Technical update

international

The International Accounting Standards Board (IASB) has issued an exposure draft of a number of amendments to 25 International Financial Reporting Standards under its annual improvements project.
The changes include a restructuring of IFRS 1, First-time Adoption of International Financial Reporting Standards, principally to remove transitional provisions that are now considered redundant. Other changes are to wording of standards in order to provide greater clarity of meaning and also to remove unintended inconsistencies between standards.

After three exposure drafts and much debate, the International Auditing and Assurance Standards Board (IAASB) has finally issued a revised version of ISA 600, Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors). The revised ISA will be effective for periods commencing on or after 15 December 2009. This date is in line with that announced by the IAASB as being that from which all new clarified ISAs will apply.
Revised ISA 600 specifies the type of work the group auditor, or component auditors, should perform in respect of group audits, both in general and particularly in relation to significant components of a group. Significant components are defined in the standard as those which are either of individual financial significance to the group or where, due to the specific nature or circumstances of the entity, the entity is likely to constitute a significant risk of giving rise to a material misstatement of the group financial statements.
The standard sets out specific requirements in respect of the group auditor's responsibilities in respect of significant components. These include:
- the need to hold discussions either with the auditor or management of the component about the business activities that are significant to the group - discussing with the component auditor the susceptibility of the component to material misstatement as a consequence of fraud or error - reviewing the component auditor's documentation of identified significant risks of misstatement - this can be in the form of a memorandum from the component auditor - evaluating the appropriateness of procedures performed by component auditors to respond to significant risks of misstatement in the group financial statements.
Two further exposure drafts of clarified standards have also been issued for comment by the IAASB. ISA 505, External Confirmations, has been revised in response to concerns that external confirmations may not always be as reliable as audit evidence as some auditors expect. As a consequence, the guidance as to when external confirmations should be used has been improved, clarifying that the decision as to whether external confirmation procedures should be used is one made on the basis of the risk assessments contained in other ISAs. ISA 505 also deals with the effective performance of external confirmations where the auditor determines that the procedures are appropriate.
The other exposure draft is of a proposed revision to ISA 620, Using the Work of an Auditor's Experts. The revised and redrafted standard will place particular emphasis on the need for the auditor to evaluate the expert's objectivity, and to establish a proper understanding with that expert as to their responsibilities for the purposes of the audit.

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 Accounting Standards Board (ASB) has expressed some 'major concerns' with the approach taken in the International Accounting Standards Board's (IASB) discussion paper setting out its preliminary views on insurance contracts. In its response to the IASB, the UK standard setter highlights the need for consistency as far as possible between insurance accounting and general financial reporting principles. While it acknowledges that complex aspects of insurance business may require the application of special principles, it says the IASB should 'clearly justify' their use and emphasise that the conclusions reached in relation to insurance contracts are not intended to be applied elsewhere. The ASB also says it is 'not convinced' by the IASB's arguments for developing a non-entity-specific exit value measurement model for insurance business. For example, it expresses doubts about the existence of liquid efficient markets for insurance contracts.
Meanwhile, the ASB is consulting on its future response to the IASB's exposure draft of proposed amendments to International Financial Reporting Standards under its first annual improvements project. The ASB notes that while some of the proposed amendments to the text of IFRS may be minor, the effect on financial reports could be significant. It also notes that a number of the IASB's proposals contain dissenting views. It questions whether, where IASB members cannot reach a unanimous agreement, a matter can be considered minor in nature and included in the annual improvements process.
The ASB has also issued its own exposure draft of amendments to the financial instruments standard FRS 26 (IAS 39) on recognition and measurement, concerning exposures qualifying for hedge accounting. This follows similar proposals previously issued by the IASB, intended to clarify what can be designated as a hedged item and when an entity may designate a portion of the cash flows of a financial instrument as a hedged item.

Sarah Perrin, accountant and writer.

