Technical update

IASB

The IASB has turned its attention to improving accounting practices in the oil, gas and mining sectors, publishing exposure draft 6, Exploration for and Evaluation of Mineral Resources. The ED proposes guidance for entities in the extractive industries that will be expected to comply with International Financial Reporting Standards (IFRSs) from 2005. At present no IFRS applies to such entities.

The definition of exploration for and evaluation of mineral resources distinguishes exploration and evaluation expenditures from other expenditures that may be regarded as similar (for example, research expenditures). The proposed IFRS would permit an entity to continue the accounting policies applied in its most recent annual financial statements for exploration and evaluation expenditures, including the recognition and measurement of exploration and evaluation assets. In addition, it would permit an entity to use an alternative level of aggregation for exploration and evaluation assets when testing such assets for impairment in accordance with the revision of IAS 36, Impairment of Assets, proposed in an exposure draft in December 2002. The ED also sets out indicators of impairment for exploration and evaluation assets.

The proposed IFRS requires disclosure about: (a) the amounts in the entity's financial statements that arise from exploration and evaluation expenditures; and (b) the level at which the entity assesses exploration and evaluation assets for impairment.

The proposed effective date for the IFRS is 1 January 2005. Earlier application would be encouraged.

ED 6 marks only the initial phase of the IASB's project on extractive industries. The IASB will subsequently address broader conceptual and practical issues related to accounting in the extractive industries generally. These will be the subject of a research project commissioned by the IASB from a group of national standard setters from Australia, Canada, Norway and South Africa.

The IASB invites comments on the exposure draft by 16 April 2004.

Copies of ED 6 (ISBN 1-904230-39-3) are freely available from the IASB's website (www.iasb.org).

The International Financial Reporting Interpretations Committee (IFRIC) has released two Draft Interpretations: D3, Determining Whether an Arrangement Contains a Lease, and D4, Decommissioning, Restoration and Environmental Rehabilitation Funds.

The proposed Interpretation D3 contains guidance on determining whether arrangements that do not take the legal form of a lease (e.g. some take-or-pay contracts) should, nonetheless, be accounted for in accordance with IAS 17, Leases. The proposed Interpretation D4 addresses the accounting to be adopted by entities that contribute to funds used to help meet decommissioning costs or environmental rehabilitation costs.

Introducing the draft Interpretations, Kevin Stevenson, IFRIC chairman, said: 'D3 clarifies that the leasing Standard has wider applicability than simply those agreements specifically described as leases. For example, it proposes that elements of some supply contracts or outsourcing arrangements should be accounted for as leases. One important consequence of this will be significantly increased disclosures about these types of transactions, because the disclosures for leases, even operating leases, are reasonably demanding. At present there is little required disclosure for these transactions when they are not viewed as leases.'

The draft Interpretations are freely available from the IASB's website. Both proposals are open for public comment until 19 March 2004.

EU

The EU said in February that it would not accept the IASB's International Accounting Standards on financial instruments (IAS 32 and IAS 39) unless agreement could be reached between the IASB and the European Commission. The financial instruments standards, which would force companies to account for derivative gains or losses, have aroused strong opposition from French banks and insurers in particular.

The Commission fears IAS 32 and IAS 39 will increase stock market volatility. It has been in regular negotiation with the IASB on the subject, and the IASB has also been consulting extensively with the banking world. If the EC cannot be convinced by the IASB, the derivatives standards may yet require further amendment.

However, the US Securities and Exchange Commission has warned that attempts by the EC to water down the financial instruments standards could endanger global convergence. Donald Nicolaisen, the SEC's chief accountant, has warned that further concessions in IAS 39 over the rules on derivatives could damage attempts to align IAS with US GAAP.

IFAC

IFAC's Public Sector Committee (PSC) has issued Invitations to Comment (ITCs) on two critical financial reporting issues for governments: Accounting for Social Policies of Governments and Revenue from Non-Exchange Transactions (Including Taxes and Transfers).

