Technical update

international

The first stage of the International Accounting Standards Board’s (IASB) project on performance reporting has culminated in its issuing for comment an exposure draft of proposed amendments to IAS 1, Presentation of Financial Statements. The first stage of the project has concentrated on the statements that should constitute a full set of financial statements and the periods for which that information should be presented. Agreement of the exposure draft would result in IAS 1 being largely in line with US GAAP.
Under the proposals in the exposure draft, an entity would present all income and expenses separately from changes in equity arising from transactions with owners. There will be an option to present income and expense in either a single statement of recognised income and expense or two statements, consisting of a statement of components of profit and loss and a second statement of other recognised income and expense.
The term “balance sheet” will be replaced by the title “statement of financial position”, and additional disclosure will be required of the statement of financial position as at the beginning of the previous accounting period.
The second stage will involve a joint project between IASB and the US Financial Accounting Standards Board (FASB), and will include reconsideration of the presentation and display of the information in financial statements.

The International Auditing and Assurance Standards Board (IAASB) has recently issued a re-exposure draft of the proposed International Standard on Auditing 600, The Audit of Group Financial Statements. The exposure draft has been drafted in the new style designed to enhance the clarity of all IAASB pronouncements.
The proposals have been modified following earlier consultations where the main issues revolved around the extent to which the group auditor needs to be involved in the audits of components audited by other auditors. Response is being sought on two specific issues, as follows.
- The previous proposals drew a distinction between the work required by group auditors dependent upon whether the other auditor was related (for example, through a network) or not. It has been acknowledged that the strength of relationships within networks can vary and that this distinction alone is not necessarily sufficient. The distinction has been removed, but with consequent significant changes as to the possible scope of work of the group auditor.
- The exposure draft is based on the premise that the group auditor has sole responsibility for the audit opinion on the group accounts. This has resulted in the exposure draft being very specific about the procedures required, and comment is sought on whether this is appropriate.
The International Public Sector Accounting Standards Board (IPSASB) has issued a consultation paper, Accounting for Heritage Assets under the Accruals Basis of Accounting. The consultation paper includes the text of a recently issued UK discussion paper on the same subject.
The consultation paper acknowledges that very different accounting bases have been developed for heritage assets, and that there is a need to have international harmonisation. The paper therefore considers a number of options.

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

There was strong demand for places at the Accounting Standards Board’s (ASB) roundtable sessions in April to discuss the basis of measurement to be used in financial reporting. The roundtable included brief presentations from representatives of the Canadian and UK ASBs, and Professor Michael Bromwich from the London School of Economics.
The ASB issued a background paper in advance of the meeting, outlining the current environment in which historical cost is increasingly being replaced by fair value. The paper raised a number of questions. For example, where an entity has access to an efficient market, might the value of the asset traded on that market be used for accounting purposes? What current measures should be used where assets are not traded on an efficient market?
The roundtables reflect the current international interest in measurement issues, with the IASB having published a discussion paper looking at measurement on initial recognition, prepared by staff of the Canadian ASB.
Meanwhile, the ASB has issued a couple of abstracts prepared by its Urgent Issues Task Force (UITF). UITF Abstract 41, Scope of FRS 20 (IFRS 2), implements recommendations of the International Financial Reporting Interpretations Committee (IFRIC) relating to share-based payment. It confirms that the scope of FRS 20 covers situations where companies give their shares or rights to shares to individuals, organisations or groups that have not provided goods or services. For example, shares might be given to charities for less than fair value.
UITF Abstract 42 again follows the approach taken by IFRIC when addressing the question of whether it is necessary to reassess the treatment of an embedded derivative throughout the life of a contract if certain events occur after an entity first becomes a party to the contract. It concludes that reassessment is not permitted unless there is a significant change to the terms of the contract.

Sarah Perrin, accountant and writer.