On 14 November the Central Bank and Financial Services Authority of Ireland published the Financial Stability Report 2007. The report sets out the Authority's overall assessment of the stability of the Irish financial system. The report states that a stable financial system, such as stable financial markets, payments and settlements systems and financial institutions, is one which is able to absorb shocks. Overall, the report concludes that there has been an increased risk compared to 2006, but that the Irish financial system's shock absorption capacity remains robust and the system is well placed to cope with emerging issues.
At a macro-economic level, the report notes that the economic fundamentals of a good budgetary position, strong employment growth and an adaptable economy are sound. While it notes that the outlook is for some deceleration in 2008, growth projections remain reasonably strong by international standards.
The main downside risks for the economy are the moderation in the contribution of residential construction sector activity to overall growth, and the longer-term deterioration in Ireland's competitiveness. The report notes that the latter is due to a number of factors, including higher inflation than our main trading partners, an appreciation of the exchange rate and lower productivity growth. One of the risks noted in the 2006 report was excessive house price inflation, and the 2007 report notes a reduction in house prices of 3.5% on a year-to-year basis, but compares this to a 50% increase in the period from 2002 to 2006 and an overall increase of 12% in 2006.
The report notes that there is a risk that the recent turbulence in the financial markets may lead to increases in the cost of credit to firms and individuals, thus reducing the volumes of credit available. The report concludes that this is an effect that is difficult to assess, but it is something that the Authority is alert to.
In the banking sector, the report concludes that the stability and health of the banking system remain robust when assessed by the usual indicators of financial health, such as asset quality, profitability, solvency, liquidity and credit ratings. The outlook for the banking sector is noted as positive.
The report concludes that, notwithstanding some significant vulnerabilities and downside risks, the Irish financial system continues to be in a good state of health.
The full report can be accessed from www.centralbank.ie

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

The Hong Kong Special Administrative Region Government signed an agreement with Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. The agreement eliminates double taxation instances encountered by Hong Kong and Luxembourg investors, and will bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities.
Without such an agreement, profits of Luxembourg companies doing business through a branch in Hong Kong are fully taxed in both places. In addition, profits earned by Luxembourg residents in Hong Kong are subject to both Hong Kong and Luxembourg income tax. On the other hand, Hong Kong residents receiving dividends from Luxembourg not attributable to a permanent establishment there are subject to a 20% Luxembourg withholding tax.
Under the agreement, Luxembourg will provide full exemption to residents for income earned in Hong Kong. The withholding tax rate on dividends will be reduced from 20% to 10%. If the recipient is a company holding 10% or more of the share capital of the paying company, or having invested €1.2m or more in that company, the withholding tax rate will be reduced to nil.
The agreement will come into force on 1 April 2008 for Hong Kong and 1 January 2008 for Luxembourg, subject to the completion of ratification procedures on both sides.

The State Administration of Taxation issued a notice to clarify the tax policy in respect of the discrepancy between the taxable profits and accounting profits in the adoption of the new accounting standards issued by the Ministry of Finance. The notice states that interest income measured based on the effective interest rates for held-to-maturity financial assets is taxable, whereas interest expenses recognised on financial liabilities is deductible to the extent not exceeding the interest rate charged on loans issued during the reporting period.
Changes in the fair values of financial assets, financial liabilities and investment properties are not recognised for tax purposes until these assets are disposed of or liabilities are discharged. Borrowing costs that qualify for capitalisation are included in the cost of non-current assets and depreciated accordingly for tax purposes.

The Chinese Institute of Certified Public Accountants issued the Guidance on Professional Competency for Certified Public Accountants. The guidance encompasses the areas of technical knowledge, professional skills, professional ethics and values, practical experience, specific requirements for auditors, requirements for auditing under specific circumstances and for specific industries, and continuous professional education.

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

Malaysia

The Malaysian Capital Markets and Services Act 2007 (CMSA), which came into force on 28 September 2007, aims to strengthen the capital market regulatory framework, improve business efficiency and enhance investor protection. The CMSA, passed by Parliament in May 2007, consolidates the Securities Industry Act 1983, the Futures Industry Act 1993 and Part IV of the Securities Commission Act 1993, which deals with fund-raising activities. The CMSA is supported by the Capital Markets and Services Regulations 2007, the Licensing Handbook and the Guidelines on Regulation of Markets. All of these documents come into effect concurrently with the CMSA.
A key CMSA measure benefiting capital market intermediaries is the introduction of the single licensing regime. Under this measure, intermediaries hold a Capital Markets and Services Licence as opposed to multiple separate licences, which effectively reduces administrative and compliance costs, and ultimately saves time. The Licensing Handbook explains the implementation of the single licensing regime.
Further information on the changes is available at www.sc.com.my

