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international
Amendments to IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements, are the latest changes to the accounting for financial instruments. These changes deal with puttable financial instruments and the effect obligations that arise on liquidation have on determining whether an instrument is debt or equity.
IAS 32 requires that if the holder of a financial instrument can require the issuer to redeem it for cash it should be classified as a liability. Some ordinary shares and partnership interests allow the holder to 'put' the instrument (i.e. require the issuer to redeem it in cash), and while these might more usually be considered equity, application of IAS 32 results in their being classified as liabilities.
The amendment to IAS 32 will require entities to classify such instruments as equity,
so long as they meet certain conditions. In addition, the amendment also requires that instruments that impose an obligation on an entity to deliver to another party a pro rata share of the net assets only on liquidation should be classified as equity.
The amendments will apply for periods beginning on or after 1 January 2009.
The International Public Sector Accounting Standards Board (IPSASB) has issued two new standards as part of the convergence of public sector accounting standards with IFRS. International Public Sector Accounting Standard (IPSAS) 25, Employee Benefits, and IPSAS 26, Impairment of Cash-generating Assets, are expected to improve the consistency and transparency of financial reporting by public sector entities.
Increased complexity in financial reporting, particularly the greater use of fair values,
poses particular challenges for auditors. The International Auditing and Assurance Board (IAASB) has recently issued a revised and redrafted version of ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The revised standard combines the previous ISA 540 and also ISA 545, which dealt only with the audit of fair value estimates. The revised standard requires the auditor to focus attention on areas of higher risk, accounting judgement and possible financial reporting bias. In adopting a risk-based approach, auditors will need to evaluate the effect of estimation uncertainty, management's methods for making estimates, the reasonableness of the assumptions made and the adequacy of related disclosures.
While the revised ISA does not apply until periods commencing on or after 15 December 2009, the IAASB has suggested that, because it is dealing with a matter of such current concern, auditors might wish to consider the material in the standard in advance of its application date. In the press release accompanying the issue
of the revised standard, the IAASB has also suggested that auditors remain alert to other relevant guidance on fair value being issued by other organisations, including the Global Public Policy Committee, the PCAOB and the UK Auditing Practices Board.
The IAASB has also amended ISRE 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, to extend its scope beyond interim statements to other historical financial information. In addition, to remove any uncertainty as to the application of ISRE 2400, Engagements to Review Financial Statements, ISRE 2410 and ISAE 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, the IAASB has restricted the application of ISRE 2400 to a review of any financial information performed by a practitioner who is not the entity's auditor.
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
In March, the UK's Accounting Standards Board (ASB) issued an amendment to FRS 20 (IFRS 2), Share-based Payment, dealing with vesting conditions and cancellations. The amendment has the effect of keeping the UK standard up to date with its international equivalent. The main change from the preceding exposure draft concerns a revised definition of the term 'vest', making it clear that particular restrictive conditions such as 'non-compete provisions' are not vesting conditions.
Meanwhile, the ASB has published an exposure draft of a proposed amendment to financial instruments standard FRS 25 (IAS 32) in relation to puttable financial instruments and obligations arising on liquidation. The board's consultation was triggered by the amendment
to IAS 32 by the International Accounting Standards Board (IASB). The IASB's final amendment was wider in scope than its original proposals. In particular, the original criterion for
a puttable financial instrument to be classified
as equity if it was puttable at 'fair value' was removed. Despite this widening of scope, the ASB believes that the impact of the amendment in the UK would not be major. However, it wants to ensure there are no unintended consequences, hence the consultation.
The ASB has also focused its attention on the topic of capital maintenance, holding an open meeting to consider the idea of a solvency-based regime for dividend distributions. The move reflects the European Commission's desire that further consideration be given to more flexible requirements regarding distributions. European accountancy body, the Federation
des Experts Comptables Europeens (FEE), has proposed an alternative system in the form of
a solvency-based regime. The ASB's public meeting enabled the sharing of opinions with
a view to influencing future developments. It included presentations from Paolo Santella, a national expert at the EC, and Erich Kandler, chairman of the FEE company law and corporate governance working party.
Sarah Perrin, accountant and writer.
IFRIC D21, Real Estate Sales, a draft international accounting standard interpretation, has clarified the issue over builders applying SSAP 9 to the construction of a housing estate.
Builders of housing estates in Ireland prefer to book revenue when the house is completed and sold, a method that postpones the payment of tax and a method that is accepted by the Irish revenue authorities. SSAP 9 would require you to treat the transaction as a long-term contract and take in a 'prudent' proportion of the profit on partially completed houses as well, although it has always been unclear if a housing estate is a 'long-term contract' as defined in SSAP 9.
