Technical update

international

At the beginning of January the International Accounting Standards Board (IASB) completed the second stage of its business combinations project with the issue of a revised version of IFRS 3, Business Combinations, together with an amended version of IAS 27, Consolidated and Separate Financial Statements. Both standards are effective for periods beginning on or after 1 July 2009.
The project was undertaken jointly with the US Financial Accounting Standards Board, which published equivalents to IFRS 3 and IAS 27, and brings US GAAP almost in line with IFRS. Two main differences remain between IFRS and US GAAP - one in relation to the measurement of non-controlling interests and the other in relation to three specific items of disclosure.
The main changes that the new standards will make to existing IFRS accounting requirements are:
the need to measure assets and liabilities at fair value at each step in an acquisition has been removed. Goodwill arising where there is an increase in ownership interest will, instead, be measured as the difference between the value of any existing investment in the business, the consideration transferred and the net assets acquired
acquisition related costs must be recognised separately from the business combination, usually as an expense
changes in contingent consideration that are identified at the acquisition date must be accounted for in accordance with other IFRS rather than as adjustments to goodwill
changes in a parent's ownership interest in a subsidiary that do not result in a loss of control should be accounted for as transactions between equity holders.

The IASB has also issued an amendment to IFRS 2, Share-based Payment, clarifying that vesting conditions are service conditions and performance conditions only, and that other features of a share-based payment are not vesting conditions. The amendment also specifies that all cancellations, whether by the entity or by other parties, should be subject to the same accounting treatment. The amendment applies for periods beginning on or after 1 January 2009.

In addition to the IASB activity, the International Financial Reporting Interpretations Committee (IFRIC) has recently issued two draft interpretations.
D23, Distribution of Non-cash Assets to Owners, addresses two issues - how to measure an obligation to distribute non-cash assets to owners, and how to account for any difference arising between the carrying amount of the assets distributed and the amount of the obligation. The IFRIC proposes that all such distributions should be accounted for at fair value.
D24, Customer Contributions, seeks to address a number of areas where practice is diverse. If adopted, those providing access will be required to recognise the assets and revenue arising from providing access to a supply of goods or services over the period that access is provided.

The International Auditing and Assurance Standards Board has recently issued the last two exposure drafts written in accordance with its new clarity drafting convention. These are ISA 210, Agreeing the Terms of Audit Engagement, and ISA 710, Comparative Information - Corresponding Figures and Comparative Financial Statements.

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 (ASB) is consulting on the financial reporting of pensions, considering changes to the way that pension fund assets and liabilities are calculated and reported. It has published a discussion paper on the topic, which it hopes will not only stimulate debate but also influence the International Accounting Standards Board (IASB) as it reviews the current standard (IAS 19) governing pensions.
Drawing on principles applied to other accounting issues, the paper suggests that changes in pension assets and liabilities should be reported in the period in which they arise, rather than being spread forward. It also proposes that financial statements should reflect the actual return on assets, rather than the expected value as is currently required. Both approaches would reflect the underlying economic reality rather than allowing smoothing mechanisms. For the measurement of liabilities, the paper argues for the use of a risk-free rate rather than the high quality corporate bond rate currently used.
As well as financial reporting by the employer, the paper addresses financial reporting by pension plans to their members. It recommends that plans should be required to include the liability to pay future benefits. At present, if a liability is reported, it tends to be the amount required by regulation.
Meanwhile, the ASB has issued an exposure draft proposing amendments to the share-based payments standard FRS 20 (IFRS 2), following similar proposals issued by the IASB. These address situations where an entity's suppliers (including employees) receive cash payments that are linked to the price of the equity instruments of the entity or of the entity's parent.
Finally, the ASB has reminded companies of their business review reporting requirements, publishing a table highlighting the link between the legislative requirements for business review reporting and the guidance in the ASB's reporting statement on the Operating and Financial Review.

Sarah Perrin, accountant and writer.

