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international
The long-running debate on how best to deal with the requirements of smaller, unlisted companies in the increasingly complex framework of International Financial Reporting Standards (IFRS) finally came a step closer to conclusion in February 2007. The International Accounting Standards Board (IASB) issued an exposure draft of its 'International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)'. The comment period expires on 1 October 2007 and a standard is expected in mid-2008.
The proposed standard aims to provide a simplified, self-contained set of accounting principles suitable for smaller entities and is published in three documents:
- the draft IFRS for SMEs
- implementation guidance consisting of illustrative financial statements and a disclosure checklist
- a basis for conclusions
To further facilitate ease of use, the standard is organised by topic rather than in IFRS number order. The simplifications for smaller entities are achieved through three types of modification.
The topics omitted include:
- Equity-settled share-based payments, although there is a cross reference to IFRS 2
- Extractive industries - any SMEs in this sector would need to look directly to the requirements of IFRS 6
- Lessor accounting - this omission is on the basis that finance lease lessors are likely to be financial institutions who would not be able to use IFRS for SMEs
- Earnings per share and segmental reporting, both standards applying only to listed companies
In the case of standards which permit more than one accounting treatment only the simpler option has been included, and those selected include:
- The cost-depreciation model for investment property (fair value would still be permitted by adopting IAS 40)
- The cost-amortisation-impairment model for property, plant and equipment (the revaluation model would still be permitted)
- Treating borrowing costs as an expense, although capitalisation would be permitted through reference to IAS 23
- The indirect method for reporting cash flows
- One method for all types of grants.
Examples include:
- Two categories of financial assets rather than four, removing 'held to maturity' and 'available for sale'
- Very much simplified hedge accounting
- Goodwill impairment reviews will be based on indications of impairment rather than being required annually
- All research and development costs will be identified as an expense
- A principles-based approach to accounting for defined benefit pensions and omission of the corridor approach
- Share-based payments to be accounted for on an intrinsic value basis
- Simplified first-time adoption with fewer prior period restatements.
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's Accounting Standards Board (ASB) has issued an exposure draft (ED) of a Statement, Half-Yearly Financial Reports. The ED reflects the requirements of the Financial Services Authority's Disclosure and Transparency Rules (DTR), which implement the EU Transparency Directive in the UK. The Financial Services Authority (FSA) made clear that UK issuers reporting under UK GAAP can satisfy the requirement for the half-yearly financial statements to give a true and fair view by a statement that they have been prepared in accordance with pronouncements by the ASB.
Once finalised, the new statement will replace the ASB's 1997 Statement, Interim Reports. Apart from reflecting the requirements of the DTR, the ASB has sought to make the minimum number of changes necessary, including changes in terminology. The ASB has done this in order to have revised guidance prepared in time for the first round of half-yearly financial reports that have to be prepared under the DTR. The ASB is, however, seeking views on a proposal to add a longer-term project on interim financial reporting to its agenda.
The ASB has also been consulting on its proposed response to the International Accounting Standards Board's (IASB) discussion paper, Fair Value Measurements. The draft response acknowledges that the text of the US standard, SFAS 157, might be useful as a methodology for determining market-based exit prices, but questions the assumption that fair value should always be equated with exit value. It also questions the 'one size fits all' assumption in the IASB's discussion paper and recommends that the appropriate basis of value needs to be considered standard by standard. The ASB also questions the assumption that fair value should always be assessed from the perspective of a market participant rather than that of the entity; and recommends that more prominence should be given to the importance of entity-specific measures.
Sarah Perrin, accountant and writer.
With effect from 1 April 2007, the European Communities (Companies) (Amendment) Regulations 2007-S.I. 49 of 2007 imposed additional disclosure rules for company documentation, company websites and certain company electronic communications including e-mail.
Currently every Irish-registered limited liability company, unless exempt, is obliged to include the following details in its business letters:
(1) the name of the company
(2) in respect of every director and shadow director of the company, (a) first name (or an initial) and surname, (b) former first name and surname, and (c) nationality if not Irish
(3) the place of registration of the company, the company registration number and the address of its registered office
(4) where a company is exempt from using 'limited' or 'teoranta' after its name, the fact that it is a limited company; where a company is being wound up this fact must be stated and where reference to share capital is made, it must be to paid-up share capital.
Every limited liability company is also required to include the information at 1, 3 and 4 above on its order forms for goods and services. In addition, it is obliged to state its name on other company documents including all invoices, cheques, money orders and receipts.
Where a company is registered in another European Union state and operates its business through an establishment in Ireland, every letter and order form used by a branch of that body corporate must include the information at 3 and 4 above and disclose the place of registration of the branch and the number with which it is registered, and if the law of the state in which the company is incorporated requires entry in a register, the place of registration of the company and its registration number.
