Technical update

FASB

FASB, the IASB and the UK's ASB are forming an International Advisory Group to assist them in improving the information presented in the financial statements of businesses. The Advisory Group will have around 20 members, most being professionals with significant experience and responsibility for the preparation, analysis, audit or regulation of financial statements. The members will assist the three Boards by providing information and practical insights, and acting as a sounding board as reporting alternatives are being considered. An initial meeting is scheduled for July or August.

The Advisory Group will pick up on earlier work done by the three boards, which was suspended in 2003 due to the pressure of other priorities. Motivations for the project include the following:

• there are different primary financial statements and different time periods for comparative data currently required in different jurisdictions
• there is no consensus on standard definitions for key financial metrics or indicators of financial performance that financial statements should provide
• there has been an increase in pro forma reporting, suggesting that the use of, and reliance on, current subtotals and totals (such as net income) as indicators of performance is decreasing, and
• there is potential benefit in separating transactions and events that are recorded at historical cost from those that are recorded at fair value.

Robert Denham, chairman and President of the Financial Accounting Foundation (FAF), which oversees FASB, has expressed grave concern over the approval of HR 3574 'The Stock Option Accounting Reform Act' in the US by the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee of the Committee on Financial Services.

'By inserting Congress into the setting of standards for accounting by publicly traded companies, HR 3574 would undermine the independence of the Financial Accounting Standards Board, which Congress recently reaffirmed in the Sarbanes-Oxley Act,' Denham said. 'Our capital markets depend on a system of continuously improving financial information about the underlying economic activities of companies, fostered by accounting standards independently and expertly developed' Once Congress starts setting accounting standards through its political process, the integrity of accounting standard setting in this country will be dangerously compromised. If enacted, HR 3574 would also severely impede the important ongoing efforts by the FAF and FASB to achieve international convergence of high-quality accounting standards.'

IASB

The IASB's International Financial Reporting Interpretations Committee (IFRIC) has published IFRIC Interpretation 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities. The Interpretation contains guidance on accounting for changes in existing decommissioning, restoration and similar liabilities that are recognised both as part of the cost of an item of property, plant and equipment in accordance with IAS 16, Property, Plant and Equipment, and as a liability in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

The Interpretation addresses accounting for (a) a change in the estimated outflow of resources embodying economic benefits (e.g. cash flows); (b) a change in the current market-assessed discount rate; and (c) an increase that reflects the passage of time (also referred to as the unwinding of the discount).

The Interpretation confirms that, under existing requirements, decommissioning, restoration and similar liabilities should be measured using a current market-based discount rate. In general, the Interpretation requires changes in the liability resulting from changes in cash flows or discount rates to be capitalised in full and depreciated prospectively over the life of the item to which they relate. It also requires the unwinding of the discount to be recognised in profit or loss as a finance cost as it occurs.

The IASB has published a single volume containing its official pronouncements applicable from 1 January 2005: The International Financial Reporting Standards (IFRSs) Bound Volume 2004. The publication provides the complete consolidated text of the latest version of IFRSs, International Accounting Standards (IASs) and Interpretations and the supporting documents published by the IASB'Bases for Conclusions, Implementation Guidance and Illustrative Examples.

The 2004 Bound Volume includes new International Financial Reporting Standards:

• IFRS 1, First-Time Adoption of International Financial Reporting Standards
• IFRS 2, Share-based Payment
• IFRS 3, Business Combinations
• IFRS 4, Insurance Contracts, and
• IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

It also contains 17 revised IASs issued in the past year. The text incorporates all the latest revisions and amendments made up to 31 March 2004 together with editorial corrections.

Copies of the publication are available, price £54 each, from the IASCF bookshop at www.iasb.org, or contact the IASCF Publications Department. Tel: +44 (0)20 7332 2730.

The Constitution Committee of the International Accounting Standards Committee Foundation has posted an update on its Constitution Review, outlining possible approaches to 10 main issues for consideration. The Committee is keen to receive feedback in the form of written submissions, or in person from participants invited to the scheduled public meetings being held between June and October in New York, London, Tokyo and Mexico City. Further information is available from the IASB website (www.iasb.org).