Accounting for Social Policies of Governments focuses on government obligations to account for the social benefits they provide. It addresses the financial reporting consequences of a government's actions in providing a wide range of social benefits to individuals and organisations and their undertakings to provide benefits in the future. This includes goods and/or services provided for collective and individual consumption and cash transfers to individuals, such as pensions and unemployment and similar benefits. It also considers the financial reporting consequences of undertakings governments may make to provide benefits in the future.

Revenue from Non-Exchange Transactions deals with key public sector issues, such as the financial reporting for tax revenues and transfers, including grants, donations, appropriations, and gifts. The ITC proposes adoption of an assets and liabilities approach to recognition and measurement of revenue from non-exchange transactions.

Comments are requested by 30 June 2004. Responses will be considered as input to the preparation of an exposure draft of an IPSAS dealing with these issues. Responses may be e-mailed to publicsectorpubs@ifac.org, faxed to +1 212 286 9570 or mailed to the attention of the Technical Director, Public Sector Committee, IFAC, 545 Fifth Avenue, 14th Floor, New York, NY 10017.

IFAC's PSC has also released two documents: Study 14 (2nd Edition), Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, and an Occasional Paper, The Governmental Accounting System in Argentina.

The second edition of Study 14 includes comment on the implications of new standards and exposure drafts issued by the PSC and notes other recent developments that impact on financial reporting by public sector entities. Available in electronic form only, it also features live links to relevant resources.

The Occasional Paper on The Governmental Accounting System in Argentina describes the major reforms affecting the Federal Government of Argentina and the Governmental Accounting System in its migration to accrual accounting. It provides background to governmental reporting in Argentina and traces the steps taken in the development and implementation of governmental financial administration in Argentina from 1993, following the government's decision to prepare its financial statements on the accrual basis.

Both documents can be downloaded free of charge from IFAC's on-line bookstore (www.ifac.org/store).

IFAC's International Auditing and Assurance Standards Board (IAASB) has issued a revised 'Assurance Framework' and an International Standard on Assurance Engagements - (ISAE) 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. The move follows from the increasing demand for assurance reports in areas such as environmental, social and sustainability reports, information systems, internal control, corporate governance processes and compliance with grant conditions.

The framework defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which International Standards on Auditing (ISAs) and ISAEs apply. It provides a frame of reference for practitioners and others involved with assurance engagements, such as those engaging a practitioner and the intended users of an assurance report.

ISAE 3000 establishes basic principles and essential procedures for all assurance engagements other than audits or reviews of historical financial information covered by ISAs. The standard is effective for engagements where the assurance report is dated on or after 1 January 2005. Existing ISAE 100, Assurance Engagements, will be withdrawn once ISAE 3000 is in effect.

As the provision of broader assurance services is an evolving field, the IAASB intends to keep the practical implementation of the framework and ISAE 3000 under review, and invites feedback from practitioners and others on their experience with applying them.

A meeting of more than 40 global representatives of the accountancy profession, convened by the International Federation of Accountants in February, has supported action to strengthen the profession and corporate governance.

The group agreed to proceed with the following:

• a global review of corporate governance practices, recognising the need to strengthen key areas of corporate oversight. Building on other work done in this area by various international groups, the project would involve the review of current standards and guidelines adopted around the world to ensure that they reflect the role of the audit and the responsibilities of professional accountants in business.
• co-ordination of ongoing IFAC, Forum of Firms, and IFAC member body initiatives to improve the quality of auditing and accounting and enhance the credibility of financial reporting.
• encouragement of national accountancy institutes to develop action plans to implement recommendations in IFAC's independent Task Force Report, Rebuilding Public Confidence in Financial Reporting (The Credibility Report), issued in 2003.

EFRAG

The European Financial Reporting Advisory Group (EFRAG) has welcomed the Draft Standard No 2 on Financial Information, Co-ordination of Enforcement Activities, issued by the Committee of European Securities Regulators (CESR). EFRAG says that co-ordination of enforcement practices throughout Europe is essential to achieve uniform financial reporting. It agrees with CESR's proposals to harmonise the work of all national enforcers, including non-CESR members.

