Technical update

international

Further progress has been made with the worldwide adoption of International Financial Reporting Standards (IFRS) following the announcement from Korea’s Government and the Korea Accounting Standards Board of a roadmap for the adoption of IFRS. By 2009, all companies in Korea with the exception of financial institutions will be permitted to adopt IFRS, and by 2011 financial reporting based on IFRS will become mandatory for all listed entities.

The International Auditing and Assurance Standards Board (IAASB) has recently issued an exposure draft of a revised and redrafted version of ISA 550, Related Parties. This is the second exposure draft of ISA 550 to be issued, the first having attracted significant comment. As a consequence of the extent of the changes made following the initial consultation, the IAASB has decided to re-expose the standard.
The standard identifies the objectives of auditors when considering related parties to be: obtaining sufficient evidence about the required accounting and disclosure of related-party information and transactions; understanding how related parties might affect the view given by the financial statements; and identifying the risk of fraud arising as a consequence of related-party relationships.
The exposure draft includes a new definition of related-party to help set a minimum level for audit purposes. This will be relevant to those jurisdictions whose accounting framework does not include requirements with respect to the disclosure of related-party transactions. The suggested definition is a party that either: controls or significantly influences the entity whether directly or indirectly; is controlled or significantly influenced by the entity; or is under common control with the entity. In line with this change to the definition the proposed requirements, with respect to the enquiries required of management to enable the auditor to identify related parties, have also been amended from the original exposure draft, in order to restrict them either to the requirements of the relevant reporting framework under which the entity has to report or the definition within the ISA.
The original exposure draft contained provision that auditors would have to search for ‘significant’ and ‘non-routine’ transactions, a requirement that many commentators thought might not be cost-effective and which also ignored the potential risks associated with routine related-party transactions that were either unidentified or undisclosed. Instead of the active search envisaged in the original exposure draft, auditors will instead be required to make enquiries of management about the existence of related parties when, during the audit, significant transactions outside the normal course of business are identified.
Finally, the inclusion in the first exposure draft of a list of certain documents that were required to be reviewed by auditors caused concern to many commentators. However, the IAASB has retained a revised list of documents that the auditor must review, albeit now restricted to bank and legal confirmations and minutes of meetings of shareholders and those charged with governance.

Yvonne Lang, a director at Smith & Williamson, the accountancy and financial advisory group, and technical adviser to the audit committee of Nexia International, an international network of accounting and consulting firms. www.smith.williamson.co.uk

UK & Ireland

The UK’s Accounting Standards Board (ASB) has issued an exposure draft of limited amendments to Financial Reporting Standard (FRS) 3, Reporting Financial Performance. In the light of concerns raised by the Urgent Issues Task Force, the ASB has proposed clarifications to the application of the requirements of FRS 3 relating to the treatment of gains and losses on remeasurement and derecognition of certain financial instruments for entities within the scope of FRS 26, Financial Instruments: Recognition and Measurement.
The main change proposed to FRS 3 is to provide exemption from certain paragraphs of FRS 3 for entities applying FRS 26 and FRS 23, The Effects of Changes in Foreign Exchange Rates. The ASB has proposed that the FRS be effective for accounting periods beginning on or after 1 January 2007, although early adoption is permitted.
Meanwhile, the ASB has decided not to amend FRS 20 (IFRS 2), Share-based Payment, in its application to subsidiary companies that grant options over the equity shares of the parent company. The ASB had been considering such an amendment following concerns that companies faced the burden of having to calculate the cost of the share-based transaction for the subsidiary on a basis different from that at which it was measured in the group financial statements.
The ASB’s discussions highlighted that although an exemption would represent a cost saving for certain companies, it would apply only to the minority of cases where the substance of the arrangement was a grant of options by the subsidiary itself. More significantly, the ASB noted that any such amendment would result in a difference between FRS 20 and the international standard on which it is based, IFRS 2. It finally concluded that the importance of not introducing a divergence between the UK and international standards outweighed the cost benefit to preparers.

