Technical update

FASB

FASB has issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133.

The new guidance amends Statement 133 for decisions made:

• as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133
• in connection with other Board projects dealing with financial instruments, and
• regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of 'underlying' and the characteristics of a derivative that contains financing components.

The amendments included in Statement 149 are designed to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, the Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in Statement 133. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. Statement 149 amends certain other existing pronouncements, resulting in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. Copies of Statement 149 may be obtained through the FASB Order Department.

IASB

Members of the IASB voted unanimously in April in support of treating share options as expenses and measuring them according to fair or market values. The vote came after a discussion on accounting for share-based payments and public consultation on the IASB's proposals. Around 70% of respondents agreed with the principle of treating options and other share-based payments as expenses, and over 85% agreed that options should be measured at fair value. A majority of companies amongst the respondents also backed the proposed treatments.

Meanwhile, discussions continue on the complex topic of accounting for derivatives and the IASB's standard IAS 39, Financial Instruments: Recognition and Measurement. European banks have been discussing macro hedging models with the IASB in an attempt to find an accounting solution that meets the IASB's requirements for hedge accounting. Other interest groups are also having private meetings with the IASB to discuss areas of concern with the international treatment. The IASB has also been consulting on various amendments to IAS 39 and IAS 32, Financial Instruments: Disclosure and Presentation, designed to simplify the current guidance.

The IASB has published its 2003 bound volume of International Financial Reporting Standards, containing the complete text of all International Accounting Standards extant at January 2003 (IAS 1, 2, 7, 8, 10, 11, 12, 14 to 24 and IAS 26 to 41) and all associated Bases for Conclusions. The volume also includes the IFRIC Preface and Interpretations (SIC-1, 2, 3, 5-25, 27-33), IAS 39 Implementation Guidance - Questions and Answers, the IASB Framework for the Preparation and Presentation of Financial Statements, the Preface to International Financial Reporting Standards, an updated Glossary of Terms and the History of IFRSs/IASs.

The IASB has also published The Abbreviated Text of International Financial Reporting Standards (IFRSs) 2003 - a new resource for students and other readers who want a concise introduction to IFRSs. The volume contains the IASB Framework and abbreviated versions of all extant IASs. Both books can be ordered via the bookshop on the IASB's website (www.iasb.org.uk) or tel +44 (0)20 7332 2730.

IFAC

IFAC's Education Committee has issued an exposure draft revising requirements in a proposed International Education Standard (IES), Content of Professional Education Programs. An earlier ED on this topic, issued in June 2002, prescribed the primary content of professional education programs for professional accountants in three major areas: organisational and business knowledge, information technology knowledge, and accounting, finance and related knowledge. It also suggested subject matters to be included in each of these areas. The revised exposure draft includes modifications to these subject matters and indicates that they are, in fact, mandatory. It may be downloaded from the IFAC website by going to www.ifac.org/EDs.

Comments are requested by 31 July 2003, preferably by e-mail to EDComments@ifac.org, but also in writing to IFAC, 545 Fifth Ave, 14th Floor, New York, NY 10017, US, or faxed to +1 212 286 9570. The committee plans to issue the final standard in late 2003.

IFAC's Education Committee has also issued a new paper, entitled Towards Competent Professional Accountants, providing advice to professional bodies looking to adopt a competence-based education and training program. The paper identifies the objectives of the competence-based approach, defines competence, and describes different types of statements of competence.

Historically, there have been two different types of competence-based approaches to accounting education. The functional analysis approach, favoured in Australia, New Zealand, and the UK, emphasises performance outcomes of the education and training process. The second approach, adopted by the US, focuses on the capabilities, such as knowledge, skills and professional values necessary to achieve potential competence as a professional accountant. The Education Committee paper explains how the strengths of the two approaches are converging and can be blended in a unified approach.

The paper encourages professional bodies and other organisations responsible for the training of accountants to link accounting curricula more closely with workplace requirements, to help ensure that the knowledge and capabilities required of professional accountants remains relevant. The paper may be downloaded free of charge from IFAC's website at www.ifac.org/store.