In a recent Supreme Court judgement, an Irish accountant has succeeded in overturning a High Court finding that he had not acted 'honestly and responsibly' in respect of his position as a non-executive director of a meat processing company. The accountant was nominated as a non-executive director (NED) of the company by an investment firm that manages tax-based investment funds. The investment firm had invested in the company, and the accountant was nominated as a director to facilitate the monitoring of the performance of the company and to safeguard the shareholders' interests. The accountant took no part in the day-to-day running of the company.
Over one six-month period, the company went from a position of having net assets of almost €1m to excess liabilities of €5.3m, partially, it was explained in court, due to the outbreak of BSE. The company was then placed into liquidation.
In accordance with Section 150 of the Companies Act 1990, the liquidator of an insolvent company in Ireland must apply for leave to not seek a restriction order for a director on the basis that, in the liquidator's opinion, they acted 'honestly and responsibly'. In respect of the accountant in question, even though he was a non-executive director, leave was refused, although no reason was given for this refusal, and the Supreme Court judgement was somewhat critical of the lack of an explanation for the refusal. The judgement noted an '...air of unreality...' over the requirement for a liquidator to prosecute a director for something the liquidator believes they have not done for reasons that are not explained. In reaching the judgement, the judges expressed doubt as to whether the whole Section 150 procedure '…is consistent with fundamental fairness and constitutional justice'.
Non-executive directors play an important part in the corporate governance of a company, and the original High Court judgement created a general uneasiness among them as to the extent of their responsibilities. While the judgement did not expressly address the issue of the extent of the responsibilities of a non-executive director, it would appear to alleviate many of their concerns and allow companies to recruit and retain the highest quality and experienced non-executive directors more easily in the future.
The full decision can be found at www.courts.ie

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & Mainland China

n With effect from 14 December 2007, the registration system for non-Hong Kong companies was revised. 'Overseas companies' are now renamed as 'non-Hong Kong companies'. Section 337B(3) of the Companies Ordinance has been amended to empower the registrar to approve a name specified by a non-Hong Kong company, other than its corporate name, under which it proposes to carry on business in Hong Kong.

The Hong Kong Exchanges and Clearing Limited (HKEx) released a consultation paper on a number of proposed changes to the Listing Rules that aim to address developments in the market, as well as international best practice. Market views are sought regarding 18 substantive policy issues which cover:
- use of websites for communication with shareholders
- proposed introduction of a new rule relating to HKEx's powers of gathering information from issuers
- proposed removal of the requirement for qualified accountants
- review of sponsor's independence
- minimum level of public float to be introduced and proposed amendment regarding the constituents of 'the public'
- proposed amendments to disapply the requirement for a minimum spread of securities holders at the time of listing in the event of a bonus issue of a new class of securities involving options, warrants, or similar rights to subscribe or purchase shares
- review of HKEx's approach to pre-vetting public documents of listed issuers
- greater disclosure of changes in issued share capital
- disclosure requirements for announcements regarding issues of securities for cash and allocation basis for excess shares in rights issue
- issues of securities under a general mandate to be revised
- extent to which voting by poll should be made mandatory at general meetings
- disclosure of information about, and by, directors
- codification of waiver to property companies
- self-constructed fixed assets to be excluded from the definition of notifiable transaction
- disclosure of information in takeovers
- review of director's and supervisor's declaration and undertaking, and
- review of model code for Securities Transactions by Directors of Listed Issuers.

The Central Government of the PRC and the Government of Hong Kong Special Administrative Region signed the Second Protocol to the China/Hong Kong Double Tax Arrangement (DTA) on 30 January 2008.
The Protocol is based on the consensus reached by the China State Administration of Taxation and the Hong Kong Inland Revenue Department on the differences in the interpretation of the DTA. The signing of the Protocol aims to resolve these differences. These include the threshold of a six-month period for a service permanent establishment to be exempt from China corporate income tax, interpretation of immovable property holding company, and the threshold of 25% shareholding for capital gain exemption.

