Technical update

international

The US Securities and Exchange Commission (SEC) has recently announced the actions it intends to take relating to the acceptance of the use of International Financial Reporting Standards (IFRS).
Currently, the SEC requires that foreign issuers who report in IFRS or any other non-US GAAP must provide a reconciliation of their financial statements to US GAAP. The SEC is planning to issue a release this summer requesting comments on proposed changes to its rules which would permit the use of IFRS by foreign issuers. The approach in the proposed rule is to give issuers a choice of either IFRS or US GAAP, and consideration is also being given to the possibility that US issuers would be permitted to use IFRS.
Further progress in the convergence of IFRS and US GAAP was achieved at the end of March when the International Accounting Standards Board (IASB) issued a revised version of IAS 23, Borrowing Costs. The new standard applies to the borrowing costs relating to qualifying assets (as defined in the standard) where the commencement date for capitalisation is 1 January 2009 or later. Earlier application is permitted. The main change from the previous version is the removal of the option to immediately expense borrowing costs relating to assets that take a substantial period of time to get ready for use or sale.

At the February meeting of the International Auditing and Assurance Standards Board (IAASB) it was agreed that auditors would be advised that reports for special purpose audit engagements could, with appropriate amendments, be issued in the form of the illustrative report in ISA 700, The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements. This advice has been issued as an interim measure while ISA 800, Special Considerations – Audits of Special Purpose Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, is being redrafted in the IAASB’s clarity style.

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) is consulting on the recently issued exposure draft of an IFRS for small and medium-sized entities.
The proposed IFRS for SMEs was originally issued by the IASB. However, in recognition of its importance, the UK standard setter has now published the draft standard in full for consultation in the UK. The ASB has also issued an accompanying invitation to comment, which it hopes will help inform its response to the IASB and generate further feedback on how the SME standard might fit into the ASB’s strategy for convergence of UK standards with IFRS.
Included in the ASB’s consultation paper is an analysis of the significant differences between the proposed IFRS for SMEs and UK GAAP, and between the proposed international standard and the ASB’s existing Financial Reporting Standard for Smaller Entities (FRSSE). The paper also refers to the significant differences between full IFRS and the IFRS for SMEs.
The ASB believes there are three main implications that need to be considered by UK respondents to its consultation. First, what other role might the IFRS for SMEs play within the ASB’s convergence project – that is, is it suitable for a middle-tier of companies above the current range for the FRSSE but below those currently required to apply full IFRS? Secondly, is the IFRS for SMEs an appropriate replacement for the FRSSE? Finally, if the IFRS for SMEs is to be considered a suitable basis for middle tier companies, or as a replacement for the FRSSE, what changes would need to be made to it?
As well as seeking views on these issues, the ASB has included in its consultation document a question on the relative costs and benefits of the UK adopting the proposed IFRS for SMEs.

Sarah Perrin, accountant and writer.

In Ireland, Apartment Owners’ Management Companies (AOMC) own and control common areas in apartment developments (such as gardens, car parks, corridors and stairways) and arrange for the provision of common services to the apartment owners (such as insurance and building maintenance, etc). AOMCs are governed by the general Companies Acts, and may be formed either as a Company Limited by Guarantee or as a Limited Liability Company. The latter is entitled, in most circumstances, to avail itself of audit exemption; the former may never do so.
Initially the company will be formed by the developer of an apartment complex and, on completion of the development and sale of all of the apartments, ownership and control of the AOMC will usually be transferred to some or all of the apartment owners.
There is a widespread public misunderstanding of the role of AOMCs, with some apartment owners believing that these are akin to resident associations where membership is voluntary. Annual monitory contributions to cover AOMC expenses are compulsory. Some residents also misunderstand the role of a management agent. A management agent is employed by an AOMC to physically carry out repairs, etc. Some developers are also holding on to one apartment themselves, effectively giving them perpetual control of the AOMC. It is speculated that this is being done to allow the developer to build additional apartments on any open spaces in the future. Once transferred to the apartment owners, often issues such as Companies Office filing, the provision of information to apartment owners and calling of AGMs are not attended to and, in some cases, the AOMCs have been struck off the companies register. Being struck off the companies register legally means that the land under the apartments vests in the Minister for Finance, and subsequent sales of apartments will be impossible until the company is restored to the register.
To assist apartment owners, the Office of the Director of Corporate Enforcement has produced a discussion paper and draft guidance on corporate governance for an AOMC. See www.odce.ie for more details.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

Sections 141E and 336A of the Hong Kong Companies Ordinance came into effect on 20 April. These introduce a new statutory regime for the revision of accounts and reports.
Section 141E enables company directors to revise accounts, where it appears to them that the accounts which have been sent to members and debenture holders under Section 129G did not comply with the Companies Ordinance, and to make necessary consequential revisions to the relevant summary financial report or directors’ report.
For overseas companies, a certified copy of the accounts is delivered to the registrar for registration under Section 336. Where it appears to the directors that the accounts did not comply with the requirements of the Companies Ordinance, Section 336A of the Companies Ordinance enables the directors to cause the accounts to be revised and make necessary consequential revision to the directors’ report concerned.