IFAC's International Auditing and Assurance Standards Board (IAASB) has released an International Auditing Practice Statement (IAPS) 1014, Reporting by Auditors on Compliance with International Financial Reporting Standards (IFRSs). The practice statement provides guidance on the auditor's responsibilities when management comments on the extent to which financial statements comply with IFRSs, when there is not full compliance. It supplements guidance provided in International Standard on Auditing 700, The Auditor's Report on Financial Statements.

The IAASB has also published two exposure drafts. The first includes a proposed International Framework for Assurance Engagements and a proposed International Standard on Assurance Engagements (ISAE), Assurance Engagements on Subject Matters Other Than Historical Financial Information, to replace IASE 100, Assurance Engagements. The proposed framework defines and describes the elements of an assurance engagement and identifies those engagements to which ISAs and ISAEs apply. The proposed ISAE provides guidance to practitioners for the performance of assurance engagements on subject matters other than historical financial information, which are covered by ISAs, and where no specific ISAEs exist.

The second ED, The Special Considerations in the Audit of Small Entities, Proposed Amendment to International Auditing Practice Statement 1005, presents guidance on how audits of the financial statements of small entities differ from audits of the financial statements of other entities. It revises the current IAPS 1005 to take account of ISAs issued from March 1999 to March 2003. Comments on the EDs may be sent by 30 June 2003 to EDComments@ifac.org, faxed to the IAASB technical director at +1 212 286 9570, or mailed to the Technical Director at 545 Fifth Avenue, 14th Floor, New York, NY 10017, US.

Americas

The American Free Trade Agreement (AFTA) Committee for Co-operation on Financial Reporting Matters has published the fourth edition of Significant Differences in GAAP in Canada, Chile, Mexico and the United States. The publication was jointly prepared by staff representatives from the organisations responsible for setting accounting standards in the four countries. It identifies GAAP differences among the accounting pronouncements issued in those countries as of October 2002 as well as GAAP differences between those countries and the IASB. The English version of this publication has been published on behalf of the AFTA Committee by the Canadian Institute of Chartered Accountants (CICA). Further information is available on the CICA website (www.cica.ca).

Australia

The Financial Reporting Council (FRC)

• The FRC is still considering whether or not to open its meetings to the public in order to increase transparency in policy and decision-making.
• The FRC has agreed to develop a strategy for monitoring and reporting to the Federal Government on the AASB progress towards adoption of IASB standards from 2005.
• GAAP/Government Finance Statistics (GFS) Convergence Strategic Direction. A remit has been sent to the AASB to consider this issue. The key objective is to increase the transparency of Government financial statements by having one set of Australian accounting standards for a single set of Government reports which can be audited and compared between jurisdictions and also direct to budget statements.

The Australian Accounting Standards Board (AASB)
The foundation chairman, Keith Alfredson, retired in May as he was unable to commit to a new extended (five) year term.
The work program of the AASB is now geared towards convergence with IASB standards as from January 2005.
Five main categories of projects have been identified as follows:

• conceptual projects
• IASB standards not scheduled for change before 2005
• proposed 'improved' IASB standards scheduled to be introduced in the second quarter of 2003
• IASB standards scheduled for short term convergence (mainly with the FASB), and
• proposed 'new' IASB standards

• SAC 2, Objectives of General Purpose Financial Reporting
• SAC 3, Qualitative Characteristics of Financial Information, and
• SAC 4, Definition and Recognition of the Elements of Financial Statements.

• expose AASB 1031, Materiality, and IASB 18, Revenue, in conjunction with the IASB Framework ED
• seek comments on IAS 7, IAS 23, and IAS 41 including whether alternative treatments should be allowed
• issue a standard on IAS 38, Intangibles, after considering comments on ED 109
• issue the 'improved' IASB standards IAS 10, 17, 27, 28, 32, 33, 39 and 40 as AASB standards
• issue EDs at the same time as the IASB on IAS 1, 2, 8, 11, 12, 14, 16, 20, 31, 34, 35 and 37, and
• continue to replicate the IASB due process for IASB EDs 1 (Share-based Payment) and 2 & 3 (Business Combinations).

• IAS 7, Cash Flow Statements, ED 110
• IAS 23, Borrowing Costs, ED 111
• IAS 29, Financial Reporting in Hyperinflationary Economies, ED 112
• IAS 30, Disclosures in the Financial Statements of Banks, ED 113
• IAS 41, Agriculture, ED 114.