EFRAG expresses concern, however, about the impact of pre-clearances in the enforcement arena. It says that a practice of pre-clearance operating in different countries poses a threat to uniform interpretation and a risk of regulatory arbitrage as companies listed in different countries choose where to seek pre-clearance. To avoid unnecessary and inappropriate applications for pre-clearance and, in particular, to preserve among both preparers and auditors a sense of personal, professional responsibility, EFRAG believes that companies, together with their auditors, should always be encouraged to make their own assessment of the proper application of IFRSs. EFRAG also calls for CESR to clarify that, although enforcement decisions form a precedent, that precedent would be overruled by any subsequent standard or IFRIC interpretation or by any further guidance resulting from co-ordination measures.

EFRAG's full comments are available from its website (www.efrag.org).

FEE

FEE has issued a discussion paper, European Enforcement Co-ordination, calling for the creation of a European enforcement co-ordination body, with a key role for CESR. The body's role would be to ensure consistency in the processes used and the decisions reached by national enforcement bodies in order to create a level playing field for the enforcement of IFRSs. FEE expects that the discussion paper will complement CESR's Draft Standard No 2 on Financial Information, Co-ordination of Enforcement Activities.

In the same discussion paper FEE has also called for an additional, wider consultation mechanism that would give an opportunity to all stakeholders to contribute to the continuous development of the enforcement system.

Copies of the discussion paper can be downloaded for free from FEE's website (www.fee.be).

UK

Financial reporting

The ASB's Urgent Issues Task Force has drawn attention to two draft Interpretations of IFRS that have been issued by the IASB's International Financial Reporting Interpretations Committee. They are D3, Determining Whether an Arrangement Contains a Lease, and D4, Decommissioning, Restoration and Environmental Rehabilitation Funds. Once finalised and if adopted by the EU, these will be mandatory for companies preparing their financial statements under IFRS from 2005.

The UITF has noted that, under accounting standards in the UK and Ireland, many of the arrangements caught by IFRIC's proposals in D3 would be covered by FRS 5, Reporting the Substance of Transactions, including Application Note F which deals with PFI and similar contracts. The UITF also noted that IFRIC's proposals would lead to increased disclosures under IFRS about future commitments in respect of these types of arrangements, whether or not they contain finance leases. UK and Irish law has a general requirement for disclosure of financial commitments that are relevant to assessing a company's state of affairs. Therefore, the UITF does not intend to issue this proposal as an addition to UK accounting standards.

In respect of D4, UITF believes the application of accounting standards in the UK and Ireland would result in a similar accounting treatment to that proposed in D4. Relevant standards are FRS 2, Subsidiary Undertakings, FRS 5, Reporting the Substance of Transactions, FRS 9, Associates and Joint Ventures, and FRS 12, Provisions, Contingent Liabilities and Contingent Assets. Accordingly, an equivalent addition to UK accounting standards will not be issued.

Auditing

The Auditing Practices Board has published exposure drafts of SAS 120 (Revised), Consideration of Law and Regulations, and SAS 620 (Revised), The Auditors' Right and Duty to Report to Regulators in the Financial Sector to reflect the requirements of the new anti-money laundering legislation. Comments are requested by 31 March.

A Consultation Draft of Practice Note 15 (Revised), The Audit of Occupational Pension Schemes in the United Kingdom, has been issued. The update was co-ordinated with the issuance by Opra of new guidance as to what breaches of legislation the regulator considers to be of material significance.

Following a consultation period last year, the APB has published Practice Note 25, Attendance at Stocktaking.

Employment law

New Equality Commission
The Government proposes to establish a new Equality Commission which will supersede the Commission for Racial Equality, the Equal Opportunities Commission and the Disability Rights Commission. It will also take on responsibility for the new statutory regime prohibiting discrimination at work on grounds of age, religion or belief, and sexual orientation. A taskforce has been set up to advise on the governance and structure of the new Commission and a white paper will be published in the spring.

