Technical update

international

One of the most important criteria for securing the convergence of International Financial Reporting Standards and US GAAP is to ensure that new and revised standards are based on consistent principles. In furtherance of this aim, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are undertaking a joint project to develop a common and improved conceptual framework.
A discussion paper was issued in early July covering two draft chapters of the proposed enhanced conceptual framework. These chapters deal with the fundamental areas The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. Further chapters will cover the definitions of assets, liabilities, revenue and expenses, how they are measured and recognised in financial statements, and the presentation and disclosure of information in financial statements.
IASB has also announced its intention of undertaking a comprehensive review of the standards on employee benefits and leases, and proposes certain changes to the disclosures required with respect to related parties.
The review of the leasing standard is expected to result in a fundamental revision of the way leases are treated in the accounts of both lessees and lessors. The review of the accounting for employee benefits will firstly concentrate on retirement benefits, with the intention that an improved standard will be introduced by 2010. Other aspects of employee benefits will then be considered in the second phase.
The need to consider changes to IAS 24, Related Party Disclosures, has come about as a consequence of the discussions on the convergence of IFRS and Chinese and Japanese GAAP. The Chinese Ministry of Finance has raised concerns over the difficulties of controlled entities applying IAS 24, and the Accounting Standards Board of Japan has raised certain issues with respect to the definition of related parties. IASB intends to address both areas in the revision to the standard.
To assist in the process of the worldwide adoption of IFRS, IASB has agreed that going forward there will be:
- an increased lead time to prepare for new standards – it is intended that there will be a minimum of one year between a standard being published and it coming into force - increased opportunity for input on conceptual issues – for example, the chapters of the conceptual framework as discussed above will be issued as discussion papers rather than moving straight to exposure drafts, and - public roundtables on key topics. Most importantly, IASB has announced that no new standards will be effective before 2009. This will both allow for a stable platform of IFRS and also give those countries that have yet to adopt IFRS a possible target date by which convergence might be practicable.
International Financial Reporting Interpretations Committee (IFRIC) 10, Interim Financial Reporting and Impairment, is effective for periods beginning on or after 1 November 2006 and deals with the apparent conflict between IAS 34, Interim Financial Statements, and principles in other statements on the recognition and reversal of impairment losses on goodwill and certain financial assets. IFRIC 10 states that any such impairment losses recognised in interim financial statements cannot be reversed in subsequent interim or annual statements.

IFAC’s International Accounting Education Standards Board has issued a new International Education Standard (IES) 8, Competence Requirements for Audit Professionals, which applies to all audit professionals.
IES 8 comes into effect on 1 July 2008 and member bodies will be expected to modify their policies and procedures to ensure that audit professionals meet the revised requirements. These requirements include having an advanced knowledge of auditing and financial reporting, relevant information technology knowledge and the professional skills and values expected.
Professional accountants who take on the role of audit professional will also be expected to undertake a period of practical experience in audit and to undergo an assessment of their capabilities and competence before they assume the role.

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 (ASB) has expressed a number of concerns with some of the proposals in the first discussion paper issued by IASB and the Financial Accounting Standards Board (FASB) in the standard setters’ joint project to develop a common conceptual framework.
ASB is unhappy about the proposal that the objective of financial reporting should focus only on decision-usefulness, with stewardship being subsumed within this. The UK board also takes issue with the focus on financial reporting, rather than just the financial statements. It is also concerned about the widening of the definition of the primary users of financial reports to cover “present and potential investors and creditors, and their advisers”, the proposal to drop reliability as a qualitative characteristic and replace it with “faithful representation”, and the introduction of verifiability as a component of faithful representation.
Meanwhile, in July, ASB issued an exposure draft of an amendment to Financial Reporting Standard 25 (IAS 32), Financial Instruments: Presentation, to change the classification from liabilities to equity of certain financial instruments, following similar proposals to amend the equivalent international standard. The new proposals would require the classification as equity of financial instruments puttable at the fair value of a pro rata share of the net assets of the entity and instruments with obligations for a pro rata share of the entity on liquidation, provided certain criteria were met. The amendments would be applied retrospectively from a date to be decided after consultation, with one exception relating to compound instruments. ASB has noted the concerns raised by two IASB members, but does not believe these sufficient to justify a divergence between the UK and international standards.
Separately, the ASB has announced it has no current plans to change UK accounting for borrowing costs, despite the IASB’s consultation on this topic.