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

Malaysia

Bursa Malaysia recently announced key amendments to the corporate governance framework under the Listing Requirements and Malaysian Exchange of Securities Dealing & Automated Quotation (MESDAQ) Market Listing Requirements (MMLR). The amendments are aimed at raising standards of corporate governance for Malaysian public-listed companies, while increasing investor confidence. These changes come in light of the recent revisions to the Malaysian Code of Corporate Governance issued by the Securities Commission.
Among the significant changes made are amendments to strengthen the effectiveness of the audit committee. Executive directors are no longer allowed to be part of the audit committee, and the internal audit function is made compulsory to provide a more effective support to the audit committee in carrying out its function.
The amendments will take effect from 28 January 2008. However, listed companies have until 31 January 2009 to comply with the requirements on the revised composition of the audit committee, as well as the mandatory internal audit function. Audit committees must begin discharging the amended functions with effect from 1 April 2008, with a minimum of ensuring the terms of reference of the audit committee to commence performing the amended functions are ready on this date. Annual reports for financial years ending on or after 31 January 2009 must contain the statement on internal audit function.
A summary of the key amendments include:
- requiring all audit committee members to be non-executive directors, with the majority of them being independent directors
- mandating the internal audit function for listed companies and requiring the internal audit function to report directly to the audit committee
- expanding the functions of the audit committee to include the review of the adequacy of the competency of the internal audit function
- setting out the rights of audit committee to convene meetings with external auditors, internal auditors, or both, excluding the attendance of other directors and employees of the listed issuer whenever deemed necessary
- enhancing the disclosure in the annual reports to include information pertaining to the internal audit function. A statement on internal audit function - whether the internal audit function is performed in-house or outsourced - and the cost incurred for the internal audit function for the year. The audit committee report to include a summary of activities of the internal audit function
- clarifying that Bursa Securities may 'approve' such other requirements relating to the financial-related qualifications or experience that must be fulfilled by at least one audit committee member, and the signatory to the statutory declaration in relation to the accounts, and
- requiring listed companies to submit a copy of written representation or submission of external auditors' resignation to Bursa Securities, as provided under Section 172A of the Companies Act 1965.

Jennifer Lopez, head of policy and technical development, ACCA Malaysia.

Singapore

The Inland Revenue Authority of Singapore (IRAS) has granted a new two-year administrative concession for determining residence status.
The Monetary Authority of Singapore (MAS), the Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Exchange Ltd (SGX) have established the Audit Committee Guidance Committee (ACGC).
Tasked with developing practical guidance for audit committees, the industry-led ACGC is a key initiative announced by MAS and SGX in June 2007 to strengthen corporate governance practices of listed companies in Singapore.
The ACGC will develop practical guidance to assist audit committees of SGX-listed companies in better appreciating their responsibilities and enhancing their effectiveness. Among other things, the guidance will:
- focus on the practical aspects and considerations of the work of audit committees, including the implications of (i) the requirements of the Companies Act, and (ii) the principles and guidelines of the Code of Corporate Governance, and - identify and describe best practices of effective audit committees.
Further information is available from ACRA's website at www.acra.gov.sg

Joseph Alfred, technical adviser, ACCA Singapore.