• consider convergence issues at whole-of-government level with an emphasis on the general government sector, and
• consider the impact on other entities/sectors involved and technical issues.

• exclude standards for budgetary reporting, and
• progress the project bearing in mind the standard setting activities of the IASB, IFAC-PSC and IMF, participate in the HoTARAC working party and form a project advisory panel.

• the issues and recommendations cover both the short and long term and were to be presented to the IASB April-May meeting, and
• only key issues are expected to be addressed by the IASB prior to 2005.

The Urgent Issues Group (UIG) of the AASB
Abstract 53, Precompletion Contracts for the Sale of Residential Development Properties, is now operable.
The Abstract requires that pre-completion sales contracts of a residential property development would be accounted for as a construction contract under AASB 1009 or AAS 11, Construction Contracts, using the stage of completion method.

UK

Financial reporting

Discussion paper issued
The ASB has published a Discussion Paper, Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities. The Discussion Paper explains how the ASB's Statement of Principles, which was published in 1999, should be interpreted in financial reporting by public benefit entities, including charities. It suggests that, in many cases, the fundamentals of accounting are the same as for profit-oriented entities although, in some areas, re-expression of the principles is required.
Comments on the Discussion Paper are requested by 1 August 2003.

UITF Abstracts
The UITF has issued a draft Abstract on Treasury Shares, following new regulations, which were laid before Parliament in April. The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 will, from December 2003, allow certain companies to purchase their own shares and hold them in treasury without cancelling them.
The UITF's proposals are consistent with International Accounting Standards and require treasury shares to be accounted for as a deduction from shareholders' funds.
At the same time, proposals have been issued to amend UITF Abstract 13, Accounting for ESOP Trusts, to bring the accounting into line with these proposals.
The ASB has published proposals on accounting for emission rights. The UK's and several other governments have been developing schemes to encourage emissions of greenhouse gases. Participants in some schemes accept a cap on their emissions and receive tradable allowances to emit pollutants up to the cap; these allowances may be allocated free of charge, or participants may be required to pay for them. Participants can also buy and sell allowances in the market. The UK's Emissions Trading Scheme was launched in 2002; an EU-wide scheme will start in 2005. At present, accounting standards do not provide guidance on the accounting for these schemes.
The proposals include a draft UITF Abstract that closely follows equivalent proposals from the IASB's International Financial Reporting Interpretations Committee (IFRIC). The intention is that the finally agreed international approach would be introduced into UK accounting.
Comments on the proposals are invited by 14 July.

Cutting red tape
Employers trying to adapt to the constant tide of new employment regulations find their task complicated by the regularity with which law changes are introduced. The secretary of state for trade and industry has now announced that there will be just two set commencement dates for domestic employment regulations for which the DTI is responsible. The dates will be 6 April and 1 October. For European legislation, as from January 2004, the DTI will plan the 'coming into force' dates for European directives where deadlines have already been set, but which have not yet been implemented, on a case-by-case basis. The DTI will aim to negotiate three-year transposition deadlines for future European directives so that it will have enough time to consult and still utilise the two set dates. From 2004, the DTI will publish an annual statement of forthcoming employment regulations every January. There is also an e-mail alert system on the DTI website to which users can subscribe. The revised financial limits for awards in the employment tribunal, however, will continue to come into force on 1 February each year.

Equal pay questionnaires
The regulations making provision for a questionnaire in equal pay cases came into force on 6 April 2003. The purpose of the questionnaire is to help individuals who believe they may not have received equal pay to request key information from their employers to establish whether this is the case and, if so, the reasons why. The questionnaire will operate in much the same way as questionnaires in other areas of discrimination law. There is, however, a issue in equal pay cases which seems likely to give rise to difficulties. It concerns the extent to which an employer can, or should, disclose information about any prospective comparator's pay. Employers will be anxious to comply with the legislation on data protection and also the common law relating to breach of confidence. Commentators have suggested that the answer may lie in legislative amendments clarifying when the equal pay questionnaire procedure takes precedence over the rules on data protection and confidentiality, but until the Government addresses this important matter, the position will remain unclear.