S.I. 49 of 2007 extends the disclosure requirements for Irish-registered companies to websites, e-mails and faxes although the new requirements do not apply to branches of foreign companies.
Michael Kavanagh, head of financial reporting supervision, Irish Auditing and Accounting Supervisory Authority (IAASA).
Asia Pacific
Hong Kong & Mainland China
The Financial Secretary delivered his fourth Budget on 28 February 2007. It was reported that GDP leapt by 6.8% in 2006, and both consumption and investment grew considerably. Inflation was kept at 2%, and unemployment rate was at a six-year low of 4.4%. The outlook for 2007 is quite optimistic, with GDP growth forecast at 4.5-5.5%.
The Financial Secretary followed the guiding principles of 'revitalising the economy, promoting employment and improving people's livelihood' in formulating the 2007/8 Budget. Financial services, trade, logistic and tourism industries have continuously been identified as the core industries for the development of Hong Kong's economy. Specific budgets have been earmarked in the following initiatives:
- Replacing the existing air traffic control system and building a new headquarters for the Civil Aviation Department
- Providing WiFi networks in government venues for citizens' free use, and
- Establishing a new fund to develop film development
A series of measures, with an allocation of HK$900m, will be implemented to help the disadvantaged, including:
- A one-year pilot transport support scheme to encourage the unemployed and low-income people in financial difficulties who live in remote areas to seek jobs and work across districts
- A child development fund to provide children from a disadvantaged background with more development opportunities
- Additional support services to families and children in need, such as victims of domestic violence
- Expansion of the Capacity Building Mileage Programme
- Additional subsidized residential care places in new purpose-built care homes for the elderly
- A trial scheme in two districts to provide one-stop support services to elderly discharges in need
In view of the fact that the government has improved its financial position, with an estimated consolidated surplus of $55.1bn for 2006/7, the Financial Secretary has also proposed a series of tax relief measures and one-off rebate measures, which cost $20.3bn, to share the fruits of economic prosperity with the community.
- The marginal tax bands and marginal rates for salaries tax will revert to their 2002/3 levels.
- Child allowance will increase from $40,000 to $50,000. In addition, an additional one-off child allowance of $50,000 will be introduced for each child in the year of birth.
- The maximum amount of deduction for self-education expenses will be raised from $40,000 to $60,000.
- Stamp duty on transactions of properties valued at $1m-2m will be reduced to a fixed amount of $100.
- Duty rates on wine, beer and other types of liquor containing not more than 30% of alcohol will be reduced by half.
There are also several one-off rebate measures proposed in the Budget:
- To waive 50% of salaries tax and tax under personal assessment assessed for 2006/7, subject to a ceiling of $15,000
- To waive rates for the first two quarters of 2007/8, subject to a ceiling of $5,000 per quarter, and
- To provide one additional month of standard rate payments for CSSA recipients and one additional month of allowance for recipients of the old age allowance and the disabilities allowance.
The Financial Secretary also proposed that the income-sharing arrangement between the fiscal reserves and the Exchange Fund will be revised. With effect from 1 April, the return on the fiscal reserves will be calculated on the basis of the average rate of return of the Exchange Fund's investment portfolio over the past six years, which results in a rate of return of 7% on the fiscal reserve for 2007. A guarantee of a minimum return will also be included to ensure the annual investment return in any year will not be lower than the average yield of three-year Exchange Fund notes for the previous year.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Institute of Accountants recently approved and issued the following Standards on Related Engagements (ISRE) and International Auditing Practice Statements (IAPS) as Malaysian Approved Standards on Auditing:
- ISRE 2410, Review of Interim Financial Information by the Independent Auditor of the Entity
- IAPS 1005, The Special Considerations in the Audit of Small Entities
- IAPS 1006, Audit of the Financial Statements of Banks
- IAPS 1003, Electronic Commerce: Effect on the Audit of Financial Statements
- IAPS 1014, Reporting by Auditors on Compliance with International Financial Reporting Standards
The above standard on review engagement is effective for reviews of interim financial information for periods beginning on or after 1 July 2007. Copies of the above standard and practice statements can be downloaded from www.mia.org.my
The Malaysian Accounting Standards Board (MASB) recently approved and issued limited amendments to FRS 121 The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation. The issuance of a limited amendment to its existing foreign exchange standard will result in exchange differences arising from investment in foreign operations to be recognised in equity. Previously, exchange differences arising from such transactions between companies in a group would be accounted for in an income statement or equity, depending on the currency of the monetary item. But with the amendment, such transactions and their foreign-currency differences will be treated as part of reporting entity net investment and recognised in equity.