In November 2007, the Malaysian Institute of Accountants (MIA) issued the following revised auditing standards:
- ISA 230 (Revised), Audit Documentation
- ISA 700 (Revised), The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements, and the Related Conforming Amendments to Other ISAs.
ISA 230 (Revised) will be effective for the audit of financial statements for periods beginning on or after 1 January 2008, and ISA 700 (Revised) and ISA 701 will be effective for audit reports issued on or after 1 July 2008. These revised standards will supersede the existing ISA 230 and ISA 700 respectively once they become effective.
In addition to the above, MIA also issued 15 exposure drafts for public consultation. These exposure drafts (revision or redrafting of existing standards) are drawn primarily from IFAC's International Standards on Auditing issues. At the same time, the following existing practice statements were withdrawn with immediate effect.
- IAPS 1001, IT Environments - Stand Alone Computers
- IAPS 1002, IT Environments - Online Computer Systems
- IAPS 1003, IT Environments - Database Systems
- IAPS 1009, Computer Assisted Audit Techniques.
Copies of the standards and exposure drafts can be downloaded at www.mia.org.my

Singapore

In October, the Ministry of Finance appointed Euleen Goh to chair the newly established Accounting Standards Council (ASC). The Ministry has also appointed 15 other members to the Council. These members represent stakeholder groups such as the accounting profession, the users and preparers of financial information, academia and government.
The ASC will prescribe accounting standards for companies and for other entities, such as societies, charities and co-operatives. Its mandate is to develop, review, amend and approve financial reporting standards for entities that are within its scope.

Parliament has passed the Income Tax Bill to amend the Income Tax Act to make effective the tax policy changes announced during the Budget statement in February. The changes include:
- the reduction of corporate tax rate from 20% to 18%
- the increase of the partial tax exemption threshold for companies from the current S$100,000 to S$300,000
- the removal of the requirement that charities spend at least 80% of their annual receipts on charitable causes in Singapore within two years to qualify for the income tax exemption status. With its removal, all registered and exempt charities will enjoy automatic income tax exemption from 2008.
There were also further tax policy changes made as part of the regular reviews to improve Singapore's tax system.

From 1 November 2007, the Summary of Return (SR) is merged with the Main Return (MR) as one new Annual Return (AR) for annual filing.
Dormant companies will no longer need to attach the statement by dormant companies exempting them from audit requirements (currently in PDF format). The appropriate online declarations will appear in the new AR if the correct company type has been selected earlier. Exempt Private Companies (EPC) need not attach the EPC certificate or the Statement by EPC exempting them from audit requirements (currently in PDF format). The appropriate online declarations will appear in the new AR if the correct company type has been selected earlier.
Further details can be found at www.acra.gov.sg

Australia & New Zealand

Australia's new Anti-money Laundering/ Counter-Terrorism Financing (AML/CTF) regime is starting to have an impact on the accountancy profession, with accountants involved in providing financial advisory services to clients now required to comply with the legislation.
From 12 December 2007, advisers making arrangements on behalf of clients to invest in a financial product are now considered 'reporting entities'. The types of financial products caught under the new rules include shares, managed investment schemes, debentures, bonds, insurance and superannuation.
Where the adviser is only providing advice or arranging for a client to become a member of a self-managed superannuation fund, the legislation does not apply.
It also does not apply in most situations where services are provided to existing clients, although it will apply when a new service is provided to an existing client.
The legislation requires advisers making arrangements for clients to invest in a financial product to have in place a Special AML/CTF Program.
Special AML/CTF Programs require advisers to establish and document their procedures for collecting and verifying the identity of a client, with the minimum identity verification requirements for low and medium risk clients set out in the AML rules.
In relation to personal information, advisers are required to collect from all new clients appropriate documentation indicating their full name, residential address and date of birth, and this documentation must be retained for seven years.
The identity information provided by clients must be verified using 'reliable and independent' materials, such as an original or certified copy of photo identification. Alternatively, both original and certified copies of primary non-photo identification and secondary identification, such as a utilities bill, can be used.
Under a Special AML/CTF Program, advisers are required to document their procedures for determining the level of risk presented by a potential client.
Advisers must avoid offering services to clients until they have satisfied the firm's client identification procedures.
Once a Special Program is in place, advisers are required to train staff in the new procedures.
The AML/CTF Act also requires employers to perform appropriate due diligence checks on applicants they are considering for employment within a firm.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