Flexible working
A scheme involving ACAS arbitration in cases concerning the right to request flexible working came into force on 6 April 2003. The scheme is supposed to be a confidential, informal, reasonably quick and non-legalistic alternative to proceedings in the employment tribunal. A similar scheme in the unfair dismissal jurisdiction has so far failed to achieve success. It may be, however, that cases concerning a request for flexible working are more suitable for arbitration than unfair dismissal claims.

Time limits
London Borough of Southwark v Afolabi is a case which saw a remarkable increase allowed in the time limit for bringing a claim of race discrimination. Almost nine years after the expiry of the statutory time limit, the applicant presented a complaint that the employers unlawfully discriminated against him on the ground of race when they failed to appoint him to an auditor's post. But a tribunal exercised its discretion to consider the claim and the Court of Appeal upheld that ruling.

Disciplinary procedures
In Panama v London Borough of Hackney, a tribunal ruled that, although an employer acted unfairly in dismissing the applicant prior to a disciplinary hearing, she was not entitled to compensation because the overwhelming probability was that, if the disciplinary proceedings had continued, she would have been found guilty of gross misconduct and summarily dismissed. The Court of Appeal decided that this was an error of law. In asking the hypothetical question 'what would have happened at the disciplinary hearing?', a tribunal must not only ask itself what conclusion a hearing would have reached, but also whether a dismissal would be fair or unfair.

Proof of discrimination
Shamoon v Chief Constable of the Royal Ulster Constabulary is an important House of Lords' decision which highlights the broad scope of discrimination law. The House of Lords ruled that a chief inspector had suffered a 'detriment' when the right to carry out appraisals was removed from her. Thus she suffered unlawful discrimination. An earlier ruling, that in order to constitute a detriment there must be some physical or economic consequence which is material and substantial, was incorrect.

Taxation

Special commissioners remit
Statutory Instrument SI 2003/968 allows appeals under s320 Proceed of Crime Act 2002 to be made to the special commissioners.

Hold over relief
Until 5 April 2003, the definition of 'trading company' and 'holding company of a trading group', which were used for hold over relief purposes, were those which applied for retirement relief purposes. Retirement relief ceased to apply after 5 April 2003 and the definitions used for hold over relief with effect from 6 April 2003 are those given for taper relief. The legislation to give effect to these changes was included in FA 98 together with the provisions for phasing out retirement relief.
Similar changes of definition are also being made for the purpose of roll over relief under s227 TCGA92 and losses on loans to traders under s253 TCGA92.

PAYE regulations rewrite
The PAYE regulations have been completely rewritten and a draft can be viewed on the Inland Revenue website at www.inlandrevenue.gov.uk.
A detailed commentary and partial regulatory impact have also been published.

Double taxation agreements
The UK Canada double taxation convention has now been signed. It will enter into force when legal formalities have been completed.
The US/UK treaty came into force as follows:

• corporation tax, 1 April 2003
• income tax and capital gains tax from 6 April 2003
• withholding taxes from 1 May 2003.

• Taiwan (SI 2002/3137)
• South Africa (SI 2002/3138)
• Jordan (SI 2001/3924).

Tax credits
Further regulations have been made as follows:

• the Tax Credits Act 2002 (Commencement No. 3 and Transitional Provisions and Savings) Order 2003 (SI 2003/938) and the Tax Credits Act 2002 (Commencement No. 4 and Transitional Provisions and Savings) Order 2003 (SI 2003/962) set out the commencement dates for various provisions in the Tax Credits Act 2002.

Child benefit and guardians allowance
The Inland Revenue has issued a direction on Internet filing. Essentially the direction allows Internet filing, provided that approved software is used.

Voluntary NI contributions
The time limit for the payment of voluntary contributions in respect of the years 1996-7 to 2000-1 has been extended to 5 April 2008.

NI avoidance by shipping companies
The Government is to take steps to prevent shipping companies operating in UK waters avoiding employers NI by transferring employees' contracts of employment to companies outside the UK.
The Inland Revenue takes the view that mariners were always covered by the legislation p9, sch 3 - Social Security (Categorisation of Earners) Regulations 1978 - but in view of previous advice to employers that it did not apply, it will not seek to collect employers' NI until 6 October 2003.

Finance Bill 2003
A number of resolutions were passed at the end of the Budget debate which allow certain measures to take effect before the Finance Bill receives the Royal Assent. The relevant dates are those announced in the Budget speech.