Technical update

international

A revised version of one of the most fundamental International Financial Reporting Standards, IAS 1, Presentation of Financial Statements, has recently been issued by the International Accounting Standards Board (IASB).
The main objective of the revision to the standard is to require that information be presented in financial statements by reference to shared characteristics. Key to achieving this objective is the separation of changes in equity arising as a consequence of transactions with owners from other transactions. All non-owner changes will need to be presented in one place resulting in the introduction of a requirement to prepare a statement of comprehensive income. Preparers will have a choice of either presenting items of income and expense and comprehensive income in one statement with sub totals for each element; or as two separate statements, with the statement of comprehensive income immediately following the income statement. Components of comprehensive income will not, however, be permitted to be presented in the statement of changes in equity.
The revisions also rename some aspects of the financial statements in a way that is thought to better reflect their function. As a result, the balance sheet becomes the statement of financial position. However, while the new name will be used in accounting standards, it will not have to be used by preparers within their financial statements. In a further change, whenever an entity retrospectively restates comparatives or reclassifies items in the financial statements, it will be required to include a statement of financial position as at the beginning of the earliest period presented.
The revised IAS 1 will apply for periods beginning on or after 1 January 2009, although early adoption will be permitted.
As part of the IASB's short-term convergence project with the US standard setter, the Financial Accounting Standards Board (FASB), a proposal has been issued to improve the accounting for joint arrangements, including joint ventures. ED 9, Joint Arrangements, would replace IAS 31, Interests in Joint Ventures. In its foreword to the exposure draft, the IASB has stated that it currently considers that IAS 31 does not necessarily result in high quality financial reporting for two reasons. First, its requirements result in accounting that follows legal form rather than reflecting the contractual obligations between parties. In addition, there is currently a choice in accounting treatment (equity accounting or proportional consolidation) and the IASB is proposing to require all joint arrangements to be equity accounted.

A further amendment to IAS 39, Financial Instruments: Recognition and Measurement, is also being proposed to provide more clarification in the difficult area of hedge accounting. The revisions will result in more guidance as to the risks that qualify to be designated as hedged risks. In addition, the amendments will clarify that it is permitted to designate only a portion of cash flows as a hedged item.

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 Accounting Standards Board has described as 'disappointing' the 'negative stance' taken by the European Commission on the proposed International Financial Reporting Standard for Small and Medium-sized Entities. The sentiment was expressed in a letter from the ASB's chairman, Ian Mackintosh, to Charlie McCreevy, the EU's Internal Markets Commissioner. It follows a speech given by McCreevy in which he said there appeared to be very little support from member states for the IASB's draft IFRS for SMEs.
Mackintosh writes that the ASB's own UK consultation process on the draft IFRS had actually found 'a large degree of support'. Although most respondents did not see the proposed IFRS for SMEs as being suitable for small and micro entities, there was a strong majority in favour of the standard being available for application by middle tier and larger companies that do not have public accountability.
The ASB has subsequently made its formal response to the IASB consultation on the draft IFRS, confirming its general support for the proposed standard. It commends the 'significant simplification of full IFRS that has been achieved'. However, it also notes UK opinion that the draft standard might not be suitable for the smallest entities. Among other comments, the ASB questions the suitability of the draft standard's current title because 'SMEs' means different things in different jurisdictions.
In a separate project, the ASB's Urgent Issues Task Force has issued a draft UITF Abstract on Hedges of a Net Investment in a Foreign Operation. The draft is based on equivalent international guidance and would apply to entities applying Financial Reporting Standard (FRS) 23, The Effects of Changes in Foreign Exchange Rates, and the financial instrument recognition and measurement standard, FRS 26. The comment period was extended slightly due to disruption to the UK postal system caused by strike action in October.

Sarah Perrin, accountant and writer.

