland China

Two interpretations have been released recently, namely HK (IFRIC) Int 8, Scope of HKFRS 2, and HK (IFRIC) Int 9, Reassessment of Embedded Derivatives.
HK (IFRIC) Int 8 is effective for annual periods beginning on or after 1 May 2006, with early application encouraged. This interpretation clarifies that HKFRS 2, Share-based Payment, applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration.
HK (IFRIC) Int 9 is effective for annual periods beginning on or after 1 June 2006, with early application encouraged. It states that reassessment of the treatment of an embedded derivative is prohibited, unless there is a change in the terms of the contract that significantly alters the cash flow that otherwise would be required in the contract.

The revised Audit Law of the PRC became effective on 1 June 2006. Under the revised law, the role of state audit institutions is strengthened to include audit of all entities using public finance, financial institutions with state majority shareholdings and infrastructure projects with government investment.

The China Securities Regulatory Commission issued Standard No. 1, Format and Content of Information Disclosure by Companies Publicly Issuing Securities - Prospectus (2006 revision) in May 2006. The standard specifies the disclosure requirement in respect of risk, business, competition, related-party transactions, directors, supervisors, senior management, corporate governance, financial accounting, management discussion and analysis, business development, utilisation of fund-raised, dividend policy, etc.

The People’s Bank of China has announced measures to ease China’s foreign exchange controls and restrictions to allow companies and individuals to invest overseas using domestic capital. Controls on converting the reminbi will also be relaxed, and qualifying enterprises will be allowed to purchase fixed-income assets and stock abroad.

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

Malaysia

The Malaysian Accounting Standards Board has proposed a new standard known as Private Entity Reporting Standards (PERS). The exposure draft on PERS is open for public consultation until 15 September 2006.
The proposed standard is a comprehensive set of accounting guidelines for owner-manager companies and companies with no public interest. Salient features of the exposure draft are as follows.
- The proposed PERS will be applied only to private entities. The standard is not applicable to private entities running programmes for charities and other social and publicly accountable activities because such charitable entities are accountable to the public. These private entities will comply with FRS.
- The proposed PERS is effective for annual periods beginning on or after 1 July 2007.
- The framework for the PERS focuses on information needs by owners, who are also managers of the private entities and the most significant users of the PERS. Since the PERS focuses on proprietary needs rather than investor needs, the framework generally prescribes the use of cost bases as the measurement basis for private entities.
- Accounting policies
i) Compliance with the full set of Financial Reporting Standards (FRS)
Private entities are allowed to comply with FRS if, and only if, they comply with the full FRS, and the entities disclose in their financial statements that they have complied with the full FRS. A private entity that has complied with the PERS and, subsequently, changed its policy to comply with the full FRS would not be allowed to change from the full FRS to the PERS unless there was a change in circumstances.
ii) Optional reversion to specific FRS
A private entity that applies the PERS may choose to apply certain FRS. For example, if the entity chooses not to apply the section on property, plant and equipment in the PERS, it will apply FRS 116, Property, Plant and Equipment. In addition, the entity shall disclose the reason why that specific FRS is applied. A private entity that has chosen to apply specific FRS will not be allowed to revert to the PERS.
iii) Absence of guidance in PERS
In the absence of guidance in the PERS, a private entity is required to consider the applicability of the following sources of guidance: first, FRS dealing with similar issues; second, the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework for Private Entity as set out in the PERS. However, if an entity undertakes share-based payment transactions and derivatives or hedging transactions, such an entity is required to comply with FRS 2, Share-based Payment, and the sections on hedging in FRS 132 and FRS 139 on financial instruments respectively. If a private entity undertakes business combinations and presents consolidated financial statements, such an entity is required to comply with FRS 3, Business Combinations, FRS 127, Consolidated and Separate Financial Statements, FRS 128, Investments in Associates, and FRS 131, Interests in Joint Ventures, respectively.
iv) Changes in accounting policies and correction of errors
The effects of a change in accounting policy or the correction of prior period errors will be adjusted to the opening balance of retained earnings for the period in which the policy is first adopted or errors are being corrected. Comparative information shall be presented as reported in the financial statements of the prior period.
- Balance sheet: current and non-current assets, and current and non-current liabilities, will be presented as separate classifications on the face of its balance sheet
As the proposed PERS prescribes only the cost bases as the measurement basis, investments in securities and other investments (except for properties) will apply the measurement basis prescribed in FRS 125, Accounting for Investments. Hence, for investments classified as current assets, they will be measured at the lower of cost and market value. Investments classified as long-term assets, they will be measured at either cost, or in the case of marketable equity securities, the lower of cost and market value determined on a portfolio basis.
- Income statement: private entities shall present an analysis of expenses using a classification based on the nature of expenses
The proposed PERS also includes an appendix on the application of FRS and illustrative financial statements. Copies of the exposure draft are available at www.masb.org.my.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Accounting and Corporate Regulatory Authority’s (ACRA) latest Legal Digest, issued in April 2006, provides clarifications on a range of matters. It contains two substantial articles on the resignation of directors and the annual reporting of private companies, as well as a set of questions and answers relating to the interpretation of the Companies (Amendment) Act 2005, which commenced operation on 30 January 2006.
There is very little guidance on resignations, whether in the legislation or in case law, since these procedures are usually regulated by the articles of association of a company. The first article sets out the common issues seen by the registrar and includes a caveat for professionals who file notices of resignation for their clients. The second article provides a useful table outlining the annual reports required to be filed with ACRA by companies, under various scenarios. It also includes an overview of questions frequently asked on audit exemptions, which have been in force since 2003, applicable to exempt private companies and dormant companies. The digest can be downloaded from ACRA’s website at www.acra.gov.sg.