The Ministry of Finance has issued an exposure draft of internal control framework, which consists of a basic framework and 17 specific frameworks. The basic framework was developed by reference to the COSO Internal Control Framework. These cover a series of internal control activities undertaken by the board of directors, the management and all employees. The internal control framework is intended to apply to listed companies, large enterprises and enterprises involving substantial public interest.

The Chinese Institute of Certified Public Accountants (CICPA) has issued an exposure draft of competence guidance for China certified public accountants. The guidance aims to establish a framework for professional competence, including the overall requirement, fundamental elements and core contents. Competency covers professional knowledge and skills in financial reporting, auditing, finance, taxation, valuation, knowledge in organisations and business knowledge, information systems, and interpersonal and communication skills, as well as professional value and ethics.

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

Malaysia

The Malaysian Accounting Standard Board (MASB) has released two draft accounting interpretations for public consultation. These are international interpretations exposed for comment by the IASB in 2006. Draft IC Interpretation 9, Reassessment of Embedded Derivatives, is IFRIC Interpretation 9, and Draft IC Interpretation 10, Interim Financial Reporting and Impairment, is IFRIC Interpretation 10.
Draft IC Interpretation 9 clarifies the treatment for embedded derivatives under FRS 139, Financial Instruments: Recognition and Measurement. FRS 139 requires embedded derivatives to be separately recognised and measured when the entity first becomes a party to the contract. According to the MASB executive director, Nordin Mohd Zain: ‘Questions were raised whether an embedded derivative has to be reassessed subsequently. The interpretation concludes that reassessment is forbidden unless the instrument contract terms change and affect its cash flows significantly. Also, reassessment would be an onerous exercise because frequent monitoring is required.’
Draft IC Interpretation 10 addresses the issue of whether or not an entity could subsequently reverse impairment losses on goodwill and investments in equity instruments and financial assets carried at cost recognised in an interim period. The interpretation concludes that an entity shall not reverse such impairment losses.
Nordin explains: ‘Reversal of impairment losses on goodwill is not allowed because of the complex nature of the item itself. It is often difficult to separate the increase of goodwill as recovery of impairment losses from increase in internally generated goodwill. As for investments in equity instruments and financial assets carried at cost, the IASB could not find an acceptable way to differentiate reversals of impairment losses from other increases in fair value. Therefore, prohibiting reversals was the only appropriate solution.’
The effective date for Draft IC Interpretation 9 and certain provisions of Draft IC Interpretation 10 are proposed to be coterminous with FRS 139.
Interested parties are encouraged to study the draft interpretations and provide feedback to MASB. The exposure period for the draft interpretations expires on 29 June. These are available on MASB’s website at www.masb.org.my

Malaysia recently scored tops marks for disclosure and transparency of accounting standards in the World Bank report on the country’s observance of standards and codes in respect of corporate governance. The report recognises the strategic steps taken by Malaysia since 1998 to enhance and strengthen its corporate governance framework. The report concludes that Malaysia is at a commendable stage in terms of corporate governance practices, with room for continuous improvement. Malaysia also fared well in areas such as stakeholder disclosure and whistleblower protection.

The Malaysian Institute of Accountants (MIA) announced that it has been informed by Bank Negara Malaysia (the Central Bank) that the Anti-money Laundering and Anti-terrorism Financing (Reporting Obligations) Regulations 2007 has come into effect from 9 March 2007. MIA was also told that the Anti-money Laundering (Amendment) Act 2003, except for paragraph 14(a), has come into operation from 6 March 2007.
The Government Gazette of the Anti-money Laundering and Anti-terrorism Financing (Reporting Obligations) Regulations 2007 and Anti-money Laundering (Amendment) Act 2003 can be downloaded from MIA’s website at www.mia.org.my

