Technical update

international

In last month's column we discussed IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. In response to a number of press articles containing what the International Financial Reporting Interpretations Committee (IFRIC) considers to be inaccurate assessments of the effect of IFRIC 14, it has taken the unusual step of issuing a clarifying press release.
In the press release, IFRIC has explained that the interpretation provides guidance on the accounting for the effect of any statutory or contractual funding requirements; it cannot change the actual requirements as these are set by regulators and pension scheme trustees. In addition, the guidance has no effect on the ability of the entity to get a refund, but does provide guidance on how to account for any restrictions.

In July, the International Auditing and Assurance Standards Board (IAASB) approved exposure drafts of nine proposed standards. All of the standards have been redrafted in accordance with the IAASB's clarity conventions. Included within the nine new standards are redrafted versions of the two key standards dealing with quality control - ISQC 1 and ISA 220. The five standards dealing with auditor reporting have also been redrafted - namely:
- ISA 700, The Independent Auditor's Report on General Purpose Financial Statements
- ISA 705, Modifications to the Opinion in the Independent Auditor's Report
- ISA 706, Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor's Report
- ISA 800, Special Considerations - Audits of Special Purpose Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
- ISA 805, Engagements to Report on Summary Financial Statements.
In addition, redrafted versions of ISA 510, Initial Audit Engagements - Opening Balances, and ISA 530, Audit Sampling, have been issued for comment.

The Professional Accountants in Business Committee of the International Federation of Accountants (IFAC) has recently issued a new publication, Internal Control from a Risk-based Perspective. This includes interviews with 10 senior-level professional accountants in business on their experiences and views on establishing effective internal control systems. The interviews help demonstrate the importance of establishing a risk-based approach to internal control in helping an organisation manage its overall risk. In addition, the interviews highlight the nature of risks in organisations, establishing an internal control system that is focused on driving performance, and contain real life success stories that can help organisations that are considering improving their processes.

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

The UK Auditing Practices Board (APB) has published a summary of research related to a review of its Ethical Standards for Auditors (ESs).
The APB is assessing the need for revisions to the standards (originally issued in 2004) in the light of developments such as the EC Statutory Audit Directive, changes to international ethical standards for auditors, and practical experience of implementing the UK's ESs. Input on auditors' views has been provided by the UK accountancy bodies and research on investors' opinions by academics. The APB's own research has focused on the corporate experience, involving a survey of company directors and an analysis of information relating to fees for audit and non-audit services published in listed company accounts.
The research found that most audit committee chairs and finance directors of listed companies thought there had been a decrease to the threats to auditor independence over the last five years. A majority of respondents also thought there had been an increase in the transparency of the relationship between a company and its external auditors over the period. Of those who had witnessed the rotation of the audit partner, 80% thought that audit quality was unaffected and 13% felt it had increased.
An analysis of auditor remuneration information in the financial statements of 62 FTSE100 and FTSE250 companies showed that non-audit fees paid to external auditors had decreased by 19% between 2005 and 2006. Similarly, non-audit fees expressed as a percentage of audit fees had decreased from 83% in 2005 to 69% in 2006.
The APB is due to consult on proposed changes to the ESs later this year. Meanwhile, it is continuing work on revising guidance on the audit of investment businesses and on bank confirmations. It recently issued a finalised standard covering reviews of interim financial information, based on the international equivalent.

Sarah Perrin, accountant and writer.

Asia Pacific

Hong Kong & Mainland China

The Hong Kong Exchanges and Clearing Limited (HKEx) released a consultation paper at the end of August, seeking views on issues relating to periodic financial reporting. In particular, HKEx sought comments on the shortening of reporting deadlines for half-yearly and year-end announcements and reports, and the introduction of quarterly reporting for Main Board issuers, as well as alignment of the Growth Enterprise Market (GEM) Listing Rules relating to quarterly reporting with the proposed new Main Board requirements.
In a 2002 consultation paper, HKEx proposed to amend the Main Board Rules to shorten the time allowed for the release of results announcements and reports, and to require quarterly reporting by Main Board issuers. However, there were diverse views from respondents and, subsequently, the deadlines for half-yearly and annual reporting were not changed, while quarterly reporting was recommended as a good practice under the Code on Corporate Governance Practices.
As the HKEx considers that the proposed changes will increase transparency and address concerns about the development of an information asymmetry between management, insiders and the investing public, it now resumes its proposals. Comments are invited by 5 November.

