Technical update

international

The International Accounting Standards Board (IASB) has recently started a public consultation on accounting for insurance contracts by issuing a discussion paper, Preliminary Views on Insurance Contracts. The public consultation is set to last for six months, with the intention that an exposure draft of a new accounting standard will be issued towards the end of 2008 and a new accounting standard should be in place by 2010.
IFRS 4, Insurance Contracts, was only ever intended to be an interim statement and although it provided much needed consistent disclosure requirements, it still permits a wide range of accounting treatments.
The discussion paper proposes that insurers should measure their insurance liabilities by reference to the following:
- explicit, unbiased, market-consistent, probability-weighted, current estimates of contractual cash flows
- current market discount rates that adjust the estimated cash flows for the time value of money, and
- an explicit and unbiased estimate of the margin that market participants require for bearing risk and for providing other services, if any.
The discussion paper suggests that a suitable name for a measurement using these three criteria would be ‘current exit value’. Current exit value is defined in the discussion paper as ‘the amount the insurer would expect to pay at the reporting date to transfer its remaining contractual rights and obligations immediately to another entity’. The discussion paper emphasises that this is very much a theoretical definition as, in most cases, insurers cannot actually transfer their liability, nor would they usually want to do so.
The IASB considers that this approach will provide a number of benefits to the users of insurers’ financial statements:
- relevant information about the amount, timing and uncertainty of future cash flows
- explicit and more robust estimates of cash flows and margins
- a consistent approach to changes in estimates - an appropriate and consistent approach to all types of insurance contract
- consistency with other IFRS that require current estimates of future cash flows in measuring non-financial liabilities and financial liabilities
- clearer reporting of economic mismatches between insurance liabilities and related assets, and
- consistency with observable current market prices, to the extent they are available.

The US Financial Accounting Standards Board has indicated its intention to issue an Invitation to Comment containing the discussion paper, and has said it will use the responses to determine whether it wants to add to its agenda a joint project with the IASB to develop a comprehensive standard on accounting for insurance contracts.

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 international interest shown by the UK’s Accounting Standards Board (ASB) has been highlighted in the 2006/07 annual report published by the Financial Reporting Council (FRC), to which the ASB belongs.
FRC chief executive Paul Boyle’s report highlights that ‘considerable attention’ has been devoted to the IASB’s projects relating to convergence with US GAAP and updating the conceptual framework for financial reporting. As Boyle notes, the ASB has ‘submitted comments on several of the convergence projects, and has taken a leading role in strengthening the capability of European standard setting bodies to influence the IASB’s thinking’.
The accompanying report by Ian Mackintosh, ASB chair, also stresses that the UK board ‘continues to work on influencing the international accounting standard setting agenda’. Commenting on the IASB’s conceptual framework project, Mackintosh notes that the ASB has articulated ‘the importance of stewardship as an objective of financial reporting’.
The UK board’s desire to influence the IASB’s projects is clear. For example, Mackintosh refers to the ASB’s research project to reconsider the fundamental principles of pensions accounting. He expresses hope that this work will ‘contribute to the development of improved international standards’.
Turning to the topic of the convergence of UK standards with IFRS, Mackintosh refers to consultation held in the UK during the year. Respondents broadly supported a two-tier approach: full convergence with IFRS for listed companies and other publicly accountable entities; and a lower level for others, potentially based on the outcome of the IASB’s project to develop an international accounting standard for small and medium-sized entities. The ASB has deferred any final decisions on convergence until there is a much clearer understanding of the outcome of the IASB project on SMEs, at which time a decision will be made on whether or not it is suitable to meet the UK’s needs.

Sarah Perrin, accountant and writer.

The Consultative Committee of Accounting Bodies in Ireland (CCABI), working with the Irish Financial Services Regulatory Authority (IFSRA), has issued guidance on the requirements for auditors of financial services firms to report to IFSRA in respect of client monies, and to provide IFSRA with a copy of any management letter issued, or confirmation that no management letter was issued.
IFSRA distinguishes between client money and client premium, although the distinction between these two is somewhat unclear. Until recently, there was a requirement for an auditor to prepare and submit to IFSRA a client premium handling report; this is no longer required. Currently there is no specific reporting requirement in respect of client premiums. Guidance on the reporting requirement where client money is held can be found at ireland.accaglobal.com/pubs/ireland/member/tech_info/auditing/guidance_report.pdf
Auditors of financial services firms are obliged to provide IFSRA with a copy of any management letter that is issued in respect of the client, or to make a ‘nil return’ where no management letter was issued. IFSRA has recently confirmed that the requirements in respect of management letters also applies to insurance brokers, and that there has been a particularly poor rate of compliance with the requirements by auditors in this sector. The CCABI guidance in respect of management letters can be found at ireland.accaglobal.com/pubs/ireland/members/tech_info/auditing/reporting_fin.pdf

