Technical update

FASB

FASB has posted to its website a proposed Interpretation to clarify some of the provisions of Interpretation No. 46, Consolidation of Variable Interest Entities, and to exempt certain entities from its requirements. The proposal is being issued in response to input received from constituents regarding certain issues arising in implementing Interpretation 46. The proposed clarifications and modifications would apply in financial statements for the first period ending after 15 December 2003. The document is available on the FASB's website (www.fasb.org).

FASB issued Interpretation 46 in January 2003 to improve financial reporting for variable interest entities, off-balance sheet structures that often have highly complex arrangements. The objective of Interpretation 46 is to improve financial reporting by companies involved with variable interest entities by requiring that a variable interest entity be consolidated by the company that is subject to a majority of the economic risks and/or rewards related to that entity.

FASB deferred to the fourth quarter from the third quarter of 2003 the implementation date for Interpretation 46, though this deferral only applies to variable interest entities that existed prior to 1 February 2003. FASB decided that additional time was needed for companies and their auditors to complete the evaluation of existing variable interest entities and to determine which of those entities were required to be included in their consolidated financial statements. Public companies are required to complete their evaluations of variable interest entities that existed prior to 1 February 2003, and the consolidation of those for which they are the primary beneficiary for financial statements issued for the first period ending after 15 December 2003. For calendar year companies, consolidation of previously existing variable interest entities is required in their 31 December 2003 financial statements.

The requirements of Interpretation 46 applied immediately to variable interest entities created after 31 January 2003, and those situations were not subject to the deferral.

IASB

The trustees of the International Accounting Standards Committee (IASC) Foundation have initiated an intensive review of the IASC Foundation's constitutional arrangements. The IASC Foundation Constitution sets out the operating procedures of the IASC Foundation and the International Accounting Standards Board, and requires five-yearly reviews of the Constitution. The trustees emphasised their willingness to examine any aspect of the Constitution and are consulting a wide range of organisations. To co-ordinate the process, the trustees have established an internal committee, chaired by Paul A Volcker.

IASB chairman, Sir David Tweedie, has presented a report to the trustees of the IASC Foundation summarising the IASB's standard setting process and the procedures that have been established to ensure its due process is followed and that appropriate consultation takes place. The report also outlines the IASB's current work programme, including convergence projects and work related to small and medium-sized entities.

The full report is available via the IASB's website (www.iasb.org.uk).

IFAC

The Council of the International Federation of Accountants (IFAC) unanimously approved, in November, a set of reforms designed to strengthen international audit standard-setting processes, achieve convergence to international standards and ensure that the international accountancy profession is responsive to the public interest. The reforms, the most comprehensive in IFAC's history, have been unanimously supported by international regulators. The reforms provide for a more transparent standard setting process with greater public input and the establishment of a Public Interest Oversight Board (PIOB) to oversee IFAC's standard setting activities, particularly with respect to auditing, assurance, ethics, and independence. The PIOB will also oversee IFAC's compliance activities. The reforms also provide a means for ongoing dialogue between regulators and IFAC through the establishment of an IFAC Leadership Group and a Monitoring Group comprised of regulators.

IFAC plans to move ahead swiftly on the reforms. The 10 members of the PIOB, including the chair, will be named in early 2004. These individuals will be appointed by regulatory and public interest groups involved in the development of the reform proposals: IOSCO, the Basel Committee on Banking Supervision, the European Commission, World Bank, and the International Association of Insurance Supervisors.

IFAC has released six International Education Standards (IESs) that establish the global benchmarks for education and development for professional accountants. Developed by IFAC's Education Committee, the standards are designed to achieve quality and consistency in global accounting education. They prescribe the essential elements of education needed to become a professional accountant and the ongoing education requirements necessary to remain competent. All IFAC member bodies are expected to comply with the standards from 1 January 2005.

Titles of the IESs are as follows:

• IES 1, Entry Requirements to a Program of Professional Accounting Education
• IES 2, Content of Professional Accounting Education Programs
• IES 3, Professional Skills
• IES 4, Professional Values, Ethics and Attitudes
• IES 5, Practical Experience Requirements, and
• IES 6, Assessment of Professional Capabilities and Competence.