The China Securities Regulatory Commission issued a standard on the Information Disclosure by Listed Companies No. 4 - Information Disclosure by Insurance Companies. The standard requires disclosure of specific accounting and financial data, embedded value and details of actuary. The actuary is required to sign on the periodic reports to ensure their truthfulness, accuracy and completeness.
In the operating review, the following should be included: an analysis of operation and results; claim payments; reserves; investment assets; re-insurance; and solvency. An insurance company should disclose in its annual report the internal control system and its implementation, risk management, and accounting policies for revenue recognition, and actuarial assumptions and methods.

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

Malaysia

On 7 September, the Honourable Prime Minister of Malaysia, Datuk Seri Abdullah Ahmad Badawi, and the Finance Minister in his Budget 2008 speech, announced a further reduction in corporate tax to 25% for 2009, compared with the earlier announced reduction to 27% and 26% in 2007 and 2008 respectively. The reduction aims to enhance the nation's competitiveness and spur the growth of private investments in the country. In addition to the tax cuts, the Government will introduce a single-tier tax system from the year of assessment 2008. Under this single-tier system, tax on profits of companies is a final tax; the dividend distributed will be exempted from tax in the hands of shareholders.
To reduce the cash flow constraints of small and medium enterprises (SMEs) at the initial stages of their operations, it is proposed that the SMEs be exempted from submitting their estimates of tax payable for the year as well as paying tax instalments on a monthly basis. SMEs are now allowed to pay taxes at the point of submission of income tax returns not later than seven months from the date of closing of accounts. This exemption is given for two assessment years beginning from the date of commencement of operations.
The other changes to the corporate tax system include:
- abolishment of service tax threshold for professional, consultancy and management services
- professional indemnity insurance premiums allowed as a deduction for income tax purposes
- all income received by non-profit oriented government-assisted and private schools given tax exemption
- expenses incurred by employers on gift of computers or payment of broadband subscription fees for employees allowed as tax deduction
- renovation cost incurred to provide facilities for disabled workers allowed as tax deduction
- cost incurred by companies for community projects allowed tax deduction, provided the facilities are provided free-of-charge to the public
- enhanced tax incentives for companies generating renewable energy and conservation of energy
- tax exemption for income derived from trading of certified emission reductions.
In addition to changes to the tax system, the Prime Minister also announced that a Public Companies Accounting Oversight Board would be established under the patronage of the Securities Commission to improve corporate governance. The Board will be responsible for monitoring auditors of public listed companies to ensure that the quality and reliability of audited financial statements is of a high standard. Changes to the existing corporate code were also announced, which include:
- executive directors will no longer be allowed to become members of the audit committee
- the internal audit function will be mandated for all public listed companies
- directors will be responsible for ensuring the adherence to the scope of internal audit functions, as specified by the Securities Commission.
To boost efforts for the country to become an International Islamic Finance Centre, the Government introduced additional incentives, which include:
- income tax exemption for non-resident consultants with the required expertise in Islamic finance
- foreigners allowed to own Islamic fund management companies
- tax exemption for all fees received in respect of Islamic fund management activities until year of assessment 2016
- additional funds of RM7bn to be channelled to Islamic fund management companies.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

Parliament has passed a bill to set up the Accounting Standards Committee (ASC) to replace the Council on Corporate Disclosure and Governance (CCDG) to issue accounting standards that apply to corporate and non-corporate entities.
For non-corporate entities, the ASC will draw up accounting standards that are tailored to their environment so as to establish a clearer link between their objectives, activities and results to their stakeholders. There will be a separate set of accounting standards for charities which are likely to be subsequently modified. A charity, regardless of the legal vehicle it uses, will have to comply exclusively with the accounting standards for charities issued by the ASC.