The Financial Reporting Standards Implementation Committee (FRSIC) has released its consensus 1/2007 which deals with the determination of substantively enacted tax rate of assessment 2008 and thereafter. MIA reiterates that FRSIC is a guidance issued by MIA and should be regarded as best practice, and it should be read in conjunction with the accounting standards. MIA’s members are expected to observe compliance with the consensus issues. In exceptional circumstances, where the departure is necessary, justification for the departure is required. The consensus 1/2007 states a tax rate of 26% should be applied to the temporary differences that are expected to be realised or reversed in year of assessment 2008, and years subsequent to year of assessment 2008, when applying FRS 1122004/MASB 25. This is on the basis that paragraph 46 of FRS 1122004/ MASB 25 requires that, in Malaysia, tax assets and liabilities are to be measured using the announced tax rate (and tax laws).
To read more, go to http://frsic.mia.org.my

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Accounting and Corporate Regulatory Authority (ACRA) has issued Practice Direction 2 of 2007, Filing of Financial Statements in XBRL, which fine-tunes and clarifies eXtensible Business Reporting Language (XBRL) reporting procedures.

Financial periods affected
ACRA will not be requiring companies to file outdated financial statements in XBRL format. A company is required to file in XBRL format on or after 1 November 2007 only if the reporting period relating to the financial statements ends on or after 30 April 2007, and the company is filing its annual return on or after 1 November 2007.

Entities not required to file in XBRL format
The following categories of unlimited companies, or companies limited by shares, will not be required to file their accounts in XBRL format.
- Banks, insurance companies and finance companies whose activities are regulated by the Monetary Authority of Singapore (MAS). - Companies that are allowed by law to prepare accounts in accordance with accounting standards other than Singapore Financial Reporting Standards (FRS) or IFRS.
These companies are required to continue to file their financial statements by attaching a PDF copy of the financial statements as tabled at or used for purposes of the AGM.

Insolvent exempt private companies (EPCs) and EPCs that are required by law to file financial statements with ACRA will do so in XBRL format. Solvent EPCs will continue to be exempted from filing their financial statements with ACRA. Companies limited by guarantee, and foreign companies and their local branches, will continue to file their financial statements with ACRA in PDF format.

Filing options available
With effect from 1 November 2007, when filing its annual returns, a company can choose to file its full set of financial statements in XBRL format (i.e. full XBRL or Option A); or file only its balance sheet and income statement in XBRL format (i.e. partial XBRL or Option B).
A company that chooses to file only its balance sheet and income statement in XBRL format (Option B) will be required to file a PDF copy of its financial statements as tabled at or used for the purposes of the AGM in addition to the balance sheet and income statement in XBRL format. This option will be applicable from 1 November 2007 to 31 October 2008. ACRA will review its policy on this matter after one year.
The Practice Direction can be downloaded from ACRA’s website at www.acra.gov.sg/legislation/index.html#3

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Following concerns that existing sanctions in the corporate law regime may be unduly influencing business decisions, the Australian Government has begun a review of the sanctions system in an effort to improve efficiency.
The review is investigating the present structure of sanctions within the Corporations Act 2001 in terms of its impact on responsible risk-taking and whether there is an appropriate balance between civil and criminal penalties.
In announcing the review, the Treasurer, Peter Costello, noted corporate wrongdoing had the potential to affect economic efficiency and development, making robust sanctions necessary to deter and punish corporate malfeasance and to protect market integrity. However, he said this needed to be ‘balanced with promoting the development of a competitive business environment’.
The current review is part of a broader ongoing strategy by the Australian Government to reduce the regulatory burden on businesses and achieve simpler, more effective regulation.
The recent Taskforce on Reducing the Regulatory Burden on Business recommended that the penalties for breaches of directors’ duties be reviewed to ensure they strike an appropriate balance between promoting good behaviour and ensuring businesses are willing to take sensible commercial risks. This reflected concerns that exposure to sanctions could engender an overly conservative approach by some directors, to the detriment of business development in Australia.
One of the issues being examined in the review is whether the expanded use of civil sanctions in corporate law would provide additional options in deterring bad corporate behaviour, and whether higher penalty amounts for civil breaches better protect consumers.
The discussion paper released to coincide with the review addresses a range of practical issues around corporate regulation, including:
- the need for a general protection for directors
- consistency between the duties of care and diligence and good faith
- reasonable reliance on information and advice provided by others, and
- the obligation to keep financial records.
Public submissions to the review closed at the beginning of June, and an advisory group has been established by the Treasurer to prepare a proposals paper for his consideration in November.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The Financial Accounting Standards Board (FASB), the US standard setter, has issued a proposal designed to improve the accounting for financial guarantee insurance contracts. Its recent exposure draft, Accounting for Financial Guarantee Insurance Contracts – An Interpretation of FASB Statement No. 60, aims to reduce diversity in practice and to provide financial statement users with clearer, more comparable information and expanded disclosures.
In keeping with FASB’s current mission to help reduce complexity in the financial reporting system, the proposal has been written in a new format intended to improve its intelligibility. Notable changes from formats in previous statements include the use of bold text at the beginning of each section to convey the accounting principle for that section and the inclusion of examples in the body of the standard to illustrate the proposed accounting guidance for certain paragraphs.
Currently, there is diversity in the way financial guarantee insurance contracts are accounted for by insurance enterprises. As FASB explains, that diversity has resulted in differences in the recognition and measurement of claim liabilities and can lead to different financial statement information for similar transactions.
In recognition of this, the US standard setter’s exposure draft requires that insurance enterprises recognise premium revenue when insured contractual payments (generally principal and interest) are made by the issuer of the insured financial obligation. The proposal presumes that the risk to the insurance enterprise is reduced to the extent of the insured contractual payments made. The proposed statement also requires: recognition of a claim liability prior to a default (insured event) under certain criteria; more consistent claim liability measurement based on the present value of expected cash flows; and expanded disclosures about financial guarantee insurance contracts. The resulting standard would be effective for financial statements issued for fiscal years beginning after 15 December 2007, and all interim periods within those fiscal years.