Together with this limited amendment, the MASB also issued the following six new interpretations to a number of existing standards covering a wide range of industry from mining to financial services:
IC Interpretation 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities
IC Interpretation 2, Members' Shares in Co-operative Entities and Similar Instruments
IC Interpretation 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
IC Interpretation 6, Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
IC Interpretation 7, Applying the Restatement Approach under FRS 1292004 Financial Reporting in Hyperinflationary Economies
IC Interpretation 8, Scope of FRS 2.
The amendments to FRS 121 and the above Interpretations applicable for Entities Other Than Private Entities shall apply to annual periods beginning on or after 1 July 2007.
The MASB has also released Exposure Draft ED 55 Proposed Amendments to Financial Reporting Standards for public consultation. ED 55 proposes amendments to existing standards on Cash Flow Statements, Construction Contracts, Income Taxes, Revenue, Employee Benefits, Accounting for Government Grants and Disclosure of Government Assistance, Borrowing Costs, Accounting and Reporting by Retirement Benefit Plans, Interim Financial Reporting and Provisions, Contingent Liabilities and Contingent Assets with the view to converge them with the international standards.
The main aim of this exposure draft is to remove the remaining differences between 10 existing Financial Reporting Standards (FRS) and International Accounting Standards (IAS) to eventually result in these FRS being virtually identical to the respective IAS, says the MASB executive director, Nordin Mohd Zain. A copy the exposure draft and clean copies of the full revised text of the 10 proposed standards can be downloaded from www.masb.org.my
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The government will set up an Accounting Standards Board (ASB) to issue standards not only for commercial enterprises but also for other entities outside the public sector, such as charities, societies and co-operatives. The ASB will replace the Council on Corporate Disclosure and Governance (CCDG) on 1 September and will comprise key regulators, senior accounting professionals and leading users of financial information. The ASB is expected to enhance the credibility of financial reporting and achieve consistency in standards across sectors. It will issue local standards for commercial entities, based on standards issued by the International Accounting Standards Board (IASB), but evaluate carefully the relevance to the local context. In addition, the ASB will prescribe modifications to accounting standards to make them relevant for other non-public sector entities such as charities, co-operatives and societies.
In terms of corporate governance, charities and non-profit organisations will continue to be regulated by the Commissioner of Charities and entities in the financial sector will be overseen by the Monetary Authority of Singapore and the Singapore Exchange. Statutory boards and other public agencies will come under the purview of the Accountant-General, who will set the accounting standards.
The 2007 Singapore Budget Speech was delivered by the Second Minister for Finance, Tharman Shanmugaratnam, on 15 February. The highlights were as follows.
- Increase in goods and services tax rate (GST) by 2% to 7%. This is to take effect from 1 July 2007.
- Reduction of corporate income tax rate by 2% to 18%. This is to take effect from the year of assessment (YA) 2008.
- The employer component of CPF [[spell?]] contribution rates to be increased by 1.5% from 1 July 2007.
- Partial tax exemption threshold to be increased from S$100,000 to S$300,000. This is to take effect from YA 2008.
- Income tax deduction will be allowed for borrowing costs.
- Reduction of foreign domestic worker levy (FDWL) and extension of concessionary FDWL to families with disabled members.
- Reduction of road tax.
Details can be found at www.singaporebudget.gov.sg/
budget_2007/index.html
Joseph Alfred, technical adviser,
ACCA Singapore.
Australia & New Zealand
New legislation that will reshape the Australian retirement income system has passed through the parliament, ushering in a raft of changes across the local financial services industry.
The Australian government's 'Simplified Super' reforms were announced in its 2006 Budget and are designed to simplify and streamline the functioning of the local retirement income system during both the accumulation and pension payment phase.
The legislative package of 11 bills, the most important of which are the Tax Laws Amendment (Simplified Superannuation) Act and the Superannuation Legislation Amendment (Simplification) Act, changes some key aspects of the existing regime.
Unlike most countries, Australia previously taxed pension (or superannuation as it is called locally) contributions at three points: on the way into the system, on their earnings and on payment to the fund member.
The new rules abolish the exit tax and simplify several other aspects of the compulsory system.
Most of the new rules take effect from 1 July 2007 and include:
- Members aged 60 and over can now access their benefits tax-free if they are from a taxed source
- Introduction of an A$50,000 annual limit on pre-tax employer contributions, with a transitional period for those aged 50 and over
- Introduction of a A$150,000 annual limit on post-tax personal contributions, with those aged less than 65 able to make post-tax personal contributions of up to $450,000 every three years
- Transitional arrangement permitting post-tax contributions of up to A$1m between 10 May 2006 and 30 June 2007
- Abolition of the existing Reasonable Benefit Limits and age- based contribution limits
- Simplified rules for retirement income streams, with no annual maximum payment required
- Introduction of new rules on the acceptance and deductibility of contributions
- Simplification of benefit drawdowns, with individuals no longer forced to cash out their benefits from a fund at a particular age
- Eligibility for self-employed contributors for the Australian government's Co-Contribution Scheme.