The EU Transparency Directive (2004/ 109/EC) came into effect in Ireland from 13 June 2007. The directive has been transposed into Irish law through the Investment Funds, Companies and Miscellaneous Provisions Act 2006 and the Transparency (Directive 2004/109/EC) Regulations 2007. The Irish Central Bank has been given the task of implementing many of the requirements of the directive and has delegated some of these functions to the Irish Stock Exchange (ISE). The Irish Auditing and Accounting Supervisory Authority (IAASA) has been allocated the task of examining whether annual and half-yearly financial reports of entities coming within the scope of the directive comply with the relevant reporting framework.
The directive applies to entities whose securities are admitted to trading on a regulated market, situated or operating within the EU. Securities include shares, bonds, securitised debt, and units issued by closed ended investment funds. While the directive applies to securities traded on the ISE official list, it does not apply to securities listed on the Irish Enterprise Exchange (IEX) as this is not a regulated exchange.
The ISE has calculated that there are 36 equity issuers within the scope of the directive. There are also 74 closed ended funds and 225 debt issuers, and there may be a number of entities whose home member state is Ireland but whose securities have been listed on a regulated market in another member state. Data on the number of issuers in this latter category is not available.
For issuers whose financial statements commence on or after 20 January 2007, the directive has immediate effect. For issuers with a financial year end prior to 20 January 2007, the directive takes effect from the commencement of their next financial year end.
Further information is available at www.iaasa.ie/news/index.htm#d2809

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

Two new Hong Kong (IFRIC) Interpretations were released, namely Hong Kong (IFRIC) Int 13, Customer Loyalty Programmes, and Hong Kong (IFRIC) Int 14, HKAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Hong Kong (IFRIC) Int 13 is effective for annual periods beginning on or after 1 July 2008, while Hong Kong (IFRIC) Int 14 is effective for annual periods beginning on or after 1 January 2008. Earlier application of both interpretations is permitted.
The Inland Revenue Department issued a revised Departmental Interpretation and Practice Notes (DIPN) No. 11 on Field Audit and Investigation. This DIPN replaces the previous DIPN No. 11 and DIPN No. 11A. It clearly sets out the Department's views on what constitutes tax evasion and provides general guidance for taxpayers and their representatives who are involved in field audit and investigation.
Meanwhile, in the 2007/08 Policy Address delivered by the chief executive, it was announced that the standard rate of salaries tax will be reduced from 16% to 15%, while the profits tax rate will be lowered from 17% to 16.5% in 2008/09.

The China Securities Regulatory Commission (CSRC) issued Detailed Implementation Rules for Non-publicly Traded Shares Issued by Listed Companies. The rules include provisions relating to target subscribers and terms of subscription, resolutions of the board of directors and shareholders' general meeting, and procedures of authorisation and issuance. The CSRC also issued the Standard on the Information Disclosure by Listed Companies No. 25 - Scheme and Report on the Non-publicly Traded Shares Issued by Listed Companies to regulate information disclosure in this respect. It requires listed companies to publish the board's resolution attached with details of the scheme and, upon completion, a report on the issuance.

The State Administration of Taxation (SAT) has completed the legal procedures for the Double Tax Treaty (DTT) between China and the People's Democratic Republic of Algeria. The DTT aims to prevent double taxation and tax avoidance and will be implemented on 1 January 2008.

