Technical update

international

The International Financial Reporting Interpretations Committee (IFRIC) has recently provided guidance in respect of two aspects of IFRS 2. IFRIC Interpretation 11, IFRS 2: Group and Treasury Share Transactions, addresses two issues and is effective for periods beginning on or after 1 March 2007.
- Share-based payment arrangements involving an entity’s own equity instruments. The interpretation concludes that share-based payment transactions in which services are received in return for an entity’s own equity instruments should always be accounted for as equity settled. This treatment is required irrespective of whether the entity chooses or is required to buy the instruments from another party, whether the rights were granted by the entity or its shareholders, and whether it is the entity or its shareholders that settle the transaction.
- Share-based payments to subsidiary companies involving the equity of the parent company. Where the parent grants rights to its equity instruments to the employees of its subsidiary, then the subsidiary should measure the services received from the employees as equity-settled, with the corresponding increase in equity representing a capital contribution from the parent. Where it is the subsidiary that grants rights to shares in its parent, the subsidiary is required to account for it as a cash-settled share-based payment, irrespective of how the employee subsequently obtains the shares.

IFAC’s International Public Sector Accounting Standards Board has issued two proposed standards – one dealing with employee benefits and the other with impairment of cash-generating assets.
ED 31, Employee Benefits, is based on IAS 19, Employee Benefits, and addresses the four categories of employee benefits dealt with in that standard: short-term employee benefits; post-employment benefits; other long-term employee benefits; and termination benefits. In addition, the proposed standard also deals with a number of issues of specific relevance to the public sector. These specific considerations include determining the risk-free discount rate to be applied for discounting obligations from post-employment benefits and the treatment of post-employment benefits provided through composite social security programmes. One of the most notable proposals in the ED is that entities should account for obligations under public sector defined benefit plans and, where appropriate, recognise liabilities related to those obligations.
ED 30, Impairment of Cash-generating Assets, deals with cash-generating assets held and operated by public sector entities which are not Government Business Enterprises, the accounting for which is covered by IPSAS 21, Impairment of Non-cash Generating Assets.

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 a further move to bring UK accounting in line with international approaches, the UK Accounting Standards Board was due to publish in December an Amendment to Financial Reporting Standard (FRS) 17, Retirement Benefits. The amendment aligns the disclosures in FRS 17 with those of the equivalent IAS 19. However, the ASB has opted for a longer implementation period than originally proposed, in response to concerns from some commentators about the time required to prepare for the amended disclosure requirements. The amendment will therefore be effective for accounting periods beginning on or after 6 April 2007, rather than 31 December 2006 as originally envisaged.
At the same time, the ASB has decided to amend paragraph 16 of FRS 17, so that for quoted securities the current bid price (rather than the mid-market value) is taken as fair value. This is a further alignment with IAS 19.
However, the ASB has written to the IASB expressing some ‘fundamental concerns’ with the IASB’s proposals in its discussion paper, The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. This forms part of the IASB’s work to develop a new conceptual framework. The ASB is concerned that stewardship is not identified as a separate objective of financial reporting, or as part of the decision-usefulness objective. Other major concerns focus on the identified primary users of financial reporting, and the replacement of the qualitative characteristic of ‘reliability’ with ‘faithful representation’.
Meanwhile, the ASB’s Urgent Issues Task Force has issued Abstract 43, concerning a recent legal change affecting intermediate parent undertakings whose parents are not established under the law of a state in the European Economic Area. Such companies now have an exemption from preparing consolidated accounts, conditional on compliance with various conditions. The abstract addresses certain questions that have arisen.

Sarah Perrin, accountant and writer.

The Minister of State at the Department of Enterprise, Trade and Employment, Michael Ahern, himself a qualified accountant, recently requested the Irish Auditing and Accounting Supervisory Authority (IAASA) to advise him on the possibility of enacting legislation to protect the general public by restricting the use of the description ‘accountant’ to persons who are actually qualified accountants.
IAASA sought the opinion of interested parties and a number of submissions were made to IAASA, including one from ACCA. Through the Consultative Committee of Accounting Bodies in Ireland (CCABI), the profession has proposed that the description of ‘accountant’ should be restricted to individuals who are members of bodies prescribed by IAASA or who apply individually and are assessed by IAASA as having a suitable qualification. There are currently nine prescribed bodies including all of the UK and Irish Chartered Accountant bodies, ACCA, CIPFA, AIA and some of the smaller local Irish professional bodies. It is envisaged that IAASA would automatically approve members of IFAC-affiliated professional bodies and would only individually assess members of more obscure professional bodies or those who claim to be ‘qualified by experience’. Firms would also be restricted from using the descriptions ‘accountants’ or ‘accounting services’ and other similar terms unless they were controlled by persons who themselves were allowed to use the term.
Ahern has said that the legislation will be by way of a single-issue bill, and he plans to have the legislation passed prior to the next election, which is due in 2007.
The breakthrough came after years of lobbying by ACCA and other professional bodies in Ireland and will be an important piece of consumer protection legislation if successfully implemented.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