The Institute of Certified Public Accountants of Singapore (ICPAS) has issued nine revised and/or redrafted exposure drafts of Singapore Standards on Auditing (ED/SSAs) and the Singapore Standard on Quality Control (ED/SSQC) under the Clarity project, based on the same drafts issued by the International Auditing and Assurance Standards Board (IAASB) of IFAC. More details are available at www.accountants.org.sg

The CCDG has issued a draft interpretation of the financial reporting standard (FRS), Hedges of a Net Investment in a Foreign Operation. The comment period for this draft interpretation ended on 19 September. It has also issued a draft interpretation of the FRS, Real Estate Sales.

The comment period for this draft interpretation ended on 5 September. More details are available at www.ccdg.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

As part of its latest initiative to reform the tax system, the Australian Government is currently considering public submissions on new legislative proposals relating to the registration and regulation of tax practitioners.
Public submissions on the draft Tax Laws Amendment (Tax Agent Services) Bill 2007 and the associated draft Tax Administration Amendment Regulations closed in mid-August.
Release of the draft legislation has been a drawn out process, which started with a national review of standards for tax professionals in 1992 and a report recommending improvements to tax agent regulation in 1994.
While a new legislative framework was announced in 1998, introduction of the Goods and Services Tax, and other major tax reforms saw the tax agent changes deferred.
Implementation of the new legislative framework for tax practitioners was revived in the 2006-07 Federal Budget, with the announcement the Australian Government would provide A$57.5m over four years for development of the proposed legislation.
According to the Minister for Revenue and Assistant Treasurer, Peter Dutton, the new legislation will provide 'benefits for both providers of tax agent services and people who use these services… Taxpayers who use tax practitioners will be given greater certainty and protection. These reforms will improve the standard of services provided by tax practitioners across the country.'
The key features of the bill and regulations are:
- establishment of a national Tax Practitioners Board, which will replace the existing state-based boards
- a legislated Code of Professional Conduct governing the provision of tax agent services
- a wider range of disciplinary sanctions that may be imposed by the board
- a civil penalty for certain significant misconduct by tax practitioners
- registration and regulation of persons meeting minimum educational and relevant experience requirements, as well as a 'fit and proper' test, and who are in the business of providing Business Activity Statement services, and
- a 'safe harbour' for taxpayers from tax shortfall penalties for making false or misleading statements, where taxpayers demonstrate they have taken reasonable care by engaging a registered tax practitioner, and that they provided the practitioner with all relevant tax information.
The draft bill and regulations were developed following extensive consultation with the various tax professional associations in Australia.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The Financial Accounting Standards Board's (FASB) work continues in relation to multiple ongoing projects, although no FASB meetings were held during August.
In July, the board discussed matters related to the 'elements and recognition' and the 'measurement' phases of its conceptual framework project. On the first of these, the board debated whether its staff should temporarily set aside further consideration of the remaining issues surrounding the working definitions of an asset and a liability, and focus on considering other cross-cutting issues, such as unit of account, recognition and derecognition. The board decided that, in order to better understand the remaining asset and liability definition issues, and how they relate to such cross-cutting issues, the staff should apply the working definition of an asset to various types of assets. It should document the issues that arise and then determine whether (and how) resolution could benefit from working on unit of account, recognition, derecognition and measurement.
Turning to the measurement phase, FASB discussed measurement concepts, principles and terms intended to help identify and understand differences in measurement basis candidates. It also discussed the use of three criteria derived from the concepts and principles of measurement (real attribute, present attribute and observable attribute) in order to evaluate measurement basis candidates.
FASB has also continued work relating to the short-term convergence project on earnings per share (EPS). For example, following discussion, it decided that the objective of the convergence project was to arrive at the same denominator in the diluted EPS calculation. Therefore, convergence would be achieved when both US GAAP and IFRS result in the same diluted EPS denominator, regardless of any differences that may arise in the numerator (the control number used in calculating EPS).
Other topics discussed recently by FASB include derivative disclosures, the codification of US GAAP, insurance risk transfer and intangible assets.