Sarah Perrin, accountant and writer.

The Republic of Ireland has almost 600 credit unions with three million members out of a total population of 4.2 million people. Credit unions in Ireland manage approximately 12.6bn euros of members’ savings. Traditionally, credit unions were staffed by volunteers and would have been seen as local voluntary self-help organisations catering for the entire community. However, as they have matured, their success has broadened their appeal to all sectors of the economy, and many have increased in size to such an extent that they are better classified as small banks.
Credit unions are regulated by the Irish Financial Services Regulatory Authority (IFSRA), the financial regulator. The regulator sets out certain prudential reporting requirements and actively monitors all credit unions, and this includes regular onsite visits by IFSRA inspectors. Credit unions have traditionally lent funds to members in both the prime and sub-prime sector, although they are restricted from having excessive amounts of long-term loans. The balance of unlent funds is invested. However, in recent times the proportion of loans to investments has fallen, in some unions to as low as 18%, but on average to about 50%. The reduction in loans and increase in investments has led some commentators to refer to some credit unions as dysfunctional investment clubs.
Recent press reporting of some irregularities in the sector, findings by inspectors on site visits and the increase in investment over loans, appears to have prompted the IFSRA to take action. First, the IFSRA has discouraged credit unions from making direct stock market investments unless the board of the credit union can demonstrate expertise in this area. Secondly, it has required all credit unions to return a schedule of investments indicating how the investments have been accounted for. The IFSRA has also indicated that the credit unions’ auditor should state on the fairness of the accounting method used. All of the main accounting bodies in Ireland have recommended to their members that they do not accept such appointments because, among other reasons, ‘true and fair’ can only be expressed about a set of financial statements as a whole and not individual line items. The regulator appears to be most concerned about the accounting for perpetual bonds, where it appears that some credit unions accrued the interest received but failed to account for the reduction in the capital value of the bond.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

With effect from 25 June 2007, mandatory paid announcements will no longer be required. The new regime for electronic dissemination of regulatory information will be launched.
Under the first phase of the implementation of this Electronic Disclosure Project, a paid announcement in newspapers will be optional so long as the Main Board listed issuer publishes the full announcement on its own website and the Hong Kong Exchanges and Clearing Ltd (HKEx) website. For a six-month transitional period, a Main Board listed issuer will be required to publish a notification in newspapers whenever it publishes an announcement on the HKEx, and its own, website. However, in the first 12 months following the commencement of Phase 1, a Main Board issuer without its own website must publish the full announcement in the newspapers, as well as on the HKEx website.

The Stock Exchange of Hong Kong Limited (SEHK) and the Securities and Futures Commission released a joint statement which sets out guidance for listing applicants who are overseas companies regarding their submissions on how to demonstrate they are subject to appropriate standards of shareholder protection. There are shareholder protection matters that the SEHK expects overseas companies to address when seeking a primary listing on the SEHK, such as the corporate structure that clearly protects principal shareholder rights, fair proceedings for general meetings to enable shareholders to utilise their rights in full, corporate governance measures that ensure the powers of directors are reasonably contained and subject to reasonable scrutiny, and so on.

The National People’s Congress of the PRC passed the Corporate Income Tax Law (CIT Law) in March, which unifies the two separate enterprise income tax laws for domestic enterprises and foreign and foreign-invested enterprises. Thus, a new tax rate of 25% will be applicable to both types of enterprises.
The CIT Law adopts the industry-oriented tax incentive policy, aimed at directing investments into the industry sectors and projects encouraged and supported by the state. These include agriculture, forestry and animal husbandry, fishery projects, basic infrastructure projects, environment protection projects and energy and water conservative projects, and qualified technology transfer. New measures to combat tax avoidance are also introduced.

