Technical update

international

At the end of November the International Accounting Standards Board (IASB) issued IFRS 8, Operating Segments, as part of its joint short-term convergence project with the US Financial Accounting Standards Board (FASB). IFRS 8 will apply for periods beginning on or after 1 January 2009 and will replace IAS 14, Segment Reporting. As with IAS 14, the standard only applies to listed entities.
IFRS 8 requires a ‘management approach’ to reporting segment information; identifying operating segments by reference to the information that is regularly evaluated by the entity’s ‘chief operating decision-maker’ in determining how to allocate resources and assess performance. Unlike the previous standard, the management approach will result in a need to report separately any component of the business that sells primarily or exclusively to other operating segments of the entity. In addition, the basis of measurement used will be that used for reporting internally, which may differ from external reporting accounting policies. The basis of measurement used will also need to be disclosed.
The financial statements will be required to include reconciliations of reportable segment revenues, total profit or loss, total assets, total liabilities and other disclosed amounts to the corresponding amounts included in the financial statements. In addition, there will need to be specific disclosure of revenues derived from products and services, the countries in which the revenues are earned and assets held together with information about major customers, irrespective of whether the information is used by management for making operating decisions.

The International Auditing and Assurance Standards Board (IAASB) has approved proposals to amend ISA 580, which is currently called Management Representations and will be renamed Written Representations. The proposed changes are an attempt to improve the quality and appropriateness of written representations sought by auditors and, in particular, to deal with concerns that auditors may seek to place too much reliance on written representations at the expense of obtaining other evidence. The proposed new standard will require both general representations in respect of the financial statements, including internal control and the completeness of information provided to the auditors, as well as representations in respect of specific assertions within the financial statements.
In addition to the proposed amendments to ISA 580, the IAASB has issued five exposure drafts of revised ISAs as part of its clarity project. These exposure drafts are:
- ISA 230 (Redrafted), Audit Documentation
- ISA 540 (Revised and redrafted), Auditing Accounting Estimates, including Fair Value Accounting Estimates and Related Disclosures
- ISA 560 (Redrafted), Subsequent Events
- ISA 610 (Redrafted), The Auditor’s Consideration of the Internal Audit Function
- ISA 720 (Redrafted), Reading Other Information in Documents Containing Audited Financial Statements.

Proposed ISA 540 combines the existing ISA 540 and ISA 545 as the IAASB considered that there are a number of similarities of principle and some repetition between the two standards.

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 is hoping to promote greater transparency in the financial reporting of pension schemes through the publication of a reporting statement, Retirement Benefits – Disclosures.
The statement (at the time of writing, due for publication last month) is designed as a best practice guide, with persuasive rather than mandatory force. It may be applied by any entity that has a defined benefit scheme and its recommended disclosures complement the disclosure requirements of the mandatory Financial Reporting Standard 17. The statement sets out six principles to be considered when providing disclosures for defined benefit schemes in financial statements. These address the following areas: the relationship between the entity and trustees of the scheme; the principal assumptions used to measure scheme liabilities; the sensitivity of the principal assumptions used to measure those liabilities; how the liabilities arising from defined benefit schemes are measured; the future funding obligations in relation to the defined benefit scheme; and the nature and extent of the risks arising from financial instruments held by the scheme.
Heritage assets have also received the ASB’s attention. A recent ASB exposure draft, Accounting for Heritage Assets, aims to improve the quality of the financial reporting of heritage assets for entities such as museums holding collections of art, antiques and books. The proposals require entities, wherever practical, to report collections of heritage assets at valuation in their annual accounts. Where it is not practicable to obtain a valuation, the collection should not be reported in the balance sheet. However, enhanced disclosures are required regardless of whether collections are reported in the balance sheet or not.
Meanwhile, the ASB’s Urgent Issues Task Force has recommended a limited amendment to FRS 3, Reporting Financial Performance. This is designed to resolve an apparent conflict with certain requirements of FRS 26 relating to financial instruments.

Sarah Perrin, accountant and writer.

The Investment Funds, Companies and Miscellaneous Provisions Act 2006 was signed into law on 24 December 2006. One provision of the act is to substantially increase the audit exemption limits in Ireland. The new levels are a maximum of 7.3m euros turnover and 3.65m euros balance sheet total (total assets with no deduction for liabilities), and less than 50 employees.
This replaces the previous figures of 1.5m euros maximum turnover and 1.9m euros balance sheet total. There is no change in the number of employees condition. These limits are almost the maximum allowed by the EU. A company must meet all three criteria and certain categories of companies may never avail of exemption, including companies limited by guarantee and most regulated companies like insurance brokers and banks. Where a company files a late annual return they will not be entitled to avail of audit exemption for two years.
The new thresholds took effect on the 24 December, in that they are applicable to financial years in progress which have more than two months to run after the date of signature of the bill, and to financial years commencing after the date of the bill’s signature. Companies must meet the new criteria for the current and previous year.
Other changed brought about by the act include:
- allowing statutory declarations to be made outside Ireland in certain circumstances
- provisions to facilitate transposition of the EU Transparency Directive
- provisions to complete the transposition of the EU Takeovers Directive
- to provide by regulations for mandatory dematerialisation (i.e. holding in electronic form) of the securities of companies listed on a regulated market, and
- changes in the amount of costs that a liquidator may recover when taking a disqualification action against a director.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