Sarah Perrin, accountant and writer.

Section 74 of the Company Law Enforcement Act 2001 requires auditors to report to the Director of Corporate Enforcement (the Director) instances of the suspected commission of indictable offences under the Companies Acts. The reporting obligation applies to all persons practising as registered auditors of Irish registered companies. This includes auditors resident outside the Republic of Ireland who are legally permitted under the Irish Companies Acts to audit the accounts of Irish companies. There are in excess of 300 indictable offences under the Companies Acts.
Section 37(e) of the Companies (Auditing and Accounting) Act 2003 extended the responsibilities of auditors in situations where they have made a report to the Director under Section 194(5) of the Companies Act 1990 (failure to keep proper books of account). The purpose of this additional provision was to enable the Director to acquire, on an efficient and effective basis, the quality of information and evidence which would be needed for a prosecution. Certain information over which an auditor may have legal privilege is excluded from this requirement.
The Consultative Committee of Accounting Bodies in Ireland, in association with the Director, has drafted updated guidance which includes a consideration of the application of International Standards on Auditing (UK and Ireland) and the amended legislation. It will also include an updated list of indictable offences. It is proposed that the updated guidance will be considered by the Auditing Practices Board (APB) at its October 2006 meeting and be issued as an APB Bulletin shortly thereafter. The new guidance will be jointly issued by the Director and APB, and will replace APB Bulletin 2002/1, The Duty of Auditors in the Republic of Ireland to Report to the Director of Corporate Enforcement, which is now out-of-date.
Copies of the Bulletin, if approved by APB, will be available from the ACCA Knowledge Library at www.accaglobal.com and www.odce.ie and on the APB website www.asb.co.uk/apb.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

On 18 July, the HKSAR Government released a consultative document, Broadening the Tax Base Ensuring our Future Prosperity – What’s the Best Option for Hong Kong? In the document, two options are considered meaningful to broaden Hong Kong’s tax base, one being reduction in personal allowances so that nearly all wage and salary earners will be brought within the tax net, and the other being the introduction of a Goods and Services Tax (GST).
The Government, however, believes that GST is the best way to achieve the objective of broadening Hong Kong’s tax base given its many advantages, including its stable and predictable revenue stream, its broad-based nature, its fairness and difficulty of avoidance, and that it would maintain Hong Kong’s competitiveness.
In view of the many concerns raised by the public that GST will increase living costs and affect livelihoods, there are a number of proposed relief measures included in the consultative document. It is proposed that tax rates be reduced for all taxpayers, an upfront, one-off supplement provided to households under the protection of Comprehensive Social Security Assistance, a cash allowance be provided for low-income households, and an across-the-board annual GST credit be provided for all households to settle particular rates and other government charges for an initial five-year period.
There are also other proposals regarding business tax relief, such as the reduction of the profits tax rate, motor-vehicle registration tax and duties on liquor, petrol, diesel, abolition of capital fees and a hotel accommodation tax.
The consultation period lasts for nine months and will end on 31 March 2007.

The China Accounting Standards Committee of the Ministry of Finance issued for public consultation the Application Guideline to the 38 accounting standards promulgated in February 2006. The Application Guideline consists of two parts, namely the Interpretation of Accounting Standards (Interpretation), and the Accounts and Main Accounting Treatments (AMAT). The interpretation contains interpretative rules on the key issues addressed in the accounting standards, and the AMAT illustrates the accounting treatments in respect of recognition and measurement for 162 accounts, which basically cover all the transactions and events addressed in these accounting standards. The Application Guideline, together with the accounting standards, is to be implemented by listed companies on 1 January 2007.

To further control the increase in real estate prices, the Government issued regulations to restrict foreign investment in real estate. Foreign enterprises without branches or a representative office in China are not allowed to purchase properties, and foreign enterprises with branches or representation in China are allowed to buy properties only for self-use. Foreign investment enterprises need approval for engaging in real estate investment, operations and/or development (real estate foreign invested enterprises (FIEs)). Meanwhile, a more stringent requirement on capitalisation is imposed on real estate FIEs.