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

Singapore

The Council on Corporate Disclosure and Governance (CCDG) has issued an exposure draft of its proposed Financial Reporting Standard for Small and Medium-sized Entities. Comments should be submitted in writing and received no later than 1 September 2007. More details are available on CCDG’s website at www.ccdg.gov.sg

To provide greater clarity and certainty to taxpayers, the Goods and Services Tax (GST) Act will be amended to provide for an advance ruling system. A new Section 90A, together with a new Fifth Schedule, will be enacted and effective from 1 July 2007. An advance ruling is a written interpretation the Comptroller of Goods and Services Tax (CGST) gives to a specific person, stating how specific provisions of the GST Act will apply for a particular business arrangement or a specific transaction.
An advance ruling request relates to the interpretation of the law for a given set of issues; it is not about information or clarification on what is already provided clearly in the law.
An advance ruling issued in accordance with these provisions will bind the CGST on the ruling made. Notwithstanding this, taxpayers may continue to enquire on the application of the GST law and procedures outside the advance ruling system. The CGST will continue to provide the advice and clarification to the taxpayers without charge. However, such advice or clarification given will not be legally binding on the CGST.

An e-tax guide has been issued by the Inland Revenue Authority of Singapore (IRAS) to explain the GST advance ruling system and the application procedures. Details are provided in the proposed Fifth Schedule to the GST Act. More details are available on IRAS’ website at www.iras.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Small business owners will be the big winners from the new taxation rules under the Tax Laws Amendment (2006 Measures No 7) Act 2006.
These legislative reforms are designed to improve access to the capital gains tax (CGT) concessions for small businesses in Australia and form part of the Federal Government’s response to recommendations made by the Board of Taxation.
The reforms change the existing rules in the following areas.
- Significant individual test - the new rules replace the controlling individual 50% test with a significant individual 20% test. This will allow up to eight people operating a small business jointly through an entity to access the concessions, compared with the previous situation that allowed a maximum of two controlling individuals. The test now considers both direct and indirect holdings through interposed entities.
- Eligibility of gifts - under the new rules, a person will be able to gift a business asset rather than the legislation requiring it to be sold. This recognises situations where owners prefer to gift an asset, such as a family farm, rather than selling it to access the retirement exemption.
- Small business rollover - taxpayers will now be able to defer a capital gain in the year the gain is made, pending reinvestment of the sale proceeds into a replacement asset. If reinvestment does not occur within two years, a capital gain arises at that point. Previously, taxpayers had to account for a capital gain in the year it was made if they had not reinvested the proceeds. In addition, rollover is now available if the proceeds are reinvested in a replacement asset or in improving an existing asset, rather than only applying to newly acquired assets.
- Deceased estates - the new rules allow legal personal representatives or beneficiaries of a deceased’s estate to access the concessions to the same extent as the deceased.
- Fifteen-year exemption - this will now be available if there has been a significant individual in relation to the company or trust for at least 15 years, rather than for the entire ownership period of the asset.
- Extension to liabilities - the new rules will allow provisions for annual leave, long service leave, unearned income and tax to be taken into account in calculating the maximum net asset value.
- Partnership assets - the rules for calculating the maximum net asset value in relation to partnership assets will be changed so that they apply to the value of assets of individual partners, rather than the partnership as a whole.
- Interests in companies and trusts - in determining whether 80% of a company’s or trust’s assets are active assets, cash and financial instruments inherently connected with the business will now be counted.
The new rules apply to CGT events that occur in the 2006/07, and later, income years.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The US standard setter, the Financial Accounting Standards Board (FASB), has been continuing its work on a number of significant projects, including the accounting for business combinations (applying the acquisition method) and financial statement presentation.
Accounting for leases has also been the subject of discussion, specifically the identification of assets and liabilities, and analyses of different possible models of accounting for lease contracts. At a meeting in March, the FASB decided that for a simple, non-cancellable lease, the lessee has an asset for the right to use the leased item over the lease term and a liability for the obligation to make payments over that term. The lessor has an asset for the right to receive payments over the lease term. The FASB has asked its staff to continue to develop this right-of-use model, with the understanding that issues relating to measurement, presentation, recognition, derecognition and scope had not yet been considered and could affect preliminary conclusions.