An introduction and framework have been issued with the standards and should be read in conjunction with them. These documents explain the scope of issues covered in the standards and the ways they may be applied to the education programs of IFAC member bodies.

The standards, introduction and framework may be downloaded from the IFAC website (www.ifac.org/education).

IFAC's Education Committee has also released an exposure draft, Continuing Professional Development: A Program of Lifelong Learning and Continuing Development of Professional Competence. The ED prescribes mandatory continuing professional development (CPD) for all professional accountants. It makes it clear that the responsibility to maintain professional competence applies to all professional accountants, including those working for accounting firms, corporations, small or medium enterprises, public sector organisations or in other environments. All IFAC member bodies are expected to comply with the standard from the proposed effective date of 1 January 2006.

The standard advocates a broader view of CPD, one that encompasses a wider range of learning and development opportunities that assist professional accountants to maintain competence. It focuses on the need for CPD to be relevant to the accountant's professional responsibilities and introduces the concepts of CPD as verifiable and measurable learning activities and outcomes. The ED can be downloaded from IFAC's website (www.ifac.org/EDs).

IFAC's International Auditing and Assurance Standards Board (IAASB) has released new guidance to assist auditors in applying International Standards on Auditing (ISAs) to smaller entities. The new guidance is included in an updated version of International Auditing Practice Statement (IAPS) 1005, The Special Considerations in the Audit of Small Entities.

Developed with the input of IFAC's Ethics Committee and Small and Medium Practices (SMP) Task Force, this IAPS explains how audits of the financial statements of small entities differ from audits of the financial statements of other entities. It is intended to be used by practitioners who already know how to conduct an audit in accordance with ISAs. Specifically, the new IAPS has been revised to take account of ISAs issued from March 1999 to March 2003. The IAASB agreed that new ISAs issued after March 2003 would, whenever necessary, address SMP considerations directly within the standards themselves. The IAPS does not establish any new requirements for the audit of small entities, nor does it establish any exemptions from the requirements of ISAs. All audits of small entities are to be conducted in accordance with ISAs.

IAPS 1005 may be downloaded free of charge from the auditing and assurance section of the IFAC on-line bookstore (www.ifac.org/store).

The IAASB has also released new standards to improve audit quality worldwide by requiring auditors to perform better risk assessments. On an international level, the new requirements represent significant changes to the standards governing audits of financial statements and provide the underpinnings for other IAASB projects currently under development.

The new International Standards on Auditing (ISAs) are as follows:

• ISA 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
• ISA 330, The Auditor's Procedures in Response to Assessed Risks, and
• ISA 500, Audit Evidence.

In addition, the IAASB has amended ISA 200, Objective and General Principles Governing an Audit of Financial Statements, and the expression of the audit risk model.

In addition to other new requirements, the auditor is now required to:

• perform audit procedures to obtain a broader understanding of the entity and its environment, including its internal control
• make assessments of the risks of material misstatements in all cases and perform more rigorous assessments, and
• design and perform further audit procedures that are linked to the assessed risks.

The changes are effective for audits of financial periods beginning on or after 15 December 2004.

EU

The complete endorsed International Financial Reporting Standards have been published in each of the official languages of the European Community in the Official Journal of the EU (Volume 46, L261, 13 October 2003.) All existing IASs and SICs are included, except for the financial instruments standards (IAS 32 and 39) and their related interpretations (SIC 5, 16 and 17) because they are currently being revised by the IASB. The Official Journal can be accessed on-line via www.europa.eu.int/eur-lex/en/oj/index.html.

EFRAG

EFRAG has completed its due process regarding a number of IASB Exposure Drafts:

• ED 4, Disposal of Non-current Assets and Presentation of Discontinued Operations
• ED 5, Insurance Contracts
• ED of Proposed Amendments to IAS 39, Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk, and
• IFRIC Draft Interpretation 2, Changes in Decommissioning, Restoration and Similar Liabilities.