For auditors’ reports dated on or after 31 December 2006, Hong Kong Standards of Auditing (HKSA) 700 and 701 apply. HKSA 700, The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements, and HKSA 701, Modifications to the Independent Auditor’s Report, are issued according to ISAs 700 and 701.

The Code of Ethics for Professional Accountants Section 290 (Revised), Independence – Assurance Engagements, was issued which clarifies the definition of a network firm. To allow more time for affected firms to develop any necessary monitoring systems, the application period is extended and is effective for assurance reports dated on or after 31 December 2008.

The Ministry of Finance released the Application Guideline for the 38 new accounting standards which are to be implemented in listed companies on 1 January 2007. Adoption by other sectors is encouraged. On the adoption of these new standards, enterprises will cease to apply the Accounting System for Business Enterprise and Accounting Systems for Financial Institutions.

To enhance the tax administration on related party transactions, the State Administration of Taxation issued a circular to stipulate that if taxpayers do not make relevant accounting adjustments following transfer pricing adjustments imposed by tax authorities, the additional taxable income earned by a related party would be regarded as ‘deemed dividends’. Such ‘deemed dividends’ do not qualify for the exemption from withholding income tax. If interest, rental or royalty payments made to related parties are disallowed as tax deductions after transfer pricing adjustments, taxpayers will not be able to apply for any refund of the withholding income tax paid.

The State Administration of Foreign Exchange (SAFE) issued new regulations to improve the administration of foreign exchange. Under this regulation, SAFE will conduct annual assessment on all enterprises in respect of their foreign exchange receipt and settlement. Enterprises which are on the monitoring list as a result of the annual assessment will be subject to stricter foreign exchange administration procedures in applications for foreign exchange settlement.

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

Malaysia

16 November 2006 saw the inaugural meeting of CSR Malaysia. Thirty representatives from 20 major organisations, such as Shell Malaysia, BP, Nestlé, HSBC and Telekom Malaysia, came together to discuss and agree on the official name, structure, objectives and future initiatives of CSR Malaysia.
Chaired by Dato’ Johan Raslan, executive chairman of PwC, the primary objective of CSR Malaysia is to promote the development of socially responsible business in Malaysia through capacity building, education, sharing of best practices and research, while raising business standards to the benefits of all stakeholders.
ACCA Malaysia is the secretariat for CSR Malaysia. The structure of CSR Malaysia consists of the Business Panel, Academic Panel and the regulators – the Securities Commission, Khazanah Nasional Berhad and Bursa Malaysia as panel of advisers.
The Business Panel comprises of organisations that are leaders in promoting CSR (and the idea of CSR reporting) in Malaysia, which are intent on sharing their experiences and learning from each other. The Academic Panel will be responsible for ensuring that the research undertaken by CSR Malaysia will be world class.
The establishment of CSR Malaysia is a significant catalyst to ensure that sustainable development is not just a fad but has become ‘the way of business’ of companies in Malaysia, says Tay Kay Luan, ACCA’s director – ASEAN (Association of Southeast Asian Nations) and Australasia.

Aimed at ensuring investors in Malaysia have more opportunities to tap on global investments, the Securities Commission (SC) recently introduced new structured warrant products. This is made possible with the latest revision of SC’s Guidelines for the Issue of Structured Warrants. The revision to the guidelines will facilitate the issuance of structured warrant products, such as call warrants, basket call warrants and bull equity-linked structures on foreign underlying shares. These new structured warrant products will allow investors to gain greater exposure to foreign markets without having to open an overseas trading account or foreign currency account. They can invest not only in structured warrants issued to companies listed on Bursa Malaysia, but also to foreign listed shares and indices.
More details and a copy of the revised guidelines are available at www.sc.com.my
Bank Negara Malaysia (The Central Bank) recently issued the following guidelines to specify the eligibility, criteria and scope of business for the establishment of new entities conducting Islamic financial business in international currencies in the Malaysia International Islamic Financial Centre (MIFC).
- Establishment of International Islamic Bank.
- Establishment of International Takaful Operator.
- Establishment of International Currency Business Unit for Islamic Bank.
- Establishment of International Currency Business Unit for Takaful Operator.
Further information can be found at Bank Negara Malaysia’s website at www.bnm.gov.my