Since the Hong Kong Government released the consultation document on the Goods and Services Tax (GST) in July 2006, there have been many debates and concerns expressed on the topic.
Although the consultation exercise will end on 31 March 2007, the Government issued an interim report in December 2006. It was reported that the public generally acknowledged the problems of the narrow tax base in Hong Kong and shared the view that the Government should stabilise its revenue by broadening the tax base so as to enhance its fiscal health and competitiveness. However, there have still been a number of worries and concerns over the proposed GST. As such, the Government considered that there is insufficient public support at this stage for the introduction of GST.
As the community generally agrees that the Government should continue public consultation on how to broaden the tax base, the Government has decided to continue its discussion with the public on options to broaden Hong Kong’s tax base, and is looking forward to a conclusion when the consultation exercise ends in March this year.

The Ministry of Finance issued the revised Financial Rules for Business Enterprises and the new Financial Rules for Financial Institutions, both being adopted on 1 January 2007.
The Financial Rules for Business Enterprises stipulate the principles for financial management in state enterprises, including fund-raising, fund and asset management, cost control, profit distribution and employees’ incentive compensation. It also requires the establishment of a financial risk management system.
The Financial Rules for Financial Institutions stipulate that distribution of profit is not allowed if the capital adequacy rate, debt repayment rate and net assets to debt rate are below the required levels. Financial institutions are also required to establish a risk management system to identify, measure, monitor and control financial risks.

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

Singapore

The Minister for Finance has appointed the following to the Council on Corporate Disclosure and Governance (CCDG) with effect from 1 December 2006.
- Choo Chin Teck, chief financial officer and group company secretary, Keppel Land Limited.
- Lai Chin Yee, finance director, Qian Hu Corporation Limited.
- Professor Tan Teck Meng, professor of accounting, School of Accountancy, Singapore Management University.
The following members have retired from their service on the CCDG:
- Liew Mun Leong, President and chief executive officer, CapitaLand Limited
- Emmanuel Daniel, managing partner, The Asian Banker
- Lawrence Wong, head (listings), Singapore Exchange Limited.
For more details, please visit www.ccdg.gov.sg
The IASB has published a discussion paper on Fair Value Measurements for public comment.
The paper sets out IASB’s preliminary views on providing consistency in the measurement of fair value, when already prescribed under existing IFRSs.
A copy of the paper can be obtained at www.iasb.org. CCDG invites comments from all interested parties on the paper. Comments should be supported by specific reasoning, submitted in written form, and are to be received by 2 March 2007. For more details, please visit www.ccdg.gov.sg
The Monetary Authority of Singapore (MAS) has released a policy consultation paper on proposed amendments to the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA). This is the second in a series of policy consultations MAS is conducting following a review of the SFA and FAA. The paper sets out the proposed amendments to five broad areas and highlights other drafting amendments.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