On ED 4, Disposal of Non-current Assets and Presentation of Discontinued Operations, EFRAG has told the IASB that it has important reservations with a number of elements of the exposure draft. For example, EFRAG does not support the proposed measurement requirement for non-current assets classified as held for sale. It believes that depreciation should cease only when an asset is retired from active use. EFRAG is concerned that the proposed standard would lead to inappropriate accounting especially when an entity decides to dispose of a division. EFRAG also found ED 4's measurement proposals confusing and sometimes inconsistent. It recommends that the IASB not adopt any ED 4 measurement requirements and incorporate any held for sale specific presentation and disclosure requirements in the existing standards ((draft) IAS 16, Property, Plant and Equipment, IAS 35, Discontinuing Operations, (draft) IAS 36, Intangible Assets and (draft) IAS 38, Impairment of Assets) instead of adopting a separate standard. It believes such an integrated approach would contribute to the understandability of IFRS in general.

On ED 5, Insurance Contracts, EFRAG has written to the IASB to say that if this were to be the final standard, it would have to 'regard it as inadequate' because it permits the use of a variety of accounting policies which conflict with both the framework and the hierarchy, which form the basis for IFRSs. EFRAG is also concerned that the ED permits the use of non-uniform accounting policies for the insurance liabilities of subsidiaries which are consolidated within one group, which would result in little consistency between accounting policies used by different companies and a lack of comparability.

Concerning IFRIC Draft Interpretation 2, Changes in Decommissioning, Restoration and Similar Liabilities, EFRAG notes that the approach proposed is inconsistent with the way in which certain existing international standards are universally interpreted. Therefore, EFRAG says it does not support the IASB's proposed approach.

Commenting on the IASB's ED of Proposed Amendments to IAS 39, Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk, EFRAG says it appreciates the IASB's efforts in exploring whether and how IAS 39 can be amended to enable fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk, and strongly encourages the IASB to issue amendments of IAS in that respect. However, EFRAG questions whether the IASB's proposals go far enough in acknowledging the difference between a portfolio approach versus an individual item approach, which becomes particularly important in cases where entities have a net risk position of core deposits.

UK

Financial reporting

ASB issues standard on revenue recognition
In a bid to address its concerns over questionable practices on reporting turnover, the ASB has issued an Application Note to FRS 5, Reporting the Substance of Transactions. The Application Note sets out the basic principles of revenue recognition, and specifically focuses on five types of arrangement which give rise to turnover and have been subject to differing interpretations in practice. These are long-term contractual performance, separation and linking of contractual arrangements, bill and hold arrangements, sales with right of return, and presentation of turnover as principal or as agent.
According to the Application Note, entities should report turnover only when they have performed in accordance with the contractual arrangements with their customers. Guidance is also given on the measurement of turnover where there are deferred payment terms or where there is a significant risk about the customer's ability to pay.
The principles and specific requirements of the standard are consistent with IAS 18.

UITF Abstract published
The UITF has published Abstract 37, Purchases and Sales of Own Shares to coincide with changes to the Companies Act 1985, which allows listed companies, from December 2003, to purchase their own shares and hold them in treasury without cancelling them. The Abstract, which adopts the accounting treatment required by IAS, requires that a company's holdings of its own shares be accounted for as a deduction in arriving at shareholders' funds. Purchases and sales of own shares should be shown as changes in shareholders' funds. And profits or losses should not be recognised in respect of dealings in a company's own shares.
The Abstract is applicable for accounting periods ending on or after 23 December 2003.

Employment law

Compromise agreements
Compromise agreements are widely used by employers seeking to part company with employees on terms that involve the employee in agreeing not to pursue claims to an employment tribunal. Typically, in return for 'drawing a line' under an employment relationship, the employer pays an agreed sum to the employee. It is not unusual for a compromise agreement to include a provision requiring the employee to repay part or the whole of the agreed sum if he or she subsequently brings a claim against the employer. A question has arisen as to whether such a 'repayment clause' renders the whole of the payment subject to tax. This is important, because often employees are incentivised to enter into compromise agreements by the prospect of receiving a payment that is, at least in part, tax-exempt. The Inland Revenue has now provided welcome confirmation that the existence of a 'repayment clause' in such an agreement will not in itself generally render all payments made under the agreement susceptible to taxation. Unsurprisingly, the Inland Revenue retains the right to challenge the position in exceptional circumstances. An example might be where the sum paid is clearly in excess of a reasonable settlement figure.