As one of the last political acts prior to the election, the then Minister for Community, Rural and Gaeltacht Affairs, Eamon O’Cuiv, published the Charities Bill 2007. See www.oir.ie/viewdoc.asp?DocID=7535&&CatID=59 for the text of the Bill.
Charities are largely unregulated in Ireland and the Bill has cross-party support which should expedite its passage through to enactment, no matter who forms the next Government.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

HKFRS 8, Operating Segments, and HK (IFRIC) Interpretation 12, Service Concession Arrangements, have been released. HKFRS 8 is effective for annual periods beginning on or after 1 January 2009, while HK (IFRIC) Interpretation 12 is effective for annual periods beginning on or after 1 January 2008. Earlier application is permitted.
HKSRE 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, has been issued to replace SAS 700, Engagements to Review Interim Financial Reports. The new HKSRE 2410 establishes standards and provides guidance on the auditor’s professional responsibilities when the auditor undertakes an engagement to review interim financial information of an audit client. It also provides some local guidance on the requirements of the Main Board and the GEM [Growth Enterprise Market] Listing Rules in relation to a report on interim financial information. It is applicable for reviews of interim financial information for periods beginning before 15 December 2006.

The State Administration of Taxation (SAT) issued Circular 363, Strengthening Transfer Pricing Investigations, aimed at standardising the investigation and analysis of transfer pricing audits in China. The Circular requires the potential transfer pricing audit candidates to complete a Function and Risk Analysis Form, which contains information of the functions performed and risks assumed by an enterprise and its affiliated enterprises. Based on the information provided, the tax bureaus are required to complete a Related Party Transactions Financial Analysis Form for a formal approval of transfer pricing investigation. This standard procedure can minimise potential disputes on the results of transfer pricing audits.

The China Securities Regulatory Commission issued the revised Rules for Preparation and Presentation of Information Disclosure by Companies of Public Offering (No. 13) – Special Provisions on Contents and Formats of Quarterly Reports. It states that a quarterly report should contain financial information, significant events, significant notice and an appendix of financial statements.

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

Malaysia

The Company Law Reform Committee (CLRC) has released its eighth consultation paper, entitled Capital Maintenance Rules and Share Capital: Simplifying and Streamlining Provisions Applicable to the Reduction of Capital, Share Buy Back And Financial Assistance.
This is the second consultation document to be issued under the area of law pertaining to Capital Maintenance Rules and Share Capital. This document relates to an earlier consultation paper, Capital Maintenance Rules and Share Capital: Simplifying and Streamlining Provisions Applicable to Shares, where the underlying premise of the review is to ascertain whether the existing capital maintenance rules serves its creditors’ protection purpose.
The paper discusses the CLRC’s recommendations and rationale for reviewing the existing capital maintenance rules share capital. It focuses on the share buy back, the financial assistance and the reduction of capital provisions in the Companies Act 1965. The capital maintenance rules reviewed in the consultation document are recommended with the intention of preventing dissipation of company’s funds that will prejudice creditors.
While there is a need to protect creditors’ interests against any dissipation of available assets that may be used to pay creditors, the CLRC is of the view that some restatement and reform to the existing capital maintenance rules – i.e. Sections 64, 67 and 67A of the Companies Act 1965 – should be made, as there is a need for providing businesses with the regulatory framework which would make it easier for a company to rearrange the capital structure, to operate more efficiently and reduce unnecessary costs of compliance. As such, the CLRC is proposing the introduction of a ‘solvency test’ regime that would be based on the ‘balance sheet’ solvency and ‘cash flow’ solvency tests. There are criteria recommended which have to be fulfilled when using the solvency test. It is hoped that the introduction of this test, together with other new proposals, will simplify and streamline the provisions relating to the reduction of capital, share buy back and financial assistance.
Copy of the consultation document can be downloaded at www.ssm.com.my