US standard setter, the Financial Accounting Standards Board (FASB), has announced its plans for a one-year verification period during which constituents can comment on the FASB's proposed accounting standards codification. The goal of the codification is to simplify the organisation of thousands of US accounting pronouncements issued by multiple standard setters, including FASB, the American Institute of Certified Public Accountants and the Emerging Issues Task Force. It reorganises these pronouncements into around 90 accounting topics.
During the one-year verification period, constituents will be able to use a new web-based research system, through which they can also give feedback on whether the codification accurately reflects existing US GAAP. Once approved by FASB, the codification will become the single source of authoritative US GAAP.
Meanwhile, debate has continued on the topic of Statement 157, Fair Value Measurements. FASB has now agreed on a partial deferral of the standard's implementation. For fiscal years beginning after 15 November 2007, companies will be required to implement the standard for financial assets and liabilities, and for other assets and liabilities that are carried at fair value on a recurring basis in financial statements. However, FASB has decided to defer for one year the implementation of the statement for other non-financial assets and liabilities. The deferral gives preparers of accounts more time to address outstanding implementation issues relating to such non-financial assets and liabilities.
FASB has also been continuing its series of discussions with the Accounting Standards Board of Japan in their shared pursuit of global convergence of accounting standards. Both boards provided updates of strategies and recent developments in this area, including their views on projects such as the conceptual framework, revenue recognition, and liabilities and equity. They agreed that such discussions are useful in promoting mutual understanding and contribute to their respective convergence projects with the International Accounting Standards Board.

Sarah Perrin, accountant and writer.

Canada

Recognising the 1.7 million owner- managed businesses in Canada that employ approximately 32% of Canadian workers, the Canadian Institute of Chartered Accountants (CICA) has released a draft simplified accounting framework for owner-managed businesses. The Framework for Owner- Managed Enterprises is based on the existing CICA Accounting Handbook and is the result of the invitation to comment, Financial Reporting by Private Enterprises, and discussion paper issued by the Accounting Standards Board (AcSB) in April 2007 (see Technical Update, accounting & business, June 2007 edition).
The invitation to comment distinguished between private enterprises that have significant external users, requiring GAAP, and private enterprises that do not have significant external users and, thus, do not require GAAP. CICA members had expressed concerns about the loss of a frame of reference for financial statements that will occur when the accounting sections of the CICA Accounting Handbook are replaced by International Financial Reporting Standards. The premise of the proposed framework is that a large number of owner-managers have no expectation of broadening ownership interests in the enterprise or of going public.
The draft framework is available on the CICA website (www.cica.ca), and comments are being received until 31 January 2008.

The AcSB has finalised its Financial Instruments Implementation Guidance with the publication of a Brochure for Private Enterprises. The objective of the AcSB's Financial Instruments Project, which included the introduction of three new handbook sections, was to introduce standards on recognition and measurement of financial instruments that were generally harmonised with US standards. The AcSB established a Financial Instruments Working Group to develop materials to assist entities in understanding the new standards.
Private companies must implement the financial instruments standards in their fiscal year beginning on or after 1 October 2007. The brochure explains the requirements of these standards and describes their possible impact on a typical private enterprise.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

The latest amendments to income tax include the enactment of certain proposed changes announced to secondary tax on companies (STC) and dividends tax (as reported in Technical Update, accounting & business, April 2007 edition). Although it includes the reduction in the STC rate from 12.5% to 10%, certain previously untaxed capital distributions will also be taxed in future.
STC is a tax levied on the company when declaring dividends. However, in the future, this would convert to a dividends tax in the hands of the shareholders instead of the company's.
Since 1 October 2007, there is also more clarity on tax implications when shares are disposed of. Once a share investment has been held for more than three years, any gains will be taxed at the lower capital gains tax rate of 10% for individuals (14.5% for corporates), as opposed to the much higher income tax rate of 40% for individuals (29% for corporates).
Other amendments include depreciation incentives, work death benefits, sports funding, co-operative banks and the merger of stamp duty and uncertificated securities tax.
Business Day stated that in the past 18 months auditors reported more than 800 cases of reportable irregularities by their clients to the Independent Regulatory Board of Auditors (IRBA). The more serious allegations included tax evasion, contravention of tax legislation as well as the Companies Act, reckless trading and inappropriate accounting policies. Auditors that fail to report an irregulatory risk could face a jail sentence of up to 10 years.
A concern has also been raised by Kariem Hoosain, IRBA's chief executive, that South Africa may lose half of its auditors by 2010 due to a potential decrease of audit services by small firms. Small firms would have to choose between paying hefty fees to be reviewed in terms of new regulations, or opt out of the audit profession. A review due every three years currently costs the Big Four firms R1.2m (£90,000). The equivalent for smaller firms is estimated to be between R200,000 and R300,000 (£15,000 and £20,000). This expense might not be warranted if a small practice only performs limited audits, which is also expected to decrease further after proposed amendments to the Companies Act mean that smaller companies will no longer be required to be audited.

Bernardt van der Linde, PSG Limited research accountant and former PwC chartered accountant.