Informing employees
In Ibekwe v London General Transport Services Ltd, the Court of Appeal ruled that an employee was not entitled to compensation for loss that resulted from the employer's alleged failure to inform him of his option to transfer accrued pension benefits to a new pension scheme. Circumstances may arise where an employer is under an implied duty to take reasonable steps to bring a term of a contract of employment to an employee's attention, so that he or she might be able to benefit. On the facts of Ibekwe, however, this was not relevant. The employee's option to make an enhanced transfer was not part of his contract. Moreover, the employer had taken proper steps to draw the option to the employee's attention.

TUPE
The Employment Appeal Tribunal has confirmed that work performed by a single employee is capable of being transferred under the regulations on transfer of undertakings (TUPE). In Dudley Bower Building Services Ltd v Lowe and others, the EAT said that there is no reason in principle why the work performed by a single person cannot amount to a stable economic entity transferable under TUPE. This decision is in line with an earlier European Court ruling in the Christel Schmidt case. It has subsequently been suggested that a subsequent European Court ruling in the Suzen case imposed a requirement that there must be a 'grouping of persons' for there to be a TUPE transfer. This is not so; the Christel Schmidt principle remains good law.

Taxation

S660A ICTA 88
In the last issue we noted that professional bodies, including ACCA, had met the Inland Revenue to discuss the application of the settlement provisions to husband and wife companies and various other company and partnership situations.
Since then strong representations have been made on the behalf of all the professions and the Inland Revenue has responded. Unfortunately, there has been no meeting of minds and it seems likely that the position will have to be resolved by a series of tax cases.
Until that happens self assessment taxpayers would be wise to ensure that the Inland Revenue has been made aware of all relevant facts.

Time limits for tax repayment
Dawn Primarolo has announced a change in legislation which will reverse the decision in the Deutsche Morgan Grenfell (DMG) case and reinstate the prior practice. That is the period during which repayment of tax overpaid due to a mistake of law can be claimed is six years prior to the year of claim, thus providing a mirror image to the Inland Revenue's normal time limit of six years to claim tax underpaid.
The legislation will be included in Finance Bill 2004 and is effective from 8 September 2003. The draft clauses have been published and can be accessed on the Inland Revenue website (www.inlandrevenue.gov.uk).

CGT - gifts relief
Legislation is to be introduced in SA 2004, which amends S165 TCGA 92 (gifts of business assets). S90 FA 2000 was intended to prevent holdover relief for business assets from applying where the asset was shares or securities and the recipient was a company. The change was effective from 9 November 1999, when holdover relief was abolished for gifts of shares to companies and was achieved by an amendment to S165 TCGA 92. Because of an oversight, the legislation left a loophole which meant that the amendment was effectively repealed with effect from 6 April 2003 when the retirement relief provisions ceased to apply. This will now be restored with effect from 21 October 2003.

Manufactured payments
A loophole has been closed with effect from 6 November 2003. New legislation will ensure that a tax deduction for a manufactured dividend payment can only be set against a corresponding taxable dividend receipt. This prevents a tax advantage from being obtained from the mismatch of rates.

On-line PAYE filing
The Inland Revenue is writing to 1.6m taxpayers advocating on-line year end filing of PAYE Returns.

Double taxation agreements
- Discussions are to take place regarding a comprehensive new double taxation agreement between the UK and Bahrain.
- The double taxation agreement with the Republic of Mauritius has entered into force.
- A protocol amending the agreement with New Zealand has been signed.
- There will be negotiations with Greece.