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

Under Section 14(1)(a) of the Income Tax Act, interest expenses incurred on capital employed in acquiring income chargeable with tax is allowable against the income earned. Since this provision is only applicable to interest expenses, the other borrowing costs (for example, guarantee fees, bank option fees) incurred in relation to the borrowing are not deductible as the borrowing is on capital account, and the related borrowing costs would then be capital in nature. Increasingly, the costs of borrowing are no longer confined to interest expenses alone. There have been representations from businesses that there are other borrowing costs incurred to secure lower interest rates on borrowings to finance capital expenditure that produce taxable income. Without incurring other such borrowing costs, the business enterprise has to pay a higher interest expense, which would then qualify for tax deduction under Section 14(1)(a). Where the other borrowing costs are payable as a substitute for interest expense or to reduce interest costs, businesses have represented that these should be accorded the same tax treatment as interest expense.
The Second Minister for Finance has therefore decided to allow a tax deduction for borrowing costs (other than interest expenses), which are incurred as a substitute for interest expenses or to reduce interest costs, with effect from the year of assessment 2008. With this change in tax treatment, the other borrowing costs of this nature, which are not currently granted tax deduction under Section 14(1)(a), will be permitted under the said section. To provide certainty on the scope of this tax change, and to ensure that the policy intention is met, the other borrowing costs that will be granted tax deduction under Section 14(1)(a) are listed in the Annex to the recently issued IRAS e-tax guide, entitled Tax Deduction for Borrowing Costs Other Than Interest Expenses. The Income Tax Act will be amended to effect this tax change. The list of other deductible borrowing costs will be prescribed by regulations. This tax change takes effect from the year of assessment 2008.
Further details can be found in the e-tax guide on IRAS’ website at www.iras.gov.sg

The Ministry of Finance (MOF) is inviting members of the public to give their comments on proposed amendments to the Income Tax Act (ITA). This consultation exercise on the Draft Income Tax (Amendment) Bill 2007 will cover the period from 15 June to 14 July 2007. The proposed amendments to the ITA are to cater for the Budget 2007 tax changes and other non-Budget changes.
The Budget 2007 changes to be legislated include: the reduction in corporate income tax rate to 18%; partial tax exemption for the first S$300,000 of chargeable income of corporations; and tax exemption for registered charities (all effective from the year of assessment 2008). In addition to the tax changes announced in the 2007 Budget, the amendments also provide for other changes or refinements to existing tax policies and administration. This includes: changes to allow deferment of Section 19A capital allowances claims; amendment to the eligibility criteria for parenthood tax rebate and working mothers’ child relief; and the enhancement and refinement of tax transparency treatment for real estate investment trusts.
The consultation papers, draft Income Tax (Amendment) Bill 2007 and accompanying documents can be found on the Government’s central consultation portal www.reach.gov.sg, as well as at the MOF’s website at www.mof. gov.sg. Respondents may send their comments to the MOF directly from the website, or separately via e-mail, fax or post. The draft Bill is scheduled to be tabled for its first reading in Parliament in September 2007.

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Australia’s taxation rules are set for another overhaul following claims the current system inhibits both foreign investment and the expansion and investment of local businesses offshore.
To kick things off, the Board of Taxation (BOT) has released a discussion paper on possible reform to Australia’s foreign source income anti-tax-deferral regimes, which include the controlled foreign company rules, foreign investment fund rules, the transferor trust rules and the deemed present entitlement rules.
The new review follows a request by the Treasurer, Peter Costello, for the BOT to identify ways to reduce the complexity and compliance costs associated with the current anti-tax-deferral regime.
While the regime is viewed as an integral part of Australia’s international tax settings and vital to protecting the local tax base, there is concern the current rules are inefficient and out of step with international practice.
The BOT will be seeking to identify ways to reduce the complexity and compliance costs associated with the existing rules, and to determine whether the four existing regimes could be collapsed into a single set of regulations.
It will also examine whether there is an appropriate balance between effectively countering tax deferral and unnecessarily inhibiting Australian businesses from competing in the global economy.
The current anti-tax-deferral rules have already been examined as part of the Review of International Taxation Arrangements (RITA), but the new study is designed to provide a further review and address any remaining issues holistically.
The review has been welcomed by the financial services industry, which has been calling for a review into the foreign investment fund rules due to their impact on both inbound and outbound investment.
The Investment and Financial Services Association (IFSA), which represents the leading fund managers in Australia, believes changes to the current regime are necessary to boost Australia’s position as a leading financial services centre.
It argues Australia’s current international tax regime is inefficient and reforms are required to ‘enhance the competitiveness of Australia’s financial services in what is a highly-contested global market’.
The BOT intends to consult with industry prior to developing its recommendations.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The Financial Accounting Standards Board’s (FASB) chairman, Robert Herz, has queried the need for the US to have so much specialised industry accounting guidance when addressing the 26th Annual SEC and Financial Reporting Institute Conference.
Herz noted the large amount of industry specific guidance in the US, covering areas such as insurance, banking, mortgage banking, broker dealers, real estate, mining, oil and gas, retail and healthcare. As Herz noted: ‘The list goes on and on.’ However, he said that ‘having all this guidance doesn’t necessarily enable people to avoid using judgment in the preparation and auditing of financial statements’. Instead, it changed the nature of judgments. Rather than preparers and auditors making judgments on the economics of transactions, they were judging whether they were in or out of the scope of the specific industry or transaction guidance.
Herz suggested that industry-specific accounting guidance could be a good thing if it reflected ‘the special nature of the activities in a particular industry’. For example, guidance tailored for not-for-profit organisations did seem justified.
However, it didn’t necessarily assist transparency and comparability. Herz noted that the US has over 200 separate pronouncements dealing with revenue recognition, many of which relate to specific industries, and that this had resulted in over 50 different models for revenue recognition under US GAAP. Herz asked his audience: ‘Does that result in better, more understandable, more transparent and more comparable financial reporting?’
The existence of numerous specialised industry accounting standards and rules increased costs in the financial reporting system and was seen by some as a barrier to developing a more principles-based approach, Herz said. The extent of industry-specific standards could also be an issue in terms of convergence. ‘I do not believe the IASB and the constituents they represent want to replicate or embrace our system of detailed industry-specific standards,’ Herz said.