Sarah Perrin, accountant and writer.

Canada

Following its examination of the needs of users of private companies’ financial statements, the Accounting Standards Board (AcSB) has released an invitation to comment and discussion paper outlining proposals for financial reporting standards for private companies. This is part of the AcSB’s Strategic Plan, issued in early 2006, in which it decided to pursue separate strategies for public and private enterprises.
There has been significant debate on this issue, with some arguing that the increasing complexity of accounting standards is problematic for private businesses, while others are concerned that different standards for different types of business will confuse financial statement users and reduce standard quality.
The invitation to comment and discussion paper include the results of the review of users’ needs, tentative conclusions on a number of fundamental issues and three possible approaches to developing private enterprise GAAP. The three approaches are the following:
- a top-down approach based on the public company GAAP, with some modification, as is currently done with the differential reporting model
- adoption of the International Financial Reporting Standard for small and medium-sized entities (IFRS for SME), which is now at the exposure draft stage with comments due by 1 October 2007, possibly with modifications to address Canadian circumstances, and
- development of an independent set of Canadian accounting standards for private enterprises.
All private companies will be eligible to apply the private enterprise GAAP (there will be no size restrictions); however, if they choose, they can also apply the standards applicable to public enterprises, which from about 2011 will be IFRS. The same conceptual framework – i.e. financial statement concepts – will apply to both private and public enterprise GAAP.
The discussion paper also requests input on whether the AcSB should develop non-GAAP guidance for entities that do not have significant external financial statement users.
Responses are due by 31 October 2007; the AcSB expects to make a decision by early 2008.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

Auditors are required to document sufficient evidence to support the audit opinion. Although this has been the age-old requirement, it is the area that requires the biggest improvement for the Big Four auditing firms in South Africa. This and other findings of the practice review department of the Independent Regulatory Board for Auditors (IRBA) were published subsequent to the practice and quality review performed on the Big Four firms and 89 of their partners. Sixty-seven partners were rated as satisfactory while 22 partners will be subject to a re-review within a year.
The inspectors took a strong stance that if audit work was not documented then there is no evidence it was done. The report stated: ‘Auditing standards require sufficient and appropriate documentation of audit evidence obtained and, for this reason, we do not accept verbal explanations on review findings.’ The major reason for review results not being rated satisfactory relates to documentation either being insufficient and/or inappropriate. However, the IRBA conceded: ‘Non-documentation of audit evidence does not necessarily imply that an inappropriate audit opinion was expressed.’
The 2,000+ audit firms in South Africa with in excess of 3,000 audit partners will in future be subject to practice and engagement reviews on either a three or six-yearly basis, dependent on the classification of their client portfolio. Reviews can be classified as satisfactory where the next review will only be performed in the next cycle. A re-review means a review within a year, and the practice review department can also refer an audit firm or partner for disciplinary proceedings by IRBA.
The firm review process focuses on the key areas of leadership responsibilities, ethical requirements, client acceptance and continuance, human resources, engagement performance and monitoring. In this process documents like policy and procedure manuals, independence confirmations and other documentary evidence are collaborated with interviews and questionnaires. No significant or systematic weaknesses were identified during the review of the Big Four, but improvements that should enhance audit quality were recommended.
Through the engagement review process the practitioners’ compliance with the relevant performance standards are evaluated. The base is the engagement files.

Bernardt van der Linde, a research accountant with financial services company, PSG Group Limited, and former PwC chartered accountant.