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international
The issue of ED 8, Operating Segments, at the beginning of 2006 has seen further steps being taken to progress the short-term convergence of international and US accounting standards. The exposure draft results from the International Accounting Standards Board (IASB) comparison of IAS 14 with the US standard SFAS 131, Disclosures About Segments of an Enterprise and Related Information.
Adoption of a standard based on ED 8 would require entities to use a “management approach” to reporting the financial performance of its business segments. This generally results in reporting based on the information used internally for evaluating segment performance and determining the allocation of resources to those segments. It is therefore possible that this information will differ from that contained in the income statement and balance sheet, and disclosure will be required on the basis of preparation.
The International Financial Reporting Interpretations Committee (IFRIC) has issued clarification of the scope of IFRS 2, Share-based Payment. IFRIC 8, Scope of IFRS 2, applies for periods beginning on or after 1 May 2006 and deals with the circumstances where an entity cannot identify specifically the goods or services being provided. In particular, if the value of the goods or services appears to be less than the fair value of the equity instrument granted or liability incurred, this would typically mean that other goods or services have been received. These should then be measured in accordance with IFRS 2.
IFRIC has also issued a draft interpretation dealing with the interaction between the standards on interim financial reporting, impairment of assets and measurement of financial instruments. D18, Interim Financial Reporting and Impairment, confirms that an impairment provision made in a previous interim period cannot be reversed.
The International Auditing and Assurance Standards Board (IAASB) has considered the involvement of related parties in recent major corporate scandals and proposed revisions to the existing auditing standard in this area (ISA 550).
The proposed standard will extend the current requirements by requiring the auditor to obtain an understanding of the nature and business rationale of related party relationships and transactions sufficient to be able to assess and respond to the risk of material misstatement. It also extends current requirements by asking auditors to attempt to identify related parties which have not been identified or disclosed by management. There is also a new emphasis on evaluating the effect of related party relationships and transactions even where their disclosure is not required by the relevant financial reporting framework.
IFAC has issued an exposure draft of proposed guidance for professional accountants and others on implementing codes of conduct within their organisations. Guidance for the Development of a Code of Corporate Conduct is aimed at supporting sound corporate governance policies around the world. As well as highlighting the benefits of an effective code of conduct, it also provides practical guidance on the scope and implementation of such codes. The guidance identifies a three-stage approach to the development and implementation of the code: managing for compliance; managing stakeholder relations; and creating a values based organisation.
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
In January, the UK Accounting Standards Board issued a reporting statement on the Operating and Financial Review, withdrawing its earlier Reporting Standard 1 on the same topic. The move follows the UK Government’s decision to remove the statutory requirement on quoted companies to publish OFRs. The revised legislation (unless amended again following extended consultation) only requires companies to prepare an enhanced review of their business.
The ASB has essentially converted RS 1 into a statement of best practice. It has sought to limit the changes to those required as a consequence of the repeal of the OFR legislation and to make the language consistent with a voluntary statement of best practice, rather than a standard. The ASB has noted that many major companies already publish an OFR on a voluntary basis, and it is keen that they should continue to do so.
Meanwhile, the ASB is turning its attention to the topic of heritage assets, which include collections of art, antiquities and books, as well as historic buildings, archaeological sites, landscape and coastline. In a discussion paper entitled Heritage Assets: Can Accounting do Better?, the ASB notes the current widespread inconsistency in accounting practice and proposes that entities should recognise heritage assets (through a capitalisation approach) where it is practicable to obtain valuations.
Finally, the ASB’s public meeting to discuss the most appropriate approach to convergence of UK and international accounting standards failed to find a clear consensus. Key figures from business, the accounting profession and academia considered four proposals: the adoption of full IFRS for all but the smallest companies; the IASB’s standards for SMEs being applied to all but the largest public interest companies; or the introduction of a third tier of reporting based either on a scaled down version of IFRS or beefed up SME standards. Views expressed were diverse.
Sarah Perrin, accountant and writer.
In January, the Auditing Practice Board issued Bulletin 2006/1, Audit Reports on Financial Statements in the Republic of Ireland. It follows on from Bulletin 2005/4, Audit Reports in Great Britain and Northern Ireland, and provides updated examples of unmodified and modified auditor’s reports for audits of financial statements of companies incorporated in the Republic of Ireland. The new wording for statutory audit reports in Ireland comes into effect for reports on accounting periods that commenced on or after 15 December 2004. Full details are available at ireland.accaglobal.com/ireland/resources/auditing/.