Most charities in Ireland have one of three legal structures:
- charitable trusts, where the trustees are personally liable
- unincorporated associations, where members are personally liable, and
- companies limited by guarantee, with limited liability.
The Irish Revenue Authorities will issue “CHY” numbers to charities which entitle the entity to an exemption from the requirement to pay any income or corporation tax. It is estimated that the not-for-profit or charity sector accounts for _20bn per year. Despite this scale of activity, apart from the issuing of tax exemptions, the sector is completely unregulated. In the UK the sector is regulated by the Charity Commission and there are currently proposals at an EU level to introduce a common legal structure for charities. Some concerns have been expressed at EU level that charitable entities are vulnerable to being used for money laundering or financing terrorism.
The existing legal structures in Ireland are therefore deemed to be unsuitable. Trusts and associations expose the trustee or members to unlimited personal liability, and difficulties arise when trustees or members die or the entity wants to merge with another charity (an option that is becoming more common). There is also a lack of a formal reporting or accountability framework. Company structures, typically companies limited by guarantee, provide limited liability and have a formal accounting and audit requirement. However, company law was not designed to meet the needs of charities. Company law is complex and based on an assumption of trading for a profit.
The Law Reform Commission has now proposed a new format for charities called a Charitable Incorporated Organisation (CIO). Specific requirements for CIOs are to include a requirement for a minimum of three trustees, limited liability, a duty of care for trustees and a simple conversion procedure for existing charities.
In a parallel development, the Government has also proposed that a statutory regulator be established. This would bring the regulation of Irish charities into line with those of other countries in the EU.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

The Revenue (Profits Tax Exemption for Offshore funds) Bill 2005 was passed by the Legislative Council on 1 March. The Inland Revenue Ordinance (IRO) will be amended to exempt an offshore fund entity from profits tax provided it satisfies two conditions.
The offshore fund entity should be a non-resident entity, and the location of “central management and control” will determine the residence status of a non-individual entity.
The non-resident entity cannot carry on any business in Hong Kong other than the qualifying transactions or transactions incidental to these qualifying transactions. There will also be deeming provisions in the IRO to prevent possible abuse of the exemption provision. The exemption will apply with retrospective effect to the year of assessment 1996/97.
The Hong Kong Standard on Investment Circular Reporting Engagement (HKSIR) 300 on Accountants’ Reports on Pro Forma Financial Information in Investment Circulars was issued in March. The HKSIR 300 establishes specific standards and provides guidance for reporting accountants engaged to issue an accountant’s report on pro forma financial information in an investment circular, and is effective for engagements where the investment circular is dated on or after 1 April 2006.
The composition of the Listing Committee will be expanded from 25 members to 28 members from May 2006. There will be at least eight appointed investor representatives and 19 appointed members who are representatives of the industry.

The State Administration of Taxation and Ministry of Finance of China issued a joint circular in March which makes significant amendments to the consumption tax. The amendments, aiming to cope with the economic development and changes in consumption pattern in China, and to align with the national policy of environmental protection and resource conservation, became effective on 1 April 2006.
The changes, which include taxable items, tax rates and policies, affect a number of items in the categories of resources and luxury products. In general, the oil processing industry and automobile industry are adversely affected by these changes, whereas the skincare and haircare products industry, the white spirits industry and the motorcycle industry benefit.

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

Malaysia

The Company Law Reform Committee’s paper on company liquidation—reforms and restatement of the law on company liquidation is available for public consultation. This consultation paper focuses on the reform and restatement of the liquidation scheme. The review conducted by the CLRC in relation to the liquidation process starts on the premise that the law and procedures for company liquidation are well-known and familiar to practitioners. CLRC informs that the gist of the structure will be retained but in line with simplification of the law. The review focuses on the three areas:
- specific recommendation on reform and restatement of the law on company liquidation
- reform and restatement of the liquidation process, and
- reform and restatement of the law and procedure in relation to company charges.
The closing date to submit views, comments and recommendations to the Companies Commission of Malaysia is 14 June 2006. A copy of the consultation paper is available on CCM’s website at www.ssm.com.my.