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

Malaysia

n The Malaysian Accounting Standards Board (MASB) recently issued a new accounting standard, FRS 6, Exploration for and Evaluation of Mineral Resources, and amendments to FRS 1192004, Employee Benefits. Both will take effect from 1 January 2007.
FRS 6 deals with exploration for and evaluation of mineral resources, an important economic sector in the country, and seeks to increase transparency by requiring improved disclosures for exploration and evaluation assets. Key features of the standard are as follows:
- entities recognising exploration and evaluation assets to perform impairment tests on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount
- vary the recognition of impairment from that in FRS 136, Impairment of Assets, but measure the impairment in accordance with that standard once the impairment is identified
- require disclosure of information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources, including: its accounting policies for exploration and evaluation expenditures, including the recognition of exploration and evaluation assets; and the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources.
The amendment to FRS 1192004, Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures, introduces an additional recognition option for actuarial gains and losses arising in a post-employment defined benefit plan. The option allows an entity to recognise actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of recognised income and expense.
Other features of the amendments are: - clarification of a contractual agreement between a multi-employer plan and participating employers that determines how a surplus is to be distributed or a deficit funded, which will give rise to an asset or liability
- accounting requirements for group defined plans in the separate or individual financial statements of entities within a group
- additional disclosures, among others, that provide information about trends in the assets and liabilities in a defined benefit plan and the assumptions underlying the components of the defined benefit cost.

A proposal to revise the framework for the preparation and presentation of financial statements is now open for public consultation. The draft document issued by the MASB proposes a conceptual framework that will enable entities to report in a coherent frame of reference, which will be consistent with the framework used by IFRS to address particular accounting issues. Dr Nordin Mohd Zain, the executive director for MASB, commented: “A common goal for the board is for standards to be based on consistent principles built upon a strong foundation of fundamental concepts. The document takes in to consideration MASB’s policy on convergence with IFRS, as well as public comments received on MASB discussion papers, issued in the past.” The exposure period is until 15 November 2006. Copies of the document is available on the MASB website at www.masb.org.my

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Inland Revenue Authority of Singapore (IRAS) has received queries on the application of the guidelines set out in the IRAS circular, Transfer Pricing Guidelines, dated 23 February 2006, pertaining to transactions involving related party loans. It intends to issue a supplementary circular that takes into consideration the concerns of businesses, and yet achieves its purpose of highlighting the importance of adhering to the arm’s-length principle, after receiving responses from a consultation document, which it had issued earlier. For more details, visit IRAS’ website at www.iras.gov.sg.