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

Malaysia

In line with the Prime Minister's recent Budget 2008 announcement (please see accounting & business, October 2007 edition), the Securities Commission announced the revised Malaysian Code of Corporate Governance on 1 October. The revised code contains key amendments aimed at strengthening the roles and responsibilities of boards of directors and audit committees, and ensuring that they discharge their duties effectively.
In particular, the revised code spells out the eligibility criteria for the appointment of directors, the composition of the board of directors and the role of the nominating committee. Independent non-executive directors are expected to provide a more meaningful and independent oversight function.
The nominating committee, in making recommendations, is now expected to evaluate the professionalism and integrity of a proposed director, in addition to ensuring the basic requirements of possessing the necessary skills, knowledge, expertise and experience to discharge his or her duties and responsibilities as a board member. All assessments and evaluations carried out by the nominating committee in the discharge of its functions should be properly documented.
The revised code strengthens the role of audit committees by requiring that they be comprised fully of non-executive directors. In addition, all members of an audit committee should be financially literate and at least one should be a member of an accounting association or body. The revised code also stipulates the need for audit committee members to attend continuous training to keep abreast of developments in relevant financial and other related developments, and the details of the relevant training attended by each director should be disclosed.
The audit committee will now be required to meet with the external auditors, without executive board directors, at least twice a year.
The revised code also requires all companies to have an internal audit function with the head of internal audit reporting directly to the audit committee. The revised code also clearly spells out what the audit committee should do in relation to the internal audit function.
In another development, amendments to the Malaysian Companies Act were recently issued. Some of salient features of the amendments include the requirement that an auditor, if in the course of his or her duties as an auditor of a public-listed company and its subsidiaries, is of the opinion that a serious offence involving fraud or dishonesty has been or is being committed against the company or the act, should report the matter in writing. A penalty of imprisonment or a fine of RM250,000, or both, will be imposed if an auditor fails to comply. Protection against this whistleblowing act is given.
The revised act also specifies that officers of the company may report serious offences involving fraud or dishonesty and will be accorded protection for whistleblowing accordingly. Companies will be obliged to ensure that these persons are not discriminated against and their lawful employment or livelihood will not be interfered with.
Under the revised act, auditors now have a duty to report to the registrar or stock exchange for public-listed companies, in writing, within seven days of the date of the letter of resignation, giving reasons for resignation or removal as auditors of a company.
The new provisions also include public-listed companies having in place proper internal control systems.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Accounting and Corporate Regulatory Authority (ACRA) has issued Practice Direction 4 of 2007, which sets out the criteria and responsibility of a reviewer appointed under a 'hot review' order issued by ACRA after a public accountant fails a practice review conducted under ACRA's Practice Monitoring Programme (PMP). Under this order, the public accountant will be subject to a review (known as a 'hot review') for a stipulated period by another suitably qualified person.
While under this order a public accountant cannot issue an audit opinion (with respect to a statutory audit under the Companies Act) unless an independent reviewer has assessed the audit work that has been performed. Notwithstanding the review, the responsibility of the public accountant who is under review remains unchanged with respect to the issuance of the audit opinion.
The public accountant under review may engage any suitably qualified public accountant or former public accountant to be the reviewer (known as the 'hot reviewer') so long as there are no conflicts of interest and independence issues.
The Practice Direction can be downloaded from ACRA's website, www.acra.gov.sg

The Inland Revenue Authority of Singapore (IRAS) currently provides advance rulings to taxpayers to specify the tax treatment based on the current income tax legislation for proposed business arrangements. To provide greater clarity and certainty to taxpayers, the advance ruling system was formalised and given legal effect on 1 January 2006. IRAS has issued a revised circular that sets out the basic features of the advance ruling system and the application procedures. The circular can be downloaded from IRAS' website, iras.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Australia may not require additional regulation in relation to directors' duties if the attitudes revealed in a new study are anything to go by.
In an Australian first, the report shows local company directors are prioritising shareholders only slightly over their employees, an approach distinguishing them from their US counterparts.
The study, Company Directors' Views Regarding Stakeholders, was conducted by the University of Melbourne's Centre for Corporate Law and Securities Regulation (CCLSR).
It involved an in-depth survey of 4,000 directors from a diverse range of Australian companies and asked respondents to rank employees, shareholders and other stakeholders.
The report found that 55% of Australian directors believe acting in the best interests of the company means they are required to balance the interests of all stakeholders. It also found that very few directors (0.3%) equate the best interests of the company with the short-term interests of shareholders.
The study found evidence that Australian directors have different priorities to those of US directors, as research there has shown that eight out of 10 US directors rank shareholders ahead of all other stakeholders, including employees.
The Melbourne University study found that only four out of 10 Australian directors rank shareholders first, while similar Japanese studies have shown that directors there rank employees over other stakeholder groups.
According to the CCLSR's Professor Ian Ramsay, the survey indicates there may be little need to change Australian laws relating to directors' duties to require that the interests of stakeholders, other than shareholders, be taken into account in decision-making.
Ramsay's view is based on the survey results, which show that the overwhelming majority of Australian directors (94.5%) believe the law concerning directors' duties is broad enough to allow them to consider the interests of stakeholders other than shareholders.
The survey also indicates that issues such as ensuring customers are satisfied, growing the business and ensuring employees are fairly treated are all rated as important by the largest proportion of directors.
Overall, less than half the directors surveyed feel increasing the share price is important to them, although the proportion among directors of listed companies holding this view is considerably higher (60.4%).

Janine Mace, Australian freelance finance and business journalist.