Sarah Perrin, accountant and writer.

Canada

To address inconsistencies in the way income trusts calculate distributable cash and other measures, the Canadian Institute of Chartered Accountants (CICA) has developed recommendations for improved disclosure, transparency and standardisation in reporting of distributable cash in the Management's Discussion and Analysis.
The guidance recommends that income trusts report a new measure called 'standardised distributable cash', which, the CICA says, would give the industry a common methodology for providing investors with information on how much and where cash was generated, the entity's strategies for managing productive capacity and for managing debt, and the existence of financial covenants that might restrict future distributions. The CICA guidance accompanies an amendment by the Canadian Securities Administrators (CSA) of its national policy on income trusts and other indirect offerings. The intent with the amended policy is to group more clearly CSA guidance in the areas of distributable cash, prospectus offerings and continuous disclosure. Both the CICA guidance and the CSA policy amendment follow recent changes to Canadian tax legislation that introduced a tax on distributions from income trusts (see 'Letter from... Canada', accounting & business, February 2007 edition).
Meanwhile, in response to comments received from its March 2007 exposure draft, Rate-regulated Operations, the Accounting Standards Board (AcSB) has made some changes to Section 1100, Generally Accepted Accounting Principles, and Section 3465, Income Taxes, which will make the Handbook sections providing guidance on rate-regulated operations consistent with corresponding guidance under US GAAP. The AcSB also decided not to withdraw the existing rate-regulated operations guidance in other Handbook sections, as well as AcG-18, Disclosures by Entities Subject to Rate Regulation. The AcSB had intended to remove all Handbook guidance regarding rate-regulated operations before its adoption of IFRS; however, it acknowledged the concerns of exposure draft respondents about the ability of Canadian enterprises to rely on US GAAP and to influence the development of any future IFRS guidance on rate-regulated operations. The AcSB expects to finalise its proposals before the end of 2007; they will be applicable to financial statements for fiscal years beginning on or after 1 January 2009.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

Sanlam Limited, the second biggest South African Life assurance company, has openly expressed unease with the results of applying IFRS.
Sanlam's chief executive, Johan van Zyl, said the indiscriminate application of the standards did not present the reality and performance of the reporting companies, a result of 'general-purpose accounting standards to be applied across all industries'.
According to Business Report (the local business daily), van Zyl said in terms of IFRS, the fund's investments in the entities were not reflected as equity investments at fair value in the Sanlam balance sheet. He said that these were deducted in full from equity on consolidation - in respect of Sanlam shares - and reflected at net asset value in respect of subsidiaries.
'The valuation of the related policy liabilities, however, includes the fair value of these shares, resulting in a mismatch between policy liabilities and policyholder investments, with a consequential impact on the group's earnings.'
Apart from earnings per share and headline earnings per share, Sanlam also disclosed core and normalised headline earnings per share in order to provide a more reliable indication of 'true' earnings.
Implications of the National Credit Act (NCA), which came into effect on 1 June 2007, are becoming more apparent. The NCA puts stringent controls on those granting credit.
A company granting staff and/or study loans and even pension funds granting home loans may also have to register if the number of loans exceed more than R100,000 or R500,000.
Companies renting out movable property will also fall under the authority of the act.
Incidental credit agreements (i.e. trade debtors) are largely exempted, although certain measures are required if the debtor is more than 20 days outstanding and penalty charges are levied on overdue balances.
Auditors are advised to remain vigilant as several instances of non-compliance are expected to exist among clients. An auditor will need to consider any transgressions in terms of International Audit Standards, as well as ethical and legal reporting requirements.

Bernardt van der Linde, financial services group PSG, former chartered accountant with PwC.