Mobile phones
From 1 December 2003, it became a criminal offence to drive, or to cause or permit another person to drive, a motor vehicle on the road while at the same time using a hand-held mobile phone. The Road Vehicles (Construction & Use) (Amendment) (No 4) Regulations 2003 provide a specific exception in a case where a person makes a call to the emergency services in response to a genuine emergency, and where it is unsafe or impracticable to stop driving while the call is being made. Otherwise, a breach of the Regulations will result in a fixed penalty of £30 or a fine of up to £1,000 on conviction in court (£2,500 for drivers of goods vehicles, buses or coaches). According to DTI guidance, an employer will not be liable simply because it has supplied the mobile phone to the employee, or because it phoned the employee while he or she was driving. But liability may arise where an employer requires an employee to use a mobile phone while driving. The guidance indicates that the employer might also be liable if it fails to forbid employees to use mobile phones while driving on company business.

Competing employees
The High Court considered the duties of a director and employee not to compete with his employer. Item Software (UK) Ltd v Fassihi & others (2003) IRLR 769 concerned a director of a software supplier who sought to divert his company's main client contract to his new business. He was held to be in breach of his duty to act in good faith in the best interests of the Company of which he was a director and employee. Although his employers were not aware of his earlier misconduct when they dismissed him on other grounds, they were entitled to rely on that misconduct as justification for the dismissal, irrespective of whether the other grounds justified it.

Constructive dismissal
The EAT gave a reminder in Tolson v Governing Body of Mixenden Community School that, when determining an issue concerning constructive dismissal, the conduct to be considered is that of the employer. A tribunal had taken an employee's failure to invoke the grievance procedure into account in deciding that the employer's conduct did not amount to constructive dismissal. But this approach was wrong in law.

Dispute resolution regulations
The Government has confirmed that regulations will come into force in October which make important changes to the law relating to employment dispute resolution. The underlying purpose of the new regime is to try to ease the pressure on the employment tribunal system (and the cost to the Exchequer) by encouraging employees and employers to settle their differences, so far as possible, at the workplace rather than through litigation. Employers will, as proposed in the consultation process, have to operate a minimum three-step disciplinary procedure, although a modified two-step procedure will be available in limited circumstances. Comparable provisions apply to the resolution of grievances in-house. The regulations will apply to employees, but not to the broader category of 'workers' and the Government has put on hold plans to impose the new procedures on all contractual employment relationships. Failure to observe the new procedures will, nevertheless, prove expensive and all employers need to become familiar with them.

ACAS code
ACAS has issued an updated draft code of practice on disciplinary and grievance procedures on which it has sought comment through a process of public consultation. The draft code anticipates the new statutory regime relating to the handling of disciplinary and grievance issues in-house. The object of the code is to combine guidance on the new rules with advice on good practice to be adopted by employers when confronted by cases of misconduct, absence and poor performance in particular. The draft code spells out in more detail than its predecessor the distinction between misconduct and poor performance, and clarifies the circumstances in which employers may move immediately to a final disciplinary warning. It is expected that the new code will come into effect in October, at the same time as the dispute resolution regulations.

Working overseas
During the past year, four different decisions of the Employment Appeal Tribunal resulted in a variety of rulings as to the precise scope of jurisdiction of employment tribunals in relation to overseas work. The confusion has followed the repeal five years ago of legislation which stated that statutory job protection rights did not apply to anyone who 'ordinarily worked outside Great Britain'. The Court of Appeal's approach in Serco Ltd v Lawson was to reject the EAT's approach to the definition of territorial limits. The Court of Appeal has taken the straightforward view that the key concept is simply that of 'employment in Great Britain'. Not surprisingly, it is acknowledged that there will be some difficulties in particular cases as to whether or not the employment actually is in Great Britain and that courts and tribunals will need to approach the issue with a degree of flexibility. Borderline cases will require an assessment of all the circumstances. For example, it seems that dismissal during a single short period of absence from Great Britain would not normally exclude an employee from the right to bring a claim to a tribunal.