Australia & New Zealand

Australia's new Labour Government has hit the ground running and is determined to tackle some of the red tape problems facing businesses operating in the local economy.
One of the new Government's first parliamentary initiatives has been to establish a tender process for the core services infrastructure for its new Standard Business Reporting (SBR) programme.
The SBR programme is focusing on harmonising the definitions, procedures and reporting requirements for information provided by business to government at various levels.
The Government's goal for the SBR is to reduce the reporting burden currently imposed on Australian businesses. The benefit of the programme to business is currently estimated at A$795m per year once it is completed.
According to the Treasurer, Wayne Swan, these measures will 'reduce the reporting burden imposed on the business community, freeing up resources for other more profitable activities'.
In the period since the new Government's election in November 2007, representatives from a range of government agencies have been planning the rollout of the new infrastructure, standards and processes to reform the way business reports financial information to the Government. The accounting, finance and tax professions, as well as the software industry, have also been consulted.
The SBR is a multi-agency programme and the agencies involved include the Australian Bureau of Statistics, Australian Prudential Regulation Authority, Australian Securities and Investments Commission (ASIC), the Tax Office and the State Revenue Offices.
The new Government is also tackling the problem of complexity and red tape in the financial services industry, with a new working group set up to slash the lengthy and often unreadable disclosure information currently provided to consumers by the sector.
The Financial Services Working Group will look at the key issues associated with financial services advice and disclosure, and will consist of senior officers from the Treasury, ASIC and the Department of Finance and Deregulation. The mandate for the working group is to determine the best possible approach for delivering short, comparable financial product disclosure documents.
It will also determine an appropriate regulatory framework to facilitate the provision of financial advice.

Janine Mace, Australian freelance finance and business journalist.

Americas

US

The US standard setter, the Financial Accounting Standards Board (FASB), has now launched its one-year verification phase for its accounting standards codification. It is encouraging constituents to use an online codification research system to investigate accounting issues and provide feedback on whether the codification content accurately reflects existing US generally accepted accounting principles (for non-governmental agencies).
The codification reorganises the thousands of US GAAP pronouncements into around 90 accounting topics, and displays all topics using a consistent structure. The FASB expects the new structure and system to reduce the amount of time and effort required to solve an accounting research issue, improve the usability of the literature and so mitigate the risk of non-compliance with standards, provide real-time updates as new standards are released, and assist the FASB with the research and convergence efforts required during the standard setting process.
Meanwhile, FASB has continued its work in other areas, including its short-term convergence project on earnings per share. In a recent meeting, the FASB took a number of decisions relating to its emerging revised exposure draft. For example, it has confirmed that instruments that may be settled in cash or shares and are measured at fair value, with changes in fair value recognised in earnings, would be excluded from the denominator of the diluted earnings per share.
Following other discussions, the FASB has issued a staff position (FIN 48-2) on the effective date of FASB Interpretation No. 48, on the accounting for income taxes. This defers the effective date of the interpretation for certain non-public enterprises, including not-for-profit organisations, to the annual financial statements for fiscal years beginning after 15 December 2007. The FASB notes that there had been confusion among certain entities as to whether Interpretation 48 applied to them. The deferred effective date is designed to give enterprises more time to apply the relevant provisions.

Sarah Perrin, accountant and writer.

Canada

The sub-prime mortgage crisis in the US has affected some Canadian investments, so the Canadian Institute of Chartered Accountants (CICA) has issued a bulletin to help companies provide information on these investments in their financial statements.
Non-bank Asset-backed Commercial Paper (ABCP) has been a popular short-term investment, with maturities ranging between 90 and 180 days from the date of issue. A trust issues the paper, using the proceeds to acquire accounts receivable, credit card receivables, car loans, home loans and mortgages. Repayment is funded by the cash flow from the underlying assets and the issuance of a new paper. About C$33bn in ABCP issued by non-bank trusts was frozen in August 2007 following the US sub-prime credit crisis. Many issuers had liquidity problems since they were not able to place new ABCP or repay maturing paper. An agreement in principle has been reached among stakeholders to restructure the paper, exchanging it for longer-term notes that will more closely match the maturity dates of the underlying securities.
Issue 5 of CICA's Canadian Performance Reporting Alert suggests that companies holding this ABCP should include management discussion and analysis (MD&A) disclosures that provide additional information about each ABCP held, including details about the nature of the assets and liabilities backing the paper, the terms and conditions of any new notes that will replace the original paper, information about its face value and additional information about the valuation process. The disclosures should also review the effects of the ABCP on compliance with debt covenants and liquidity in general, as well as the action management is taking to ensure that obligations continue to be met; the impact of the ABCP on the entity's strategy; and the impact of market conditions in general on the entity's ability to roll over existing debt and raise new finance.
'Companies holding non-bank ABCP have seen a high quality cash equivalent become a long-term investment with unclear realisation prospects,' said Chris Hicks, principal with the CICA Knowledge Development Group. 'Investors want to understand how a company with non-bank ABCP holdings is being impacted. We are urging companies to provide accurate, complete and transparent information about these holdings.'