The Malaysian Accounting Standards Board (MASB) has issued two pronouncements to deal with accounting for Zakat and Ijarah (accounting standards to Islamic financial transactions). The pronouncements are in the form of technical releases (TR), entitled TR i-1, Accounting for Zakat on Business, and TR i-2, Ijarah.
Copies of TR i-1 and TR i-2 can be purchased from MASB’s office or downloaded from MASB’s website at www.masb.org.my.

The Inland Revenue Board recently issued PR No. 3/2006, Property Development & Construction Contracts. The said public ruling can be downloaded from the IRB’s website at www.hasil.org.my under the heading of “Law & Regulations—Rulings”.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Accounting and Corporate Regulatory Authority (ACRA) unveiled details of its newly revised Practice Monitoring Programme (PMP) on 16 March to the media and public accountants attending a conference it organised in partnership with the Institute of Certified Public Accountants of Singapore (ICPAS). In the previous programme, all audit firms were monitored by ACRA on a four-year cycle. Under the new programme:
- audit firms that audit public-interest entities will be monitored more frequently by ACRA. (The larger firms are likely to be reviewed every year, at the discretion of ACRA.) The remaining audit firms will be monitored by ICPAS. All reviewers/monitors will be appointed by ACRA’s Public Accountants Oversight Committee (PAOC)
- Public-interest entities include: a. companies already listed on the Singapore Exchange and those planning to get listed by issuing initial public offerings; (b). firms in regulated industries such as banks and insurance firms; and (c). organisations which raise public funds, such as charities
- the monitoring of public accountants who do not audit public-interest entities will commence in April 2006. The monitoring of public accountants that audit public-interest entities had already begun in May 2005.

The Inland Revenue Authority of Singapore (IRAS) has clarified the tax treatment of travel-related allowances and reimbursements.
- IRAS will regard the reimbursements of employees’ overseas expenditures as not taxable if these are for business purposes.
- To avoid imposing undue compliance costs on companies in identifying the private component for taxation, IRAS will not tax reimbursements of taxi fares for home to and from the business meeting venue, and reimbursements of taxi journeys for home to and from the airport when they make overseas business trips.
- The tax concession will also be extended to allowances or reimbursements for meals and transport for employees working beyond official working hours (whether during their off-days, weekends or public holidays), if these are on an ad hoc basis.
The tax treatment set out above will take effect from the year of assessment 2006—that is, for payments made from 1 January 2005. If employers have already issued IR8As for the year 2005 to their employees to include items that IRAS has now clarified to be not taxable, employees should proceed to file their returns based on the IR8As issued. Employers need not revise and re-issue IR8As, but instead can give IRAS a list of the affected cases. IRAS will adjust the employees’ tax assessments based on the amendments provided by respective employers.

An agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income was signed today between the Republic of Singapore and Malta. With the signing of this agreement, Singapore has signed comprehensive avoidance of double taxation agreements with 56 countries. 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’ website at www.iras.gov.sg.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Tax reform continues to be a hot topic in Australia. Treasurer, Peter Costello, has released draft legislation designed to hack out more than 31%, or 4,100 pages, from Australia’s growing mountain of taxation legislation.
The legislative changes will reduce the existing Income Tax Assessment Act to half its current size. The Treasurer said the exposure draft represented a major step in reducing the complexity of Australia’s taxation laws.
Under the initiative, the amount to be cut consist of 2,600 pages of income tax law identified as inoperative and 1,500 pages of other inoperative tax acts such as Sales Tax Acts.
The inoperative provisions are to be repealed, as they either have no effect after a particular period has passed or because all the transactions or events they did affect have now concluded.
The exposure draft will be released to provide a public verification process to ensure the provisions to be repealed are truly inoperative.
The Treasurer said the Government was also taking the opportunity to make a number of minor improvements to the usability and readability of Australian tax laws. These include making amendments to ensure certain expressions are defined in only one way across all the various tax laws.
The exposure draft, which follows work by the Board of Taxation on inoperative provisions, should be enacted later this year.
In another response to growing pressure over the complexity of taxation and business red tape, the Australian Government has also announced a revamp of the existing Fringe Benefit Tax (FBT) rules.
In 2001, an OECD study estimated Australian businesses spent A$17bn complying with regulations covering employment, the environment and taxation.
The changes will see a relaxation of the FBT rules for businesses, with an increase in the minor fringe benefits exemption threshold from A$100 to A$300, and an increase in the threshold for reporting from A$1,000 to A$2,000.
Other modifications include halving the fee for incorporating a business and allowing companies to make their annual reports available on the internet, with hard copies sent on request.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The financial reporting of pensions could be in for a shake-up, following the US Federal Accounting Standards Board’s (FASB) latest proposals designed to improve the transparency and completeness of reported information.
In an exposure draft issued at the end of March, FASB proposes that employers should recognise the overfunded or underfunded positions of defined benefit post-retirement plans in their balance sheets. Employers should also be required to measure plan assets and obligations as of the date of their financial statements.
As FASB explains, current accounting standards do not provide complete information about post-retirement benefit obligations. Employers can recognise in the balance sheet an asset or liability that almost always differs from its over- or underfunded positions, with information on the current funded status of plans being given in the notes to the accounts.
The changes would apply to plan sponsors that are public and private companies and non-governmental not-for-profit organisations. They result from the first phase of a comprehensive project to reconsider current guidance on the accounting of pensions and post-retirement benefits. FASB expects to collaborate with the IASB on a second, broader phase which will look at other remaining issues.
In addition to seeking written comments, FASB is also planning to hold one or more roundtable meetings in June to hear the views of interested parties.
Meanwhile, FASB has completed its work on another topic, issuing Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets. This simplifies the accounting for servicing assets and liabilities, such as those common with mortgage securitisation activities. The new standard addresses the recognition and measurement of separately recognised servicing assets and liabilities, and provides an approach that allows hedge-like accounting without organisations having to deal with the complexities of Statement 133. FASB believes the change will encourage more consistent accounting in this area.

Sarah Perrin, accountant and writer.

Canada

Governments need to account for the resources taxpayers have entrusted them with, and taxpayers are entitled to know what is done with their tax dollars.
Recognising the importance of the information governments provide about their plans, how much they spend and what they have accomplished, the Public Sector Accounting Board (PSAB) has issued a draft Statement of Recommended Practice (SORP). Although not part of generally accepted accounting principles, the SORP will provide guidance for developing performance reporting recommendations. The aim is to establish some consistency in performance reporting, since no generally accepted approach to developing overall public sector performance measures exists. The project’s long-term goal is to develop a set of overarching recommended practices to guide the future development of performance reporting, including a framework for identifying specific performance indicators.
The SORP project is the second step in the PSAB’s efforts to enhance the usefulness of public sector financial and non-financial performance information. The first project, Financial Statement Discussion & Analysis (FSD&A), was completed in June 2004. The FSD&A uses narrative and illustrations to highlight and explain a government’s summary financial statements, improving users’ understanding of the government’s financial position.
Financial statements alone cannot fulfil all users’ needs, and demand for additional information on the Government’s accountability and performance has increased. The PSAB believes performance reporting would improve a government’s performance, since it provides a means to monitor expectations and adjust and revise activities to accomplish goals. The PSAB expects to approve the final SORP in June 2006.

After a lengthy research and consultation process, the Accounting Standards Board (AcSB) has published its new strategic plan for 2006–11, Accounting Standards in Canada: New Directions, in which it pursues separate strategies for publicly accountable enterprises, non-publicly accountable enterprises and not-for-profit organisations. These strategies are a significant change from the past and are expected to have fundamental effects on Canadian financial reporting practices.

Alison Arnot, freelance writer and editor, Ottawa.