The ongoing argument over Australia’s corporate taxation rate has received a new lease of life following the launch of the Business Council of Australia’s (BCA) Corporate Taxation: An International Comparison – 2006 Update, which was prepared with assistance from KPMG. (The BCA represents the chief executives of 100 of Australia’s leading companies, and is an influential voice in Australian business.)
The level of Australia’s corporate tax burden compared to its key competitors and trading partners has long been a bone of contention, with both business and accounting groups pushing the Federal Government on the need to reduce the existing rate.
While there have been significant reforms to both the personal income tax and superannuation (pension) tax systems, there have been few major business tax reforms in recent years.
The new BCA report claims Australia’s corporate tax burden reached 5.7% of GDP in 2006, compared to 5.1% a year ago, and is unfairly high compared to countries such as the UK and US.
‘Australia’s corporate tax burden remains the highest against every relevant global comparison, and its relative position is worsening,’ the report states.
The claims received a dismissive response from the Federal Treasurer, Peter Costello, who labelled the findings ‘misleading’ because they were based on the measure of company tax collections to GDP.
‘The BCA’s results do not really illustrate tax comparisons – what they really show is how profitable Australian companies have been in recent years,’ he argued.
Costello went on to note Australia’s company tax rate is 30%, which is below that of its major bilateral trading partners such as the US, Japan, Germany, New Zealand and China. It also has a full dividend imputation system.
The BCA report claims that while Australia’s corporate tax rate has remained at 30% over the past 12 months, there have been falls in the average corporate tax rates in the OECD from 29.1% to 28.4%, 25.3% to 24.8% in the EU, and 30.4% to 30.1% in the Asia Pacific region.
According to the Treasurer, as corporate tax is levied on profits, the BCA approach ‘perversely’ rates countries with more profitable corporate sectors as less internationally competitive.
Debate over the level of taxation in Australia remains heated, despite the Federal Government’s attempt to hose down the issue by producing its own report in April 2006, International Comparison of Australia’s Taxes.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The US standard setter FASB has issued an exposure draft proposing an amendment to Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The proposal responds to concerns that existing disclosure requirements associated with the statement do not provide adequate information to users of accounts on the effects of derivative and hedging activities on a company’s financial statements.
The exposure draft requires that objectives and strategies for using derivative instruments be discussed in terms of underlying risk and accounting designation. It proposes tabular disclosure of notional and fair value amounts of derivative instruments, and the gains and losses on derivative instruments and related hedged items. It also proposes disclosure of information about counterparty credit risk and the existence and nature of contingent features in derivative instruments. The FASB believes these disclosures should better convey the risks the entity is intending to manage and the additional risks the entity may be taking on when using derivative instruments, as well as making clear how derivatives and related hedged items affect reported amounts in the financial statements. The proposed requirements would be effective for financial statements issued for fiscal years and interim periods ending after 15 December 2007, with early application encouraged.
Last month the FASB also announced the establishment of an Investors Technical Advisory Committee (ITAC), made up of users of financial reports with strong technical accounting knowledge. The ITAC members will serve as a resource for the FASB in obtaining further user perspectives and insights on the board’s projects. The committee will help the FASB to identify urgent accounting and financial reporting issues, propose new items to be added to the board’s agenda, and provide perspectives on the implementation of new standards. The FASB plans to meet the ITAC in public sessions at least twice a year, while meetings with the FASB’s staff are expected to occur every quarter.

Sarah Perrin, accountant and writer.

Canada

Following the Federal Government’s recent tax changes to income trusts, the Canadian Institute of Chartered Accountants (CICA) issued guidance that recommends standardised reporting of distributable cash in the management discussion and analysis (MD&A). The guidance calls for enhanced disclosure of the management strategies used to determine what percentage of an income trust’s cash is distributable to investors. Currently, there is no standard practice governing this calculation or the disclosure of management strategies regarding it.
This enhanced disclosure would include information on how much cash was generated and where it came from; management’s strategy for maintaining a productive capacity and managing debt; whether the income trust is retaining enough cash to provide for all long-term unfunded contractual liabilities, such as pension plans; and whether it will be able to meet its financial commitments, such as loan covenants, if it makes cash distributions.
‘The lack of consistent disclosure practices across the industry made it difficult for investors to know what they were buying, to compare one income trust to another, and to assess whether or not current cash distributions from the trusts were sustainable,’ said Kevin Dancey FCA, President and CEO of CICA, in a release.
In addition to the CICA guidance regarding the MD&A, the Accounting Standards Board (AcSB) has proposed changes to Cash Flow Statements, Section 1540, of CICA Handbook – Accounting. The amendments to paragraph 1540.55 would require disclosures about cash distributions on financial instruments classified as equity, when the distribution is determined according to a contractual agreement, such as an income trust. The entity would have to disclose the terms and conditions that apply to the determination of the cash distribution; the total cash distribution; and the proportion of the distribution that is non-discretionary. The requirements apply to all enterprises making cash distributions on equity instruments, not just income trusts, and would be effective for interim and annual periods ending on or after 31 March 2007.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

South African auditors and accountants will this year be looking out for more information on corporate law reform. The Department of Trade and Industry is in process of updating and rewriting the current companies’ law.
The process is taking place in two phases, with the short-term phase one updating previous legislation dating back from 1973 with necessary changes immediately required. The phase one changes have been approved and it is awaiting the signature of the State President. Phase two (long-term) will be the drafting of a modernised new bill.
Relevant matters for the accounting profession include audit exemption for a certain group of small companies. Auditor rotation and application of accounting standards have been included in phase one.
Current legislation requires all companies, irrespective of their size or shareholders, to be audited. The only alternative was doing business in a so-called ‘close corporation’ which is exempt from auditing but has restrictions in that, usually, only natural persons can be members and hold a share.
The South African Institute of Chartered Accountants (SAICA) recently solicited comments from its members regarding the auditing of small companies usually referred to as ‘closely held’ companies. Seventy-five percent of the members agreed that a certain group of companies should not be audited. The overriding factor was that the cost exceeded the benefit. In addition, many felt that in a developing country such as South Africa, there should be fewer bureaucratic requirements which would make it easier to do business. Seventy percent of respondents, however, said that another report should accompany financial statements.
There are, however, concerns that training opportunities will diminish and that certain public practices will have to close down or significantly reinvent themselves to survive.

Bernardt van der Linde, freelance writer and former PwC chartered accountant.