Some accountants were reconciling the requirements of SSAP 9 and the allowed tax treatment by being extremely prudent and actually taking in no profit on partially-built houses, something not really within the spirit
of SSAP 9.
IFRIC D21, Real Estate Sales, while an international accounting standard and not UK GAAP, considers this specific issue and has determined that, in most cases, the sale of a house in a housing estate is the sale of goods and, therefore, revenue should only be booked when the house is completed and sold.
The draft interpretation suggests that
where the purchaser of the house can only make minor amendments to the contract,
such as the location of power outlets and
some extras, it is the sale of goods. Where the purchaser can make structural changes, and would be entitled to replace the builder, it is a construction contract - and SSAP 9 only applies to construction contracts.
Application note G to FRS 5, which
applies to the sale of goods, requires that you '...recognise revenue under an exchange transaction with a customer, when, and to the extent that, it obtains the right to consideration in exchange for its performance', where performance is defined as 'the fulfilment of the seller's contractual obligations to a customer through the supply of goods...'
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & Mainland China
On 27 February 2008, the Hong Kong Financial Secretary announced the Budget
for 2008-2009. The budget surplus was anticipated to be HK$115.6bn for the year ending 31 March 2008, as compared to HK$25.4bn budgeted.
With the significant increase in 2007- 2008's revenue, a wide spectrum of various measures has been proposed to return wealth to the community. These measures include tax cuts and initiatives to help the less well-off in the community. There have been proposals to reduce standard rates of profits tax, property tax and salaries tax by 1%, while personal allowances for salaries tax would be increased and income bands under salaries tax would be widened.
There is a series of 'one-off' tax rebates, including 75% rebates under profits tax, salaries tax, property tax and personal assessment for the 2007-2008 tax payable, subject to a cap of HK$25,000. Other one-off concessions include the waiver of a business registration fee for 2008-2009 and rates, capped at HK$5,000 per quarter, for properties during 2008-2009.
In order to increase Hong Kong's competitiveness, the Financial Secretary announced the abolition of hotel accommodation tax and duties on wine, beer and all other alcoholic beverages except spirits. Expenditure incurred on environmentally friendly machinery and equipment will be wholly deductible in
the first year of purchase, while accelerated depreciation allowances will be introduced for environmentally friendly installations, mainly ancillary to buildings, with the depreciation period shortened from 25 years to five years.
To demonstrate the Government's commitment to enhancing retirement protection and relieving the pressure on social welfare expenditure in the long run, it was proposed
that for employees and the self-employed who currently have MPF accounts, and who each earns not more than HK$10,000 a month, a one-off injection of HK$6,000 would be made into their Mandatory Provident Fund (MPF) accounts.
The Financial Secretary also pledged to
set aside HK$50bn from the fiscal reserves to assist the implementation of healthcare reform, no matter what the arrangements would be.
With all the proposals set out in the
2008-2009 Budget, a consolidated deficit
of HK$7.5bn was anticipated by 31 March 2009.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Institute of Accountant's (MIA) Financial Reporting Standards Implementation Committee (FRSIC) recently issued two implementation guidances relating to accounting standards to provide assistance to both preparers and auditors of financial statements.
The first consensus deals with a common issue on whether fixed deposits held on lien for bank guarantee facilities granted to subsidiaries meet the definition of cash and cash equivalents, and form part of the component of cash and cash equivalents pursuant to FRS 107 (equivalent to IAS 7).
In considering the issue, the committee acknowledged that fixed deposits held on lien for bank guarantee facilities are not available for general use by the parent or other subsidiaries due to restriction over the use of such cash for specific purposes. However, the fact that they are not available for general use does not necessarily mean that they are not eligible to be part of the components of cash and cash equivalent of an entity.
Paragraphs 48 and 49 of FRS 7 states
that there are various circumstances in which cash and cash equivalent balances held by an entity are not available for use by the group
and requires an entity to disclose the amount, together with a commentary by management. FRS 107, paragraph 46, states that, in view
of cash management practices and banking arrangements around the world, and in order to comply with FRS 101 (IAS 1), Presentation of Financial Statements, an entity is required to disclose the policy that it adopts in determining the composition of cash and cash equivalents.
Based on the above provisions, the committee decided that an entity may adopt
the policy of including fixed deposits held on lien for bank guarantee facilities in determining the composition of cash and cash equivalents, provided there are adequate disclosures. However, appropriate disclosures, including the policy adopted by the entity and the amount of cash and cash equivalent balances that are not available for use by the group in the financial statements, together with a commentary by management that provides a clear explanation of the nature of the restrictions, should be made in the financial statements to enable users in understanding the financial position and liquidity of the entity.
The second consensus informs that the Central Bank, in a letter to FRSIC, has confirmed that MSC Malaysia status companies are no longer required to submit their audited annual financial statements to the Central Bank.