Publications and Guides, etc
Publications include the following:
- The International Manual
- The Business Income Manual
- The Income Tax Self Assessment Manual
- National statistics on corporation tax and individual wealth
- An updated list of registered community amateur sports clubs
- IHT 18, Inheritance Tax - Foreign Aspects (an updated version)
- Detailed proposals for the child trust fund
- Special arrangements for the administration of stamp duty land tax
- SDLT60 Certificate that no land tax transaction return is required
- Guidance on S17 and 18 TMA 70
- Notes on authorised unit trusts and open ended investment trusts
- Guidance and forms relating to the non-resident landlords scheme
- Leaflet A01, The Adjudicators Office
- Leaflet ED 171 relating to Voluntary NICs
- A list of Forms for Stamp Duty Land Tax
- An amended guide to the community investment tax relief scheme
- Issues of the Employers Bulletin
- C0P 26 - What Happens if We Have Paid you Too Much Tax Credits.

Statutory instruments
- The Insurance Companies (Taxation of Reinsurance Business) (Amendment No. 2) Regulations 2003 (SI 2573/2003). The regulations amend the Insurance Companies (Taxation of Reinsurance Business) Regulations 1995 (SI 1730/1995)
- The Double Taxation Relief (Manufactured Overseas Dividends) (Revocation) Regulations 2003 (SI 2581/2003). The regulations revoke the Double Taxation Relief (Taxes on Income) (General) (Manufactured Overseas Dividends) Regulations 1993 (SI 1957/1993)
- SI 2718/2003 - provides for electronic delivery of certain information in relation to petroleum revenue tax
- The Income Tax (Pay As You Earn) Regulation 2003 (SI 2682/2003) rewrites the PAYE Regulations with effect from 6 April 2006
- The Individual Savings Account (Amendment) Regulations 2003 (SI 2747/2003) and the Personal Equity Plan (Amendment) Regulations 2003 (SI 2748/2003) amend the ISA and PEP rules to allow shares or units in UCITS schemes to be components with effect from 17 November 2003
- The Income Tax (Manufactured Overseas Dividends) (Amendment) Regulations 2003 (SI 2582/2003) amend the Income Tax (Manufactured Overseas Dividends) Regulations 1993 (SI 2004/1993)
- The Insurance Companies (Taxation of Reinsurance Business) (Amendment No.3) Regulations 2003 (SI 2642/2003) correct an error in SI 2573/2003)
- The Non-resident Insurance Companies Regulations 2003 (SI 2714/2003) modify the effect of S11AA ICTA 88 (which was inserted by FA 2003)
- The Tax Credits (miscellaneous amendments No. 2) Regulations 2003 (SI 2815/2003).
This makes amendments to all of the following Tax Credit Regulations:
- The Tax Credits (Definition and Calculation of Income) Regulations 2002 (SI 2006/2002)
- The Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 (SI 2005/2002)
- The Child Tax Credit Regulations 2002 (SI 2007/2002)
- The Tax Credits (Income Thresholds and Determination of Rates) Regulations 2002 (SI 2008/2002) and
- The Tax Credits (Claims and Notifications) Regulations 2002 (SI 2014/2002)
- The Stamp Duty and Stamp Duty Land Tax (Variation of Finance Act 2003 (No. 2) Regulations 2003 (SI 2816/2003) revoke and supersede (SI 2760/2003), which contained errors in the formula for the computation of lease duty and makes various amendments to FA 2003
- The General Insurance Reserves (Tax) (Amendment) Regulations 2003 (SI 2862/2003), which come into force on 5 December 2003, amend SI 1757/2001
- The Stamp Duty Land Tax (Consequential Amendment of Enactments) Regulations 2003 (SI 2867/2003)
- The Stamp Duty and Stamp Duty Land Tax (Consequential Amendment of Enactments) Regulations 2003 (SI 2866/2003).