The Solicitors’ Accounts Rules (SARs) require Irish solicitors to engage an accountant to perform a client money audit and report the outcome of the audit to the solicitor’s regulator, The Law Society. For solicitors with accounting periods ended on or after 1 January 2006, the requirements of the SARs have been amended by the Solicitors Accounts (Amendment) Regulations 2005. The amended regulations require the solicitor to sign a form of acknowledgment confirming that they recognise their obligations to comply with the SARs, that they have discussed the content of the report to the Law Society with the accountant who performed it, and that they understand how the content of the report affects the discharge of their obligations under the SARs. The changes will encourage more communication between the auditor and solicitor and should encourage solicitors to take more responsibility for their accounting and bookkeeping. Further changes to strengthen the SARs are expected in 2006.
Following the implementation of the Insurance Mediation Directive, any firm undertaking insurance or investment business in Ireland must now have at least 1.5m euros professional indemnity insurance. The requirement extends to all professional accounting firms that hold investment business authorisation from ACCA, but will not apply to firms who hold authorisation for protective reasons only, or who refer all of their clients to another authorised firm and do not give advice themselves.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & Mainland China
Practice Note (PN) 900, Audit of Financial Statements Prepared in Accordance with the Small and Medium-sized Entity Financial Reporting Standard, has been issued. The standard came into effect for accounting periods beginning on or after 1 January 2005. PN 900 gives guidance on how the Hong Kong Standards on Auditing applies in cases where SME-FRS is adopted. It also provides an example of an unqualified auditors’ report on financial statements prepared in accordance with the SME-FRS. As one of the conditions under which the SME-FRS can be adopted is that the company is eligible to adopt section 141D of the Companies Ordinance. As such, PN600.2, Audit Approach to Companies Applying Section 141D of the Companies Ordinance, now only applies to audit of financial statements of companies applying section 141D for periods beginning before 1 January 2005.
The Inland Revenue Department has revised its Departmental Interpretation and Practices Note 15, which covers the following subject matters:
- limitation of loss relief (Section 22B)
- leasing arrangements (Section 39E)
- general anti-avoidance provision
(Section 61)
- general anti-avoidance provision
(Section 61A)
- loss companies (Section 61B)
- Ramsay principle
- penalties on tax avoidance cases
- guidelines on lease financing, and
- advance rulings.
In January, the Ministry of Finance issued an exposure draft of accounting standard on share-based payment for consultation. The ED addresses the recognition and measurement of equity-settled share-based payment, cash-settled share-based payment, and share-based payment with cash alternatives. For measurement of share-based payment transactions, the fair value model is proposed.
The Chinese Institute of Certified Public Accountants issued the revised exposure drafts of auditing standards on the following for public consultation: audit on the fair value measurement and recognition; audit on financial instruments; consideration of environmental dimensions on audit of financial statements; impact of e-business on audit of financial statements; and relationship with the banking supervisory institutions.
The National People’s Congress issued the Chairman’s Decree No 46 to announce that the PRC Agriculture Tax Ordinance, which was passed on 3 June 1958, would be abolished on 1 January 2006.
The China Securities Regulatory Commission issued Measures on Employee Share Incentive Plan (ESIP) of Listed Companies, stating that ESIP can be granted to directors, supervisors, senior management, staff equipped with core technology, but not to independent directors. The total underlying shares granted in aggregate should not exceed 10% of the company’s share capital, and no-one should be granted shares in excess of 1% of the company’s share capital.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Institute of Accountants (MIA) has issued proposed revisions to the Institute’s existing by-laws, which are binding on all members of MIA once issued in final form.
The exercise to review the by-laws was undertaken subsequent to the issuance of the revised Code of Ethics for Professional Accountants by IFAC in June 2005. Being a member body of IFAC, MIA is required to adopt and apply the same standards insofar as the standards are not inconsistent with national laws and requirements.
The ED is divided into two main parts.
Part I - The By-laws on Professional Ethics
The By-laws on Professional Ethics incorporate IFAC’s Code of Ethics and additional requirements applicable to the Malaysian regulatory and professional environment. These by-laws establish the ethical requirements and standards applicable to all professional accountants. The By-laws on Professional Ethics consists of three parts.
Part A establishes the five fundamental principles with which a professional accountant is required to comply, and provides a conceptual framework for applying those principles. These are: integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. Each of these principles are discussed in detail in Section 110-150 of By-laws.