Both the above consensuses are already effective. FRSIC Consensus is guidance issued by the MIA, and is to be regarded as best practice and should be read in conjunction with the respective applicable accounting standards.
Jennifer Lopez, head of policy and technical development, ACCA Malaysia.
Singapore
The Ministry of Finance (MoF) has convened an 11-member strong steering committee to review the Companies Act. The committee is chaired by the solicitor-general, Professor Walter Woon, and the aim of the review is to retain an efficient and transparent corporate regulatory framework that supports Singapore's growth as a global hub for both businesses and investors. It will seek to update the law to keep pace with relevant international legal developments and technological advances, promote greater accountability and transparency, while keeping the compliance cost low. Five working groups, which will study distinct areas of the Companies Act, will aid
the committee. After evaluating the issues identified in the course of its review, the committee will issue a consultation paper.
Singapore Exchange (SGX) has introduced a 'watch list' for listed companies on the SGX Mainboard following a public consultation in May this year. The new 'watch list' and rule changes took effect on 1 March 2008. The introduction of these new rules is part of the ongoing efforts of SGX to heighten market transparency by alerting investors to the financial developments of listed companies under the 'watch list'.
Under the new Part V of Chapter 13 of the SGX-ST Listing Manual, listed companies will
be placed on the 'watch list' if they register:
- pre-tax losses for the three most recently completed consecutive financial years (based on the latest announced full year consolidated accounts, excluding exceptional or non-recurrent income and extraordinary items), and
- an average daily market capitalisation of less than S$40m over the last 120 market days on which trading was not halted or suspended for the full day.
Companies on the list are required to provide the market with quarterly updates on their financial situation, including their future direction and any other material development that may have a significant impact on their financial position. Trading in the 'watch list' companies will continue as usual, unless a trading halt or a suspension is imposed. The list will be reviewed quarterly.
Companies that cannot satisfy the relevant criteria for removal from the 'watch list' within 24 months will face delisting from SGX. A listed company on the 'watch list' may apply for its removal from the list upon meeting either one of the following requirements:
- it records consolidated pre-tax profit for the latest completed financial year, and has an average daily market capitalisation of S$40m or more over the last 120 market days on which trading was not halted or suspended for the full market day, or
- it satisfies the Mainboard admission criteria as set up in Listing Rule 210(2)(a) or 210(2)(b).
The rules on the 'watch list' do not apply to investment funds, real estate investment trusts, business trusts, global depository receipts (GDRs) and secondary-listed companies featured on the Mainboard.
In connection with the introduction of the 'watch list', SGX is introducing a new Appendix and a new Practice Note in its SGX-ST Listing Manual for listed companies as follows:
- Appendix 13.1 provides the announcement template for listed companies that have recorded three consecutive years' losses, and
- Practice Note 13.2 sets out the guidelines for inclusion of listed companies on the 'watch list'.
More details can be found on SGX's website at www.sgx.com
Joseph Alfred, technical adviser,
ACCA Singapore.
Australia & New Zealand
The ongoing high volatility in equity markets has forced market regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX), to remind listed companies and their officers about the need to keep the market fully informed at all times.
The current downturn in the Australian share market has led to growing concern about the financing arrangements of listed companies and the impact on the share price of margin loans held by company directors.
Both issues have led to dramatic declines in the share price of several high profile Australian companies after their directors received margin calls, or the market became concerned about their ongoing ability to finance high levels of debt.
In light of the turmoil, the ASIC and ASX have tightened their scrutiny of the market and are encouraging listed companies and their key financial officers to ensure they are aware of, and in compliance with, their disclosure obligations under the continuous disclosure regime.
To assist with maintaining an informed market, the ASX and ASIC have released
two Companies Updates to ensure firms meet their disclosure obligations.
Companies Update 02/08 provides guidance on the disclosure of material information relating to the financial arrangements of listed entities and the margin loans held by company directors.
As the regulators noted: 'Directors have a duty under the Corporations Act to disclose to the company material personal interests on a matter relating to the company. Accordingly, ASIC would expect all directors to have provided the company with all relevant information when a margin loan is entered into over securities in the company.'
In particular, this disclosure relates to
the financing arrangements of entitles and
the existence and terms of any finance arrangements in place in relation to directors' shareholdings.
Companies Update 01/08 provides guidance on the disclosure obligation of listed entities when they seek a trading halt or suspension of their securities.
ASX and ASIC have announced they will work together closely to monitor company disclosures and will take enforcement action where necessary to ensure the market remains fully informed at all times.
Janine Mace, Australian freelance finance
and business journalist.