Changes were also implemented to the rules for qualifying for a means-tested government-provided aged pension.
Janine Mace, Australian freelance finance
and business journalist.
Americas
US
The US standard setter Financial Accounting Standards Board (FASB) has issued a standard that provides companies with an option to report selected financial assets and liabilities at fair value.Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, aims to reduce both complexity in accounting for financial instruments and the accounting-induced volatility in earnings caused by measuring related assets and liabilities differently. The statement achieves further convergence with the IASB, which has already adopted a fair value option.
SFAS No. 159 also establishes presentation and disclosure requirements designed to support comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The standard requires companies to provide additional information that will help investors and other users of financial statements to understand more easily the effect of a company's choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.
Meanwhile the Private Company Financial Reporting Committee (PCFRC) has announced its founding membership. The PCFRC is part of a broad initiative by the FASB and the American Institute of Certified Public Accountants to improve FASB's current standard-setting process to better meet the financial reporting needs of private companies and the users of their financial statements. The primary objective of the PCFRC is to provide recommendations to FASB that will help it determine whether and where there should be specific differences in prospective and existing accounting standards for private companies. The committee consists of four certified public accountant (CPA) practitioners, four financial statement preparers and four users of private-company financial statements. It will hold its first meeting over two days in Chicago in May.
Sarah Perrin, accountant and writer.
Canada
The Canadian Institute of Chartered Accountants Public Sector Accounting Board (PSAB) has approved a single conceptual framework and reporting model for all levels of government in Canada.
This framework includes new standards requiring full accrual accounting in local governments. After extensive consultation with the local government community and with only minor amendments to the existing standards for senior governments, the PSAB has revised sections PS 1000, Financial Statement Concepts, PS 1100, Financial Statement Objectives, and PS 1200, Financial Statement Presentation, to apply to all levels of government. Under the new standards, municipal and regional governments will be required to account for stock of capital assets, such as roads, bridges, sewage treatment facilities and buildings, and their use in financial statements. While local government financial statements have traditionally focused on annual surplus or deficit, the new reporting standards provide for key indicators such as net debt, accumulated surplus/deficit, annual surplus/deficit, and change in net debt and cash flows.
'The new reporting model eliminates the one-dimensional focus on annual surplus/deficit by requiring a more comprehensive set of indicators that will be much more useful to the public and anyone having a stake in making sense of the numbers,' said Kent Kirkpatrick, PSAB vice-chair and City Manager for the City of Ottawa, in a release.
The new accounting and reporting standards come into effect on 1 January 2009, though some governments plan to apply them sooner. Others have a lot of work to do before they are able to apply them. 'Many local governments do not have a complete inventory of what they own or the cost of those assets when they were acquired,' Kirkpatrick said. 'Completing the inventory, determining cost or an estimate of it, and creating capital assets policies all need to be done before 1 January 2009.'
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
The South African Minister of Finance, Trevor Manuel, delivered his annual budget speech in February. For corporate taxpayers the most noteworthy change was the abolishment of Secondary Tax (STC) on companies in favour of a dividends tax.
Previously companies paying dividends were required to pay STC of 12.5%. This payment was over and above the 29% of normal income tax that companies pay on their taxable profits.
Manuel said that most other countries have a dividend tax on shareholder level, while South Africa levied STC on a company level. STC was instituted in the early 1990s to encourage companies to rather reinvest their profits before distributing to shareholders.
Unintended consequences were that international investors did not always understand the concept of STC and could not claim it as a tax credit. The attractiveness was, however, that collection was simpler with only a few thousand companies to look after instead of millions of shareholders. The collection administration will remain with the companies.
The phased approach will, in phase one, decrease the STC rate to 10% from 1 October 2007 but broaden the pay-out base on which STC will be levied. Phase two, converting to a formal dividends tax on shareholders, is expected to commence in 2008 after international double-taxation agreements have been amended.
Taxpayers are eagerly awaiting clarity on unanswered questions. For instance, what will happen to STC credits? STC credits were earned when a company was on the receiving side of dividends. These credits could be utilised against your STC liability when in turn your company decided to pay dividends. As a result, shell companies with STC credits were often bought (at a premium) to facilitate dividend payments and save STC. This loophole might now be closed with the shell companies essentially becoming worthless.
Bernardt van der Linde, freelance writer and
former PwC chartered accountant. |