Sarah Perrin, accountant and writer.

Canada

n The Canadian Securities Administrators’ Multilateral Instrument 52–109 requires the chief executive officers (CEOs) and chief financial officers (CFOs) of all publicly-traded Canadian companies to certify that they have evaluated the effectiveness of their internal controls over financial reporting and have disclosed their conclusions, including information about identified deficiencies, in the Management’s Discussion and Analysis.
Smaller companies may lack the personnel and financial resources necessary to implement and certify internal controls over financial reporting. So the Canadian Institute of Chartered Accountants (CICA) has created new guidelines to help CEOs and CFOs meet their obligations.
Called Internal Control: The Next Wave of Certification – Helping Smaller Public Companies with Certification and Disclosure about Internal Control over Financial Reporting, the guidelines aim to help companies prepare for and meet the CEO and CFO internal control reporting and certification requirements, some of which apply to fiscal years ending on 30 June 2006, some having a 31 December 2007 deadline, while the final phase of the certification requirements are expected to become effective on 30 June 2008. The CICA said in a release that the guidance ‘presents a principles-based approach centred on good governance, tone at the top, integrity, strengthening internal business processes and protection of company reputation’.
Canada’s Accounting Standards Board (AcSB) recently approved the adoption of the requirements for assessing and disclosing an entity’s ability to continue as a going concern from IFRS IAS 1, Financial Statement Presentation. The requirements proposed in the exposure draft will apply. These include: the management’s assessment of an entity’s ability to continue as a going concern; the preparation of financial statements on a going concern basis, unless management intends to liquidate the entity, cease trading, or cease operations; and disclosure of material uncertainties that may cast a doubt on an entity’s ability to continue as a going concern. The requirements will be effective for financial statements relating to fiscal years beginning on or after 1 January 2008. (See Technical Update, accounting & business, October 2006.)

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

A growing international trend has commenced in South Africa, and London can thank the notorious Sarbanes-Oxley Act for obtaining the listing of another company at the expense of the US.
Naspers Ltd, with a market capitalisation of R70bn (£5bn), will be (voluntarily) discontinuing its secondary American Depository Shares (ADS) listing on the NASDAQ stock exchange, and intends to apply for a Depository Receipt programme on the London Stock Exchange in the third quarter of 2007.
Its official comment said: ‘The company’s decision to delist from NASDAQ is based on the high costs of maintaining its listing and registration in the US, and complying with US obligations, especially the provisions of the Sarbanes-Oxley Act of 2002.’
Of the top 30 companies listed on the South African JSE, there are 14 companies with a second listing in another major international centre. Currently, seven companies are listed in London, six in the US on either NASDAQ or NYSE, and the remaining companies on the Swiss Bourse.
As many as four other South African dual listed companies might consider discontinuing their listing in the US.
Meanwhile, the Accounting Practices Board (APB) is attempting to speed up the simplification of accounting standards for small and medium entities (SMEs) in South Africa. It issued ED 225, inviting comments on the proposed interim process to early adopt the IASB’s IFRS for SMEs (South African reference ED 222) in exposure draft form.
Currently, all South African companies have to comply with IFRS. This is proving unduly burdensome for SMEs. The current company law reform, however, created the opportunity for simpler accounting standards to be adopted for SMEs.
The closing date for comments on ED 222 to the IASB is 1 October 2007. In that regard, the ED noted that due process has not yet been completed and, therefore, SMEs may be exposed to substantial changes subsequent to final approval by the IASB. The interim relief brought by ED 225 may, however, compensate for any changes when the finalised IFRS is to be adopted, possibly in 2008/09.

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