Directions
Inland Revenue directions relating to Regulations 42A (1) and 46ZC (1) (b) of the Employment regulations 1993 (SI 7441/1993) have been made as follows:
- The methods of electronic communication approved for the purposes of making payments under regulation 42A (1) of the regulations are the services known as BACS direct debit, CHAPS, debit card over the Internet ('BillPay'), Paymaster, Bank Giro and Alliance and Leicester Commercial Bank.
- The methods of electronic communication approved for the purposes of transmitting or delivering specified information either by the employer or by another person on his behalf, in accordance with Regulation 46ZC(1)(b) of the regulations, are the Internet services provided through PAYE Online for Agents.
The specified date in each case is 26 October 2003 for the year ended 2004/5.
Directions have also been made under the Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) Regulations 2003 (SI 2495/2003).

Tax Bulletin 67
In Tax Bulletin 67, the Inland Revenue has set out its views on a number of matters as follows:
- Mansworth v Jelley - the Inland Revenue has now changed the view put forward in March 2003 and considers that tax payers who have already settled claims to capital losses under self assessment are not barred from claiming increased losses following the Mansworth v Jelley decision, provided that they are within normal time limits.
- Termination payments - the view expressed by the Inland Revenue is that the existence of a 'repayment clause' in a compromise agreement made at a termination will not give rise to a charge to tax except in very exceptional cases.

R (on the application of Barnett) v IRC
In this case the taxpayer sold one property and bought a replacement property more than three years later. He attempted to claim rollover relief, although the replacement property was not acquired within the statutory time limit and argued that the Inland Revenue should exercise its discretion in his favour because the purchase was delayed by planning difficulties.
The High Court refused the taxpayer application for judicial review on the grounds that the discretion to extend the time was expressly vested in the Inland Revenue who could exercise it as it wished.

IRC v Laird
In this case the Laird Company (L) had acquired all the shares of another Company (S).
No group election was in force so that when (S) paid a dividend to (L) it accounted to the Inland Revenue for ACT and claimed a set off against its own mainstream liability which resulted in a repayment. (L) Ltd paid a dividend to shareholders and set off the ACT paid on the dividend received against the ACT due on the dividend paid.
The Inland Revenue raised an assessment to corporation tax on (L) on the grounds that the dividend payment was a transaction in securities within S709 ICTA 1988.
The Lords discharged the assessment on the grounds that whilst a dividend related to securities it was not of itself a transaction in securities.

Netherlands tax case
The Netherlands recently lost a case in the European Courts of Justice when it fought to restrict the ability of a Netherlands based holding company to deduct costs relating to a subsidiary established in another EC jurisdiction.
The Court took the view that the need to prevent the diminution of tax receipts could not justify a restriction on freedom of establishment.

VAT

Invoicing changes
All EU based businesses will be affected by changes being made to the requirements for VAT invoicing, which came into force on 1 January 2004. What will the changes mean for UK businesses?

Background
The changes implement the EC Invoicing Directive (2001/115/EC). In the UK the changes have been the subject of extensive consultation with business and will shortly be introduced by a statutory instrument amending the provisions of the VAT regulations. The new regulations will be made under S24 of the Finance Act 2002, which came into force following the making of an Appointed Day Order on 27 November 2003.

Changes
The main changes are:
- an additional requirement to show the unit price on a VAT invoice
- changes to the sterling requirements - fewer items will have to be shown in sterling
- an increase in the upper limit for simplified retailer's invoices from £100 to £250 including VAT
- removal of the need to obtain Customs' approval to self-bill, provided the conditions for self-billing outlined in VAT regulations and VAT notices are met, and
- changes to the arrangements for electronic invoicing.
There will no longer be a mandatory requirement for VAT invoices to show the type of supply or the amount of VAT charged at each separate rate, but businesses may continue to show these data elements on their invoices if they want to.
The requirement to include unit price on an invoice applies to countable goods or services. For services the countable element might be, for example, an hourly rate or a price for standard services. If the supply cannot be broken down into countable elements, then the total tax exclusive price will be the unit price.
Customs says it will apply a light touch for a transitional period of 12 months, so invoices in the old format (i.e. without a unit price) will continue to be acceptable until 31 December 2004. This will also give businesses time to adjust to the revised procedures for self-billing and electronic transmission and storage of VAT invoices.