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

The 2007 amendments to the South African Companies Act now require the auditors of widely held (public) companies to attend their clients' annual general meetings (AGMs). It is to answer any questions regarding the audit of the financial statements that shareholders might have. The Independent Regulatory Board for Auditors (IRBA) recently released a draft guide, The Auditor Attending the AGM, to this effect. This is based on a similar guide by the Australian Auditing Assurance Board.
Most importantly, it assists auditors to determine when a question is relevant to the audit of the financial statements and to be aware of questions addressed to the designated auditor that should rather be addressed by the company's directors. It also gives the auditors direction for preparation, like anticipating possible questions and discussing them with the audit committee and its chairman. A meeting with the chairman at the AGM is also advised to discuss what type of questions should be put to the directors and what can be referred to the auditor.
Before tending to questions it is advised that the auditor should provide context to explain key aspects of an audit - i.e. the auditor is not responsible for preparation of the financial statements and that reasonable, instead of absolute, assurance on material matters is provided. Auditors should steer away from responding to questions on specific areas. Permission from the chairman and/or directors is required if the auditor receives a question that he/she feels may disclose some confidential information of the company.
The auditor is allowed to defer a question if he/she wishes to obtain specific legal or professional advice, the questions are inappropriate or the auditor does not have the knowledge or ability to answer them.
An auditor can face criminal charges if he/she fails to attend the AGM or make alternative arrangements for a fitting representative of his/her firm to attend. Failure to appropriately answer a question can also lead to disciplinary action against the auditor.

The GAAP Monitoring Panel (GMP) released a summary of matters and their outcomes relating to non-compliance with accounting and related standards by listed companies on the South African Stock Exchange, the JSE. The issues of non-compliance included inter alia incorrect accounting for subsidiaries and associates, using estimates instead of actual results, faulty cash flow statements, inconsistencies between earnings and headline earnings, goodwill and restatement of comparative numbers. Of the 34 matters referred, 24 related to specific policies or line items in interim, provisional or annual financial statements, nine dealt with the entire financial statements, while one matter referred to the financial information of a prospectus.
In the worst cases, the JSE suspended two companies. Three companies had to withdraw and re-issue financial statements, while 14 revised their announcement made on the official stock exchange news service (SENS).
The other matters mostly required the companies to rectify the current or future annual financial statements sent to the shareholders. In several outcomes reference had to be made to the GMP.
The GMP also engaged with the other listed companies in the affected industries to enhance the comparability of financial reporting across the industries. While one case is still pending, there was only a single matter where the GMP and JSE required no remedial action.
The GMP is a body enacted by the JSE to investigate any matters referred to it by the Issuer Services division of the exchange. It consists of the chairman and 15 members representing preparers, auditors, academics and users of listed entities' financial statements.
In light of the current corporate laws amendment process, Ignatius Sehoole, President of the South African Institute of Chartered Accountants, cautioned legislators not to be overly enthusiastic in writing corporate governance codes into legislation. Mervyn King, author of the King Codes on Corporate Governance, also warned that it may detract non-executive directors from serving on company boards and, thus, further shrink the group of willing and competent individuals.
These usually risk adverse directors already have to deal with an enormous amount of work and responsibility, while it is believed that directors can sufficiently be held accountable for any dereliction of duty without the existence of another specific act.

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