Americas
US
The US standard setter, the Financial Accounting Standards Board (FASB), is consulting on proposed guidance intended
to improve the quality and consistency of financial reporting of endowments held by
not-for-profit organisations. The FASB has issued a proposed FASB Staff Position (FSP) FAS 117-a, with the rather challenging title Endowments of Not-for-profit Organisations: Net Asset Classification of Funds Subject to
an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures.
Following the adoption of the Uniform Prudent Management of Institutional Funds
Act of 2006 (UPMIFA), questions have been raised about the reporting of donor-restricted endowment funds. Organisations across the US now find themselves subject to increased public scrutiny on how they manage and use their endowments. The FSP would provide guidance on classifying the net assets (equity) associated with donor-restricted endowment funds held by organisations that are subject to an enacted version of UPMIFA. It would also require additional disclosures about endowments (both donor-restricted funds and board-designated funds) for all organisations, including those that are not yet subject to an enacted version of UPMIFA.
Separately, major changes have been approved to the oversight, structure and operations of FASB following public consultation and a vote by the board of trustees of the Financial Accounting Foundation (FAF). Changes will also be made to the FAF's oversight, structure and operations, and to those of the Governmental Accounting Standards Board. The implications for FASB are that its size will be reduced from seven to five members as of this July. The need for investor participation on the board has been affirmed, with FASB's bye-laws adjusted to make it clear that members should possess investment experience. FASB's agenda-setting process
has also been changed to a 'leadership agenda process', whereby the FASB chair is vested
with the authority, following appropriate consultation, to set FASB's project plans, agenda and priorities.
Sarah Perrin, accountant and writer.
Canada
The Canadian Securities Administrators
(CSA) has proposed new rules on how Canadian public companies disclose information about compensation paid to executives. The proposals are modelled on new US Securities Exchange Commission rules that came into effect in 2006, though with some differences.
According to the revised Form 51-102F6, Statement of Executive Compensation, companies will be required to disclose all compensation awarded to certain executive officers and directors in a new tabular format, and provide a narrative discussion and explanation. The effective date of the new rules would be 31 December 2008 (for proxy disclosures prepared in the spring of 2009). The CSA, the council of the securities regulators of Canada's provinces and territories, will be receiving comments until 22 April 2008; the revised Form is available on its members' websites.
Since the new compensation rules will dramatically increase the volume and complexity of information provided to the market, the Risk Management and Governance Board of the Canadian Institute of Chartered Accountants (CICA) has issued a document
to help corporate directors address them. Directors Alert: Executive Compensation Disclosure - Questions Directors Should Ask
is available at www.rmgb.ca
Few rules govern the construction and disclosure of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) and Free Cash Flow, even though they are widely used by financial statement preparers. Since this makes comparison difficult, CICA's Canadian Performance Reporting Board (CPRB) has published guidance for reporting these financial measures, which are not included in Generally Accepted Accounting Principles (GAAP). The CPRB guidance defines the calculation of Free Cash Flow and EBITDA, requiring additional contextual information that will help users in assessing these measures. The guidance also allows flexibility in reporting, giving management the opportunity to highlight company-specific issues.
Improved Communication with Non-GAAP Financial Measures - General Principles and Guidance for Reporting EBITDA and Free
Cash Flow is available on CICA's website and comments will be received until 30 April
2008.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
Trevor Manuel, South Africa's Minister of Finance, delivered his 12th Budget speech
on 21 February 2008. While budgeting for a surplus, his main proposals included:
- personal income tax relief to individuals to the value of R7.6bn
- companies with a turnover of R1m (£66,000), previously R300,000 (£20,000), will now only be obliged to register for VAT
- a reduction in the corporate tax rate from 29% to 28%.
The current budget included more details on the abandoning of secondary tax on companies (STC) in favour of a dividends withholding tax that were announced in 2007. This tax will
fall in line with international practice to shift
tax from a company to a shareholder level.
In October 2007, STC was lowered from 12.5% to 10%. It is envisaged that the rate of the new dividend's tax also be set at 10%, or
it may be limited by specific international tax treaties.
It is proposed to provide cascading relief where dividends will only be taxed when paid
to individuals or non-domestic company shareholders. As an anti-avoidance measure, dividends paid to closely-held (passive) companies used to accumulate passive income will be subject to a 10% tax rate.
Previously, companies also received STC credits when dividend income was earned.
This could have been set off against STC on dividends to be paid. These credits will, however, expire in 2009.
Manuel also announced further measures to ease the tax administration burden on SMEs. Very small businesses with turnover of less than R1m (£66,000) can benefit further by electing to be taxed on a progressive tax scale based on turnover.
In an attempt to encourage venture capital funding, investors will in future receive certain deductions in exchange for funding start-up operations in both mining and non-mining sectors of the economy. Specific thresholds apply.
Bernardt van der Linde, PSG Limited
research accountant and former PwC chartered accountant. |