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Institute of Certified Public Accountants of Singapore (ICPAS) has issued the revised Statement of Auditing Practice (SAP) 19, Guidance to Auditors on Money Laundering and Terrorism Financing. SAP 19 provides auditors in Singapore with updated information about the anti-money laundering (AML) and anti-terrorism financing (ATF) legislation, and guidance on compliance with this legislation. It also provides guidance to auditors on their responsibilities on auditing and reporting on financial statements.
ICPAS also issued revised guidance on the Audit of Solicitors’ Accounts (under Appendix 1 of AGS 5, Audits of Entities in Specific Industries, Professions or Vocations). The revised guidance provides greater clarity on what procedures the auditors should perform to satisfy themselves that the solicitors are in compliance with the legal profession’s (Solicitors’ Accounts) Rules. More details can be found at the ICPAS website at www.icpas.org.sg
The Minister for Trade and Industry and the deputy chairman of the Monetary Authority of Singapore (MAS) has moved the Banking (Amendment) Bill for first reading in Parliament. The bill will be read a second time and discussed at the next parliamentary sitting.
As part of its ongoing review of the banking regulatory and legislative framework, MAS is introducing several new policies and measures to strengthen prudential safeguards, facilitate risk-based supervision, provide banks with greater operational flexibility and update regulations. MAS has consulted the industry on the major policy changes and regulatory measures.
A draft bill was also released for public consultation in July 2006 and the feedback received was taken into account in finalising the bill. The consultation papers and MAS’ response to the public consultations are published on its website at www.mas.gov.sg
MAS has issued a consultation paper that sets out the proposed regulatory framework for the mortgage insurance business. The paper describes how mortgage insurance will be treated in the calculation of the capital requirements for locally incorporated banks. The paper proposes that a Singapore-incorporated bank be allowed to recognise the credit risk mitigation effects of mortgage insurance for a mortgage loan with a loan-to-value of more than 80% if certain conditions are met. More details can be found on MAS’ website at www.mas.gov.sg
A new agreement for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income was signed between the Singapore and Belgium Governments. The new agreement will enter into force after ratification by both countries.
The provisions of the new agreement will apply to income arising in the year after its entry into force. Upon ratification of the new agreement, the provisions of the old agreement signed on 8 February 1972, as amended by a supplementary agreement signed on 10 December 1996, will cease to apply. The full text of the agreement is available on the Inland Revenue Authority of Singapore’s (IRAS) website at www.iras.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

The Australian Government has introduced its controversial and long awaited Anti-Money Laundering and Counter Terrorism Funding (AML/CTF) bill to Parliament, with hopes it will be passed before the end of the 2006 parliamentary session.
The bill reforms Australia’s current AML/CTF system by implementing the international standards issued by the Financial Action Task Force (FATF).
Although the final bill was developed through an iterative process involving extensive industry consultation, it still imposes extensive customer identification and financial transaction reporting requirements on parts of the financial sector.
The bill contains extensive modifications to the arrangements proposed in the draft legislation made public in December 2005 and July 2006, with the final legislative package using a risk-based methodology, rather than the initial more prescriptive approach.
In releasing the bill, the Minister for Justice and Customs, Senator Chris Ellison, said the new regime was designed to create a financial system hostile to money laundering and terrorism financing while minimising the impact on business.
The reforms are being implemented in two tranches, with the first covering the financial and gambling sectors and bullion dealers. The second tranche will cover real estate agents, jewellers and some transactions provided by accountants and lawyers.
Superannuation and pension funds have managed to avoid many of the regime’s extensive customer identification and transaction reporting requirements despite having been classified as ‘reporting entities’ for the purposes of the bill.
The pension industry argued hard its special, long-term nature meant identification at the point benefits were paid out was more appropriate than when the money was paid into the system.
Additional funding of A$139m over four years is being provided to pay for an enhanced role for the Australian Transaction Reports Analysis Centre, while the Australian Institute of Criminology will also receive additional funding for research into money laundering and terrorism financing in Australia.
To assist with implementation of the new legislative regime, funding is also being provided for a public and industry awareness campaign. This will be designed to boost understanding and compliance with the new regime.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The importance of the not-for-profit sector has been recognised by US standard setter FASB, being the subject of two recent exposure drafts. The two EDs are intended to improve the accounting and disclosures for mergers and acquisitions by not-for-profit organisations.
FASB refers to recent studies which estimate that the total asset base of the US not-for-profit sector would make it the sixth largest economy in the world. The number of not-for-profit entities reporting financial results grew by 68% between 1993 and 2003, representing around 9% of the US’ gross domestic product.
The first ED, Not-for-Profit Organisations: Mergers and Acquisitions, would eliminate the use of the pooling-of-interests method of accounting, in which assets acquired and liabilities assumed are recorded at ‘carryover’ amounts on the books of acquired organisations. Instead, FASB’s proposal would require the application of the acquisition method to all mergers and acquisitions by a not-for-profit organisation. This would involve measuring identifiable assets acquired and liabilities assumed at their fair values at the acquisition date, and then recognising any goodwill of the acquired activity or contribution inherent in the merger or acquisition. Information would need to be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the transaction.
In the second ED, Not-for-Profit Organisations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition, FASB proposes accounting guidance for those intangible assets after a merger or acquisition. Not-for-profit organisations would be required to provide consistent and comparable information about identifiable intangible assets acquired in a merger and acquisition (M&A) deal, as well as more representative and relevant information about events resulting in impairments of acquired goodwill.
Underlying these exposure drafts is FASB’s aim to provide financial statement users with more consistent and comparable information that more reliably portrays the underlying economics of M&A transactions by not-for-profit entities.