Working time
In January, the European Commission launched a consultation on working time issues. A key issue will be whether the 'opt-out', which allows individuals to sign away their rights to limited working time, should continue in their present form or be subject to revised conditions.

Employment tribunal procedures
The Department of Trade & Industry has been consulting on proposed changes to the rules that govern procedures in the employment tribunal. There is a welcome move towards greater use of 'plain English' and new procedures to 'weed out' claims and defences that, for specified reasons, should not be allowed to proceed. The current restricted rules on the awarding of legal costs are to be expanded and it will be possible for representatives (except those working on a not for profit basis) to incur a costs award on account of their own conduct.

Taxation

Electronic filing of SA returns
The Inland Revenue has clarified the position relating to returns filed over the Internet.
The time of receipt of a return validly filed is the time and date the return is passed to the Inland Revenue by the Government Gateway.
If for any reason a return filed before midnight on 31 January does not reach the Inland Revenue until after midnight, because validation by the Inland Revenue takes an unusually long time, tax advisers should ask for any penalty imposed to be removed.

Trust taxation
From 6 April 2004 the rate applicable to trusts (RAT) is to be increased from 34% to 40% and the dividend trust rate from 25% to 32.5%. While they have been announced as measures to deal with tax avoidance, they will apply generally.
Four discussion documents have also been published.

CGT changes
With effect from 10 December 2003 it is no longer possible to claim CGT Relief under S225 TCGA 92 for a property occupied under the terms of a trust, as the principal private residence of a beneficiary; in circumstances where at the time the property was transferred into trust, the donor claimed gift relief under S260 TCGA 92.
The change is specifically aimed at certain schemes which were in common use.

Strips of government bonds
Anti avoidance legislation is to be introduced which will amend FA 96 Sch.13, pp14 and 15 and prevent the use of strips of government bonds to produce artificial losses.
The effect of the amendment will be to substitute market value for the cost of acquisition and disposal proceeds. A further change will disallow any loss to the extent that the actual or deemed disposal proceeds fall below the cost of acquisition.

Other anti avoidance measures
From 6 April 2004:
- the 100% foreign earnings deduction for seafarers will not apply to employees working on offshore installations, and
- charities will not be able to grant free day admission in return for gift aid donations.
Changes have already been imposed to prevent the use of film tax relief to obtain a tax advantage.

Fraud investigations
A report entitled Tackling Fraud Against the Inland Revenue has been published by the House of Commons Public Accounts Committee.
The report, which can be found at www.publications.parliament.uk/pa/cm/cmpuball.htm, urges the Inland Revenue to increase the level of fraud investigations and to enlighten public awareness of the risks for those committing fraud.

Property investments trusts
A consultation document is to be published to consider the most appropriate structure for a tax transparent property investment trust.
Discussion is also taking place on the possible introduction in 2005 of an allowance for the renovation of business premises in enterprise areas.

Employee loans official rate
The official rate, used to establish the amount of any benefit in kind, when an employer makes a loan to an employee, either interest free or at a preferential rate, has been fixed for 2004-5 at the present rate of 5%.

Double tax treaties
The new treaty between the UK and Australia entered into force on 17 December 2003.

Revised forms for non-residents
The Inland Revenue centre for Non-Residents has issued new versions of the following forms:
- CA 3916 - request for further information from a non-resident who has requested certificate E104, E205 or E301.
- A1 FOTRA - claim for repayment of UK tax deducted from investments classified as free of UK tax to non-residents (i.e. FOTRAs) and foreign dividends.
- FD6 forms for Swiss resident companies and individuals to claim repayment of UK tax in respect of treaty protected income and forms to allow Swiss direct investor companies to claim a UK tax credit in respect of dividends from UK companies.