In March, the FASB’s chairman, Bob Herz, spoke at a conference in New York, entitled Principles into Practice, organised by the Institute of Chartered Accountants of Scotland. The event was designed to encourage debate on the potential to develop accounting standards based on principles rather than rules. Herz gave FASB’s perspective on the workability of principles in the US environment. He noted there would need to be some significant institutional, structural, cultural and behavioural changes in the US if some form of principles-based approach were to work.
Meanwhile, Larry Smith has been appointed to a five-year term as a member of the FASB from 1 July. Smith has been closely involved in the standard setter’s activities as its director of technical application and implementation activities, and chairman of the Emerging Issues Task Force. He replaces Edward Trott, who retires from the FASB at the end of June. Before joining FASB, Smith was a partner at KPMG LLP.

Sarah Perrin, accountant and writer.

Canada

The Auditing and Assurance Standards Board (AASB) has approved final handbook material providing standards and guidance on the public accountant’s professional responsibilities in conducting a procedures engagement regarding internal control over financial reporting.
The development of this standard is in response to the Canadian Securities Administrators’ issuing of Multilateral Instrument 52-109 and a related companion policy that requires management to provide specific certifications related to internal control over financial reporting. Since the AASB had decided to defer its project to develop a Canadian standard regarding an audit of internal control over financial reporting, it developed these standards so that public accountants would have assistance in providing services to their clients regarding their regulatory certifications. The new standards address a number of issues, including the purpose of the engagement - that is, the public accountant has been hired not to provide assurance or an opinion on internal control, but to report findings from an agreed-upon procedures engagement; take responsibility for the agreed-upon procedures; and what findings to report and how to report them. The AASB will resume its project to develop a standard for the audit of internal control over financial reporting after the Public Company Accounting Oversight Board releases revisions to its Audit Standard No. 2, Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements.

The AASB has decided not to issue a new handbook section on going-concern, based on its exposure draft issued in August 2006. Instead, it proposes to adopt as a Canadian Auditing Standard the ISA 570 that the IAASB is currently developing (see Technical Update section, accounting & business, October 2006). The AASB has also discussed responses to its exposure draft and has approved final handbook material revising the standards and guidance for compilation engagements that will apply to Notice to Reader communications issued on or after 1 July 2007 (see Technical Update section, accounting & business, Nov/Dec 2006).

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

South African accountants have been regulated under the Audit Professions Act (APA) since April 2006. As with any new legislation, it takes time to understand the practicalities of the new Act, the most significant probably being Section 45 of the APA.
Section 45 of the APA imposes a duty on the registered auditor to send without delay a written report to the Independent Regulatory Board for Auditors (IRBA) when he or she has reason to believe that a reportable irregularity has taken, or is taking, place in that entity. An irregularity is clearly defined in the Act as any unlawful act or omission committed by any person responsible for the management of an entity, which:
- has caused, or is likely to cause, material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity
- is fraudulent or amounts to theft
- represents a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or the conduct or management thereof.
The Act stipulates that the company’s board should be recognised within three days of reporting the matter to IRBA. However, confusion arose regarding the process to be followed.
Previous versions of the Act created the impression that the auditor was not allowed to discuss the matter with the client before reporting. This has, however, since been clarified in a guide released by the IRBA which sets out the steps to follow.
In short, the auditor should carry out any investigation considered necessary. This may or may not include discussions with management. These investigations should, however, not be designed to provide management with time to rectify the situation in order to avoid reporting.
Within 30 days, a subsequent update advising whether corrective actions have been taken must succeed the initial report to the IRBA. If the reportable irregularity is continuing, the IRBA will notify appropriate regulators such as the Financial Services Board, JSE or the Reserve Bank.
Auditors are encouraged to have reasonable grounds before reporting any matter, as no legal privilege exists where a matter with insufficient evidence is reported to the IRBA.

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