Practice Direction No. 4 of 2006
This Practice Direction, issued by ACRA, elaborates on the issues raised and the interpretation taken in Practice Direction No. 9 of 2005, which dealt with the difference between the definitions of “subsidiary” and “holding company” in Section 5(1) and (2) of the Companies Act, and the accounting definitions of a “subsidiary” and “parent” under Financial Reporting Standard (FRS) 27. As the definitions are similar, but not identical, a company may meet the definition “subsidiary” or “holding company” under the Companies Act but not the accounting definition of “subsidiary” or “parent” under FRS 27, and vice versa. This non-congruence of definitions generated some ambiguity over the interpretation of consolidation requirements under the Act, in relation to the FRS. To clarify, ACRA issued the following interpretation of Section 201(1A), (3) and (3A) in this Practice Direction.
- A parent which is not a holding company must prepare consolidated accounts in accordance with the Accounting Standards as mandated under the Companies Act.
- A holding company, regardless of whether it is a parent or not, in consolidating the financial information relating to its legal subsidiaries in accordance with Section 201(3A) of the Companies Act, must do so in accordance with the Accounting Standards.
This 2006 Practice Direction supersedes Practice Direction No. 9 of 2005, and can be downloaded from ACRA’s website at www.acra.gov.sg. The latter is revoked with immediate effect.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