Other revised forms
- IHT 4 has been revised to take account of the increase in the rate of interest on late payments of IHT. The new version can be viewed on the Inland Revenue website.
- IHT 200 has also been revised to correct an error.
New versions of the following forms are available on the Inland Revenue website.
- ISF - allows pension scheme administrators to report chargeable events relating to occupational pension schemes.
- FB1-2 - authorises agents to use on-line PAYE for employers.

EC parent subsidiary directive
The EC has adopted directive 123/2003 which amends the EC parent subsidiary directive. Member states are obliged to implement the changes by 1 January 2005.
The amendments make the following changes:
- include the new European Companies (Societas Europaea) within the scope of the directive.
- reduce the minimum shareholding to qualify as a subsidiary from 25% to 10% over a period.
- require a member state either to exempt from tax dividends from qualifying subsidiaries or give credit for underlying tax (including that paid by subsidiaries downstream).
- ensure that profit distributions to a permanent establishment are treated in the same way as those from a subsidiary to its parent.

Dividends from EU members
An EU communication has been adopted, aimed at ensuring that individuals receiving dividends from any EU member state do not suffer taxation at a higher level than they would suffer on domestic dividends (i.e. dividends received from companies resident in the State in which the individual is resident).

Extra statutory concessions
A new edition of IRI - Extra Statutory Concessions has been published and is available on the Inland Revenue website.

Regulations
- SI 3297/2003. The reporting of Saving Income Information has been made and will come into effect no earlier than 1 January 2005. The regulations require information to be reported to the Inland Revenue of savings income paid in the course of business to an individual resident in another EU State.
- SI 3308/2003. The Tax Credits (Provision of Information) (Evaluation and Statistical Studies) Regulations 2003, came into force on 9 January 2004. The regulations allow the Inland Revenue to provide information relating to tax credits, etc, to the Secretary of State, for certain prescribed purposes.
- SI 2682/2003. The Income Tax (PAYE) Regulations 2003 come into force on 6 April 2004. This is a complete rewrite of SI 744/1993. The Income Tax (Employments) Regulations 1993 following the introduction of ITEPA 2003. (A note outlining changes that may arise for some employers is on the Inland Revenue website.)
- SI 3293/2003. The Stamp Duty Land Tax (Amendment of Schedule 4 to the Finance Act 2003) Regulations. The regulations clarify the treatment of certain transactions forming part of a PF1.

Arkwright v Anor v IRC
In this case, a husband and wife each owned a half share of the matrimonial home as tenants in common.
The Inland Revenue argued that, at the date of death of the husband, the value of his share was one half of the total value.
The special commissioner held that the value was less than one-half because it had to be valued taking into account the statutory rights of the wife as tenant in common.
The case was referred to the Lands Tribunal.

Osborne (dec'd) v Dickinson
In this case, an Inland Revenue discovery assessment in respect of a gain was held by the special commissioners to be valid on the basis that, whilst the taxpayer had provided substantial information, it had not been done in the correct form and, in particular, that a claim for repayment on form R40 did not refer to the gain.
At that time provisional calculations showed a loss, but these were subject to valuation. A gain was subsequently agreed.

Two settlors v IRC
In this case, settlor one transferred certain shares in a company to the trustees of a settlement and, on the next day, settlor two transferred certain shares in the same company to a similar settlement.
In each case, the taxpayers held that the transfer constituted a disposal for CGT purposes and the intention was to claim hold over relief under S260 (2) TCGA 92 on the grounds that the disposals constituted transfers of value for IHT purposes.
The Inland Revenue took the view that the transfers did not constitute transfers of value for IHT purposes and issued notices of determination under S221 IHTA 84.
At the time of the appeal, no CGT assessments had been raised and, as a result, the special commissioner held that, at this stage, no valid appeal against the S221 determinations was possible, but that these could be dealt with as part of any subsequent CGT appeal, once the Inland Revenue raised assessments.