Professional accountants are required to apply the conceptual framework to identify threats to compliance with the above principles and to evaluate the significance of these threats. If the threats are significant, safeguards are to be applied to eliminate them or reduce the threats to an acceptable level.
Part B and C illustrate how the conceptual framework is to be applied in specific situations, to professional accountants in public practice and business respectively. However, Part C may be relevant to those in public practice in particular circumstances.
Part II - By-laws on Professional Conduct
and Practice
Part II sets out the obligation applicable to all professional accountants or to firms in respect of their professional contact or practice.
ACCA members who also hold membership to MIA are advised to review the exposure draft and provide comments and feedback either to info@my.accaglobal.com or directly to MIA before 31 March 2006. A copy of the ED can be downloaded from www.mia.org.my.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
CCDG (Council on Corporate Disclosure and Governance) has issued FRS 107 to revise and enhance the disclosures in FRS 32, Financial Instruments: Disclosure and Presentation.
The FRS supersedes the disclosure requirements of FRS 32. The presentation requirements of FRS 32 remain unchanged.
FRS 107 applies to companies incorporated or foreign companies registered under the Companies Act which have been admitted to
the official list of a securities exchange in Singapore and have not been removed from that official list, for annual periods beginning on or after 1 January 2007. Other entities incorporated or registered in Singapore shall apply this FRS for annual periods beginning on or after 1 January 2008. Earlier application is encouraged.
The full standard can be downloaded at www.ccdg.gov.sg/frs/index.htm.
An agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income was signed on
20 December 2005 between the Republic of Singapore and the Republic of the Fiji Islands. The agreement will enter into force after its ratification by both countries. The provisions of the agreement will apply to income arising in the year after its entry into force. The full text of the agreement is available on IRAS’ (Inland Revenue Authority of Singapore’s) website at www.iras.gov.sg.
The Singapore Exchange (SGX) has partnered with FTSE and Yasaar Research to allow the development of a series of Shariah-compliant indices. The indices will be pegged against international standards, be free-float adjusted and based on the Industry Classification Benchmark (ICB). The stocks are screened for Shariah-compliance using Yasaar Research’s proprietary screening methodology. The first index of the series is the FTSE-SGX Asia Shariah 100 Index. It will facilitate investments in Asian securities by Middle East investors. Shariah-compliant indices will exclude companies with core businesses in gambling, tobacco and alcohol. Companies carrying on conventional banking will also be excluded as Shariah law does not permit interest to be charged.
Joseph Alfred, technical adviser,
ACCA Singapore.
Australia & New Zealand
The latest review into the adoption of the Australian equivalents of the International Financial Reporting Standards (AIFRS) has shown that local companies appear to be on track for a smooth transition to the new reporting regime.
Australia is one of the early adopters of the new international accounting standards, with many companies and entities being required to prepare financial reports for reporting periods beginning on or after 1 January 2005.
The review of the adoption process for 1,250 listed entities, with balance dates between
30 June 2005 and 31 July 2005, was undertaken by the Australian Securities and Investments Commission (ASIC).
According to the regulator, all the entities reviewed had successfully provided the required disclosures under AASB 1047, Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards, by providing a narrative explanation of the key differences in accounting policies they expect to arise due to the transition to the new regime.
ASIC found only 19 entities of those reviewed concluded there would be no material impact arising from adopting AIFRS.
Most entities were able to quantify or disclose the financial impact of the adoption of AIFRS, with around 700 entities also disclosing the quantitative impact for each key difference.
ASIC chairman, Jeffrey Lucy, said the overall result of the review was very positive: “It is encouraging that a large number of entities have qualified the expected impact of AIFRS to enable users of their financial reports to understand the nature and extent of the significant impacts of AIFRS, especially given these entities are required to prepare their first AIFRS accounts in the next few months.”
Lucy said that while it was apparent some entities still had work to do, there was nothing to suggest that Australian companies were having any particular difficulties meeting the timetable for smooth adoption of the new standards.
Janine Mace, Australian freelance finance
and business journalist.
Americas
US
FASB has issued an exposure draft with a view to reducing the current complexity in accounting for financial instruments. It proposes providing companies with the option to report selected financial assets and liabilities at fair value. Under the option, any changes in fair value would be included in earnings. FASB has noted that the move would help to achieve further convergence with the International Accounting Standards Board, which has previously adopted a fair value option for financial instruments.