After a relatively smooth transition to the new International Financial Reporting Standards (IFRS) regime on 30 June, Australian standard setters are now looking to sort out the outstanding reporting issues.
One of these is the reporting standard relating to retirement benefit funds, or superannuation plans as they are called in Australia.
The Australian Accounting Standards Board (AASB) recently announced it will be giving high priority to a full review of the existing standard in this area (AAS 25, Financial Reporting by Superannuation Plans) in an effort to reconcile differences between the local standard and the international accounting standard for pension funds.
Although Australia adopted the IFRS in most areas of financial reporting, they were not applied to local superannuation funds as the accounting profession was concerned the international standards could produce misleading reports when used with Australian funds.
The review comes as other countries, including the UK, are looking at whether the international standards are suitable for financial reporting relating to their own retirement benefit plans.
Although the AASB has decided not to adopt the relevant international standard (IAS 26), it has agreed to endeavour to ensure the requirements in any proposed replacement for AAS 25 are not inconsistent with the corresponding requirements in IAS 26, or the corresponding requirements in the Australian equivalents to the IFRS.
To facilitate the review, the AASB will be liaising with standard setters in other countries that have retirement and pension arrangements similar to those in Australia, with a view to forming an expert advisory panel.
The AASB also decided to retain the reporting entity concept in determining the application of any proposed replacement for AAS 25 and to exclude managed investment schemes.
In announcing the review, the AASB noted potential users of Australian retirement benefit plan financial reports were a broader class of user than in many other jurisdictions, due to the compulsory nature of the superannuation system. Accordingly, the review will provide an opportunity to examine the presentation and disclosure issues facing these users, such as the use of plain English.
Any proposed replacement for AAS 25 will apply to all types of superannuation plans, including defined-contribution and defined-benefit funds, private and public sector funds, and pooled superannuation trusts.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The Financial Accounting Standards Board (FASB) has issued a joint proposal with the American Institute of Certified Public Accountants (AICPA) intended to improve the financial reporting process for private companies.
The two bodies are seeking feedback on proposed enhancements to FASB’s standard setting process that would determine whether the board should consider differences in accounting standards for private companies within GAAP. Under the proposal, FASB would enhance the transparency of its standard setting process for private companies and encourage their input. FASB and AICPA would sponsor and fund a joint committee to serve as an additional resource to FASB to further ensure that the views of private companies are incorporated into the standard setting process.
Meanwhile, FASB is also seeking comments on the potential bifurcation of insurance and reinsurance contracts into insurance components and financing components. The proposals reflect FASB’s concern about a possible lack of transparency in the financial statements of both policyholders and (re)insurance companies relating to the depiction of insurance risk associated with contracts that include terms or features that significantly limit the actual amount of risk transferred. FASB notes that current accounting standards provide only limited guidance on the accounting for insurance contracts by policyholders. In addition, insurance and reinsurance contracts often have both insurance components and financing components which are combined and accounted for simply as “insurance contracts”.
FASB is therefore seeking views on bifurcation, which would divide some or all insurance contracts into two main components. Components of contracts that transfer significant insurance risk would be accounted for under existing insurance accounting guidance and generally provide an income statement benefit (recovery) in the period of an insured loss. Financing components accounted for as deposits would be recorded as an asset by the policyholder. Any recovery from an insured event would reduce the deposit and not have a significant income statement benefit.

Sarah Perrin, accountant and writer.

Canada

The Auditing and Assurance Standards Board (AASB) has issued final handbook material providing guidance for an auditor’s report on financial statements of public sector reporting entities. Because the Public Sector Accounting Board (PSAB) has issued a new Public Sector Accounting Handbook Section PS 1150, Generally Accepted Accounting Principles, the AASB needed to revise paragraph 5100.02 of Generally Accepted Auditing Standards, as well as Section PS 5200, Audit of Government Financial Statements.
According to auditing guidance the Accounting Standards Board issued in 2003, Section 1100 of the CICA Handbook - Accounting required the auditor’s report on an entity’s general-purpose financial statements to be issued according to Section 5400, The Auditor’s Standard Report. However, the AASB’s paragraph 5100.02 provided an exemption for financial statements of a federal, provincial, territorial or local government, requiring the auditor to express an opinion on the fair presentation of the financial statements according to a disclosed basis of accounting. With the new PSAB section, the AASB had to review this exemption. In January 2006, the AASB approved a new assurance and related services guideline, Legislative Auditor’s Report on Financial Statements of a Federal, Provincial or Territorial Government, as well as revisions to Section PS 5200, Audit of Government Financial Statements. The new guideline and revisions are subject to the PSAB finalising amendments to Section PS 1150. Other AASB initiatives include plans to revise Section 5400, The Auditor’s Standard Report, to adopt new audit report wording contained in ISA 700, Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements. The AASB has also reviewed and discussed ISA 260, Communications with Those Charged with Governance, and the first draft of an exposure draft that would harmonise Section 5751, Communications with Those Having Oversight Responsibility for the Financial Reporting Process, with ISA 260.

Alison Arnot, freelance writer and editor, Ottawa.