IRAS has issued an e-tax guide on the use of treasury shares to fulfil obligations under employee equity-based remuneration schemes. It clarifies various questions with regards to tax deductions for treasury shares transferred under an employee equity-based remuneration scheme. It also provides clarification on issues such as the tax treatment of “gains” or “losses” upon the transfer or disposal of treasury shares, and recharges from the parent company for shares transferred to a subsidiary company’s employees. For more details, visit IRAS’ website. The Council on Corporate Disclosure and Governance (CCDG) has issued an exposure draft which proposes amendments to FRS 32 to require certain financial instruments to be classified as equity. These include financial instruments, which are puttable at the fair value of a pro rata share of the net assets of the entity and instruments with obligations for a pro rata share of the net assets of the entity on its liquidation, provided specified criteria are met. The exposure draft, Proposed Amendments to FRS 32, Financial Instruments: Presentation and FRS 1, Presentation of Financial Statements – Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation, is available on CCDG’s website at www.ccdg.gov.sg. The comment period for the exposure draft ends on 23 September 2006.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Australian companies and their auditors are being urged to consider the implications of the new Force of Law Auditing Standards (ASAs), introduced by the Australian Auditing and Assurance Standards Board.
With the new standards applying to financial periods commencing on 1 July 2006, companies will need to consider the ramifications of the changes.
Although the new ASAs do not radically change existing auditing standards, they are now legally enforceable under the Corporations Act, rather than the current position where they are enforceable by Australian accounting bodies.
The ASAs remain principles-based, with auditors expected to use their professional judgement in light of the given circumstances.
One area where the new standards will have an impact is in the auditor’s opinion, with new naming conventions introduced.
Instead of the current “clean” or “unqualified” opinion, the new standards require an auditor to give an “unmodified” opinion.
“Modified” opinions are to be expressed as:
- qualified opinions – situations where the auditor previously used the term “except for”
- disclaimer of opinion – situations previously constituting an “inability to form an opinion”
- adverse opinion – situations where the auditor believes qualification is inadequate to disclose the misleading or incomplete nature of the report.
Under the ASAs, if the auditor’s opinion includes an “emphasis of matter” paragraph, it will now be considered a “modified” opinion. This contrasts with the previous situation where such a paragraph could be included to draw readers’ attention to certain matters, even if the auditor did not believe the matters warranted a qualified opinion.
Related party information will also be subject to more rigorous reporting, with auditors now urged to obtain a written representation from the company management concerning the completeness and adequacy of the report’s related party information and disclosures.
Under the ASAs, the auditor is required to review the information provided and identify the names of all known related parties and the safeguards in place.
Auditors are also required to communicate with those responsible for corporate governance on matters relating to auditor independence, any significant relationships that may affect this independence and the safeguards designed to protect it. This is intended to ensure the company is appropriately informed and able to address possible risks to the audit.
The new ASAs are based on International Auditing Standards issued by the International Auditing and Assurance Standards Board.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have published the first two draft chapters resulting from their joint project to create an enhanced conceptual framework. At present the two boards are guided by their own individual and differing frameworks.
The draft chapters contain the boards’ preliminary views on the definition of the objective of financial reporting, and the qualitative characteristics of decision-useful financial information. They define the objective of general purpose external financial reporting as providing information that is useful to present and potential investors and creditors and others in making investment, credit and similar resource allocation decisions. Relevance, faithful representation, comparability (including consistency) and understandability are identified as being among the characteristics that make financial information decision-useful.
International co-operation is also being extended to other topics, with FASB adding to its agenda another joint IASB project to reconsider the current accounting standards for leases. Its goal is to ensure that financial statements provide useful, transparent and complete information about leasing transactions. The new project reflects FASB’s concern that the current accounting standards are complex and rules-based, with the result that financial statements do not clearly portray the resources and obligations arising from lease transactions.
Meanwhile, clarification work has progressed in relation to income taxes and leases. FASB has issued an interpretation clarifying the way companies account for uncertainty in income taxes. It prescribes a consistent recognition threshold, and sets clear criteria for subsequently recognising, derecognising and measuring such uncertain tax positions for financial statement purposes. At the same time, the US board issued a FASB Staff Position, requiring companies to recalculate their leveraged leases if there is a change or projected change in the timing of cash flows relating to income taxes. The FASB Staff Position reflects the board’s view that accounting should fully reflect the economics of a transaction.

Sarah Perrin, accountant and writer.

Canada

The Accounting Standards Board (AcSB) has replaced its Handbook Section 1506, Accounting Changes, with a new section based on International Financial Reporting Standard (IFRS) IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. According to the new standard, voluntary changes to accounting policy can be made only if they result in the financial statements providing reliable and more relevant information. Changes are to be applied retrospectively when possible. In addition, prior-period errors will be corrected retrospectively, and new disclosures are required for changes in accounting policy or estimates, and error corrections. Issued in July, the new standard is effective for fiscal years beginning on or after 1 January 2007.
The adoption of this new standard is part of the AcSB’s ongoing strategic plan to incorporate IFRS into Canadian GAAP, for which the AcSB issued an implementation plan this summer. This plan includes determining what, if any, modifications can be made to an IFRS when adopting it into Canadian GAAP, and how to treat Canadian standards that have no IFRS equivalent at the time of the changeover. AcSB also plans to establish procedural rules for the exposure of IFRS after the changeover. The implementation plan includes a complete progress review in 2008, at which time the AcSB will announce the changeover timing.
Meanwhile, the Auditing and Assurance Standards Board (AASB) has approved its new strategic direction, which similarly focuses on converging Canadian auditing and assurance standards with the International Standards on Auditing (ISAs). The AASB’s decision took into account responses to its Invitation to Comment, Auditing and Assurance Standards in Canada – Maintaining High Standards in a Global Environment, in which the vast majority of stakeholders expressed strong support for the proposal to converge with the ISAs.

Alison Arnot, freelance writer and editor, Ottawa.