Under FASB’s proposals, entities would be able to measure at fair value financial assets and liabilities selected on a contract-by-contract basis. They would be required to display those values separately from those measured under different attributes on the face of the balance sheet. Companies would also be required to provide additional information to help investors understand the effect on earnings more easily.
The proposed standard seeks to reduce the complexity in accounting and volatility in earnings caused by differences in the existing accounting rules. Current US GAAP uses different measurement attributes for different assets and liabilities, which FASB says can lead to earnings volatility. FASB believes its proposed standard would help to mitigate this type of accounting-induced volatility by enabling companies to achieve a more consistent accounting for changes in the fair value of related assets and liabilities without having to apply complex hedge accounting provisions.
Meanwhile, FASB has issued a new staff position addressing the classification (either as equity or liabilities) of options issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. FASB looked at the issue after becoming aware that some share-based payment plans contain provisions requiring companies to settle outstanding options in cash when certain events occur. These events would include a change in control of the company or the death or disability of the options holder.
Sarah Perrin, accountant and writer.
Canada
In line with its observation that “one size does not fit all”, Canada’s Accounting Standards Board (AcSB) has ratified a new strategic plan for the direction of Canadian accounting standards that will affect how financial reporting is carried out in the country. The AcSB has completed deliberations on the input it received from its March 2005 invitation to comment on its draft strategic plan, and has decided to pursue three separate strategies for three types of reporting entities: public companies, private businesses, and not-for-profit organisations. Through the consultation process, the AcSB confirmed the basic directions it proposed, but also agreed to some changes to provide clarification and address concerns raised.
One of the AcSB’s biggest challenges has been deciding on which direction to pursue for public companies, whether to align Canadian standards with US GAAP or with international standards. From the past year’s consultations, it has found the majority of Canadian companies and their investors have little interest in following the detailed, rules-oriented US GAAP system. For public companies, the AcSB plans to move to a single set of globally accepted standards by converging Canadian GAAP with International Financial Reporting Standards. This convergence will take place over approximately five years, after which a separate Canadian GAAP will no longer exist. Public companies that are SEC registrants will continue to use US GAAP, as currently permitted by the Canadian Securities Administrators.
The AcSB is examining the financial reporting needs of private companies and plans to develop the most appropriate model to meet those needs.
For not-for-profit organisations, the AcSB will continue to apply the elements of GAAP that are relevant, while developing standards to address circumstances specific to the not-for-profit sector.
The AcSB plans to publish a final version of its strategic plan by 31 March.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
The Receiver of Revenue has issued a discussion paper on tax avoidance, which proposes to revise Section 103 of the Income Tax Act containing the act’s general anti-avoidance rule (GAAR). The discussion paper states that, in its current form, the GAAR has proven to be an inconsistent and, at times, ineffective deterrent to the increasingly complex and sophisticated tax “products” that are being marketed by banks, “boutique” structured finance firms, multi-national accounting firms and law firms.
The discussion paper distinguishes three broad concepts: tax evasion, impermissible tax avoidance and legitimate tax planning. Tax evasion has always been considered illegal, but the confusion comes in distinguishing between tax avoidance and tax planning. Tax avoidance has been defined in the discussion paper as “the exploitation of structural loopholes in the law to achieve tax outcomes that were not intended by Parliament, but also includes the manipulation of the law and a focus on form and legal effect rather than substance”.
ACCA has commented that it believes that tax avoidance is a legal and legitimate form of tax planning. Where the scheme as a whole is commercially viable, individual steps that have been included for tax efficiency should not be attacked. ACCA supports the inclusion of “anti-tax provisions” where steps with no commercial purpose, other than the avoidance of tax, are inserted into a transaction.
ACCA believes that the distinction between the term “tax mitigation” as an acceptable form of tax planning and “tax avoidance” as an illegitimate form of tax planning is blurred and confusing. The test of substance over form will be very difficult to apply in these instances. Furthermore, aligning tax evasion with tax avoidance is not business-friendly and creates uncertainty. The additional compliance burden will also add to this hostile climate.
In the UK, there was little support for the provision of a GAAR in legislation. Some considered that there was already enough protection in place and a GAAR would be unnecessary. A major concern seemed to be
the degree of uncertainty that a general anti-avoidance rule would cause.
ACCA believes that clearer guidelines should be set before introducing a dramatically revised GAAR.
Irene Christopher, head of policy development, ACCA South Africa. |