Americas

US

Intangible assets have been under the microscope at US standard setter, the Financial Accounting Standards Board (FASB). In September, FASB debated how to resolve the inconsistency between the guidance for determining the useful life for amortisation purposes under FASB Statement No. 142, Goodwill and Other Intangible Assets, and the periods of cash flows used in determining the fair value of an intangible asset.
Following discussion, FASB decided to limit the scope of a proposed staff position to the issue originally raised by constituents, i.e. the determination of the useful life of intangible assets for amortisation purposes. It will not seek to provide clarifying guidance on the amortisation of intangible assets, renewal costs and periods of zero/negative cash flows. This narrower approach is seen as reflecting the key concerns of FASB's constituents and supporting the simplification of accounting literature.
FASB also decided to enhance the disclosure requirements for intangible assets in Statement 142 by requiring an entity to report the weighted-average initial contract period, the entity's history of contract renewal, amounts expended to renew or extend the contractual terms of an intangible asset, and changes in the likelihood of renewal or extension.
Meanwhile, work on the conceptual framework has also continued, with FASB discussing a revised draft of its preliminary views document on the reporting entity. FASB agreed that this revised draft responded appropriately to earlier comments, subject to some minor clarifications. It decided there were no further issues to be discussed before proceeding to publication.
FASB has also taken the decision to no longer treat two projects - one on going concern and the liquidation basis of accounting and the other on subsequent events - as separate agenda items. Instead, these will be included in the board's codification and retrieval project, where it is felt they can be dealt with more efficiently.

Sarah Perrin, accountant and writer.

Canada

The Accounting Standards Board (AcSB) continues to work toward its Strategic Plan to adopt International Financial Reporting Standards (IFRS) for public companies.
It has reviewed proposed major new and amended IFRS that might be incorporated into Canadian GAAP before the planned January 2011 changeover from Canadian GAAP to IFRS. The AcSB expects to incorporate the upcoming IFRS on business combinations and amend Section 3500, Earnings Per Share, to harmonise it with amendments to IAS 33, Earnings Per Share. It also expects to issue exposure drafts corresponding to IASB proposals to amend IAS 12, Income Taxes, and IAS 31, Joint Ventures.
It is also proceeding with amendments to Canadian GAAP regarding rate-regulated operations, and expects to complete its project on intangible assets. It might issue proposals for other, less comprehensive, amendments to Canadian GAAP that would have mandatory effect before the changeover date; however, it does not expect to require any more comprehensive proposals before the changeover. In the first quarter of 2008, the AcSB will likely issue an Omnibus Exposure Draft (OED) containing the IFRS in the 2007 IFRS bound volume. The OED will request comment on whether there are any reasons why an IFRS would not apply to specific Canadian circumstances, and whether there is a needfor any additional application guidance or transitional provisions to address them. The AcSB will add to, or otherwise modify, IFRS only if there are compelling arguments that Canadian circumstances require such modifications.
The AcSB has also begun to discuss changes to the structure of the Canadian standard setting function resulting from the implementation of its Strategic Plan. It decided to begin the process of winding up its Emerging Issues Committee, which has developed standard interpretations for 19 years. The AcSB will assume direct responsibility for providing any interpretations that might be required in the future.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

Small business owners can get down to business again instead of accounting.
South Africa has taken the lead in adopting the new and less stringent reporting requirements for small and medium enterprises (SMEs) proposed by the International Accounting Standards Board (IASB). The International Financial Reporting Standard (IFRS) for SMEs was released as an exposure draft in May this year. Following the closing date of 1 September for submission of comments, the Accounting Practices Board decided to adopt the exact format of the IASB's IFRS.
The precursor to this adoption was signing into law the Corporate Laws Amendment Act (CLAA) in April this year, which allowed for differential reporting between companies. Entities not in the public interest (or part of such a group) or those that have restrictions on the transfer of their shares (i.e. shares not for offer to the general public) - commonly referred to as 'limited interest' companies - will in future have the option to use the less stringent accounting standards in preparing their financial statements.
Prior to the adoption of IFRS for SMEs, the only legal accounting standard was IFRS with its more than 3,000 possible disclosure requirements. These onerous requirements were widely criticised predominantly because of the costs involved compared to the limited use or benefit. The financial statements for the majority of small companies are only used by the tax authorities.
There are fewer than 400 disclosure requirements in the new SME IFRS and, inter alia, they allow companies to recognise assets and liabilities at cost rather than fair value. These will definitely be welcomed by the SME community. Limited interest companies may apply the IFRS for SMEs from 1 October 2007 for year-ends after 31 December 2005.
There is no doubt that South Africa will gain experience in its pioneering role and, therefore, will be able to provide the rest of the world with training material or assistance in setting up their infrastructure in this regard in future.

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