Sarah Perrin, accountant and writer.

Canada

Canada’s forensic accountants now have new standard practices for investigative and forensic accounting (IFA) engagements. The Chartered Accountants of Canada (CICA) Alliance for Excellence in Investigative Forensic Accounting (IFA Alliance) developed the standard practices to ensure that all chartered accountants (CA) who perform investigative and forensic accounting (IFA) engagements conform to specific criteria that address professional skills, engagement performance and report preparation. As of 1 March 2007, all CA-IFA practitioners must follow these standard practices, which the IFA Alliance believes will be of particular interest to litigation lawyers, as they could enhance the usefulness of expert evidence that an IFA practitioner provides. The release of these standard practices marks the completion of a development process that began in 2001, with the issuing of several documents for comment, including the draft standards in December 2005.

The Accounting Standards Board (AcSB) has undertaken a new project to make changes to Canadian GAAP requirements concerning post-retirement benefit plans. These changes include recognising on the balance sheet the funded status of a post-retirement defined benefit plan, such as: the difference between its assets and obligations; measuring plan assets and obligations at the balance sheet date; and recognising changes in the funded status in comprehensive income in the year in which the changes occur. Current Canadian GAAP requires disclosure of the funded status only in the notes to the financial statements, and permits a measurement date up to three months before the balance sheet date. The new standard would converge with the FASB’s recently released FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans. The AcSB says it will harmonise to some extent with IFRS, and any differences would not require significant procedural amendments once the organisation changes to IFRS. The exposure draft, expected in the first quarter of 2007, will include an analysis of any differences between Canadian GAAP and IFRS. The final standard is likely to be effective for fiscal years ending on or after 31 December 2007.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

South African companies are commemorating the second year of applying IFRS. An Ernst & Young survey indicated that the following statements had the biggest impact on financial statement numbers: depreciation for property, plant and equipment; share-based payments; bad debt provisioning, designation through fair value through profit and loss and the equity versus debt split for financial instruments; and impairment of goodwill and cessation of goodwill amortisation in business combinations.
Difficult statements to implement were financial instruments IAS 39, IAS 32 and IAS 7, especially embedded derivatives; the practicality of determining and reassessing the useful life and residual value of property, plant and equipment (IAS 16); the valuation of share options, especially the application to non-vanilla share compensation schemes for share-based payments (IFRS 2); and insurance contracts (IFRS 4).
Breathing space offered for adjustment is welcomed, as now new standards will not have to be applied until 2009.
This, however, does not mean that the accounting fraternity is not active in commenting on draft accounting standards. Most recently, the South African Institute of Chartered Accountants sent comments to the IASB on ED 218 (IFRIC D20) dealing with customer loyalty programmes, ED 217 (IFRIC D19), The Asset Ceiling: Availability of Economic Benefits and Minimum Funding Requirements, ED 216, Preliminary Views on Improved Conceptual Framework for Financial Reporting, and ED 215, Amendments to IAS 32.
It was felt that the practical implementation of accounting for loyalty programmes will have challenges. Preparers of financial statements do not necessarily have the structures and systems in place to provide appropriate information to comply with requirements, to account for the award credits separately at the point of sale by reference to the relative fair value of the components of the sale. It was recommended that field tests should be conducted to determine the nature of the majority of the customer loyalty programmes in the various industries worldwide, and whether the information required can be readily obtained.

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