IFAC

The Ethics Committee of the International Federation of Accountants has revised its Code of Ethics for professional accountants to clarify guidance relating to lead partner rotation for listed audit clients. When the Committee initially updated Section 8 of the Code, Independence Requirements for Assurance Engagements, in November 2001, the Code specified that lead audit partners should be rotated after a pre-defined period, normally no more than seven years and, after such rotation, should not resume the role of lead engagement partner until a further period of time. However, the Ethics Committee recognised that this guidance as worded might imply that the lead engagement partner would be able to assume the role of another partner on the engagement. It believes this would not adequately address the familiarity threat created by using the same lead partner on an audit of a listed entity for a prolonged period of time and provide a necessary fresh look at the engagement. The Ethics Committee has therefore approved a revision to make it clear that an individual who has completed a predefined period in the role of lead engagement partner for an audit of a listed entity should not participate in the assurance engagement until a further period, normally two years, has elapsed.

The revision to the Code of Ethics for Professional Accountants may be downloaded from the IFAC website (www.ifac.org).

A new research report commissioned by IFAC's Public Sector Committee (PSC) considers best practices in budget formulation and reporting under differing budget models and government administrative arrangements. The research report, Budget Reporting, also examines whether the development of an International Public Sector Accounting Standard (IPSAS) on budget reporting falls within the PSC's mandate.

The report was prepared by Dr Jesse Hughes, professor emeritus of accounting at the College of Business and Public Administration, Old Dominion University, Virginia, USA, with input from the PSC's Budget Reporting Steering Committee. Philippe Adhémar, chair of the Public Sector Committee, commented: 'In many respects, and for many external users, the budget documents are the most important financial statements issued by governments. The budget also serves as a key tool for financial management and control, and is the central component of the process that provides for government and parliamentary or similar oversight of the financial dimensions of operations.' He also noted that the IPSASs currently on issue do not require the presentation of budget/forecast information at the time it is approved by the legislature or other authority, nor do they require the historical general purpose financial statements to report period results against the budget for that period.

The PSC is considering the report's findings at its July 2004 meeting. Copies of the report may be downloaded free of charge from the IFAC website.

EFRAG

EFRAG has recommended endorsement of IFRS 3, Business Combinations, and amendments to IAS 36, Impairment of Assets, and IAS 38, Intangible Assets, published by the IASB in March 2004. EFRAG has told the EC that it regards IFRS 3 as an improvement on IAS 22, Business Combinations, in that IFRS 3 eliminates the use of the pooling of interests method. It noted that the pooling of interests method has been applied in the past to business combinations that were often acquisitions in order to avoid goodwill amortisation costs and the restatement of assets and liabilities at fair values. Although EFRAG believes there is a need for a specific accounting method other than purchase accounting in cases of real mergers, it also believes that such cases are rare and that IFRS 3 improves the general quality of information provided for business combinations. It also improves comparability of financial statements in Europe and globally by converging international accounting policies.

However, EFRAG says it still has 'one serious concern', which it expressed in its previous comments on ED 3, Business Combinations, which has not been alleviated by the final standard'the recognition requirements for certain assets and liabilities. It notes that IFRS 3 establishes requirements which result in recognition of certain assets and liabilities in cases of business combinations, which would not be permitted to be recognised in any other circumstances, because they have to meet the probability requirement that the future benefits will flow to or from the acquirer, as established in the framework. For example, the requirement to recognise contingent liabilities and certain in-process research and development projects in business combinations is inconsistent (IFRS 3 Basis for Conclusion, paragraphs BC96 and BC112) with the recognition criteria for assets and liabilities laid down in the framework and, in the case of contingent liabilities, inconsistent with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. EFRAG believes that changes to general concepts and inconsistencies with existing standards should not be introduced in advance of a full review of recognition criteria in the framework.

However, EFRAG concludes that the improvements introduced by IFRS 3 compared to IAS 22 outweigh its concern, and therefore recommends endorsement of IFRS 3. It nevertheless urges the IASB to work on (i) the adaptation of the framework and (ii) the completion of the subsequent phases of this project in order to have a comprehensive and consistent standard on the accounting for business combinations in place as soon as possible.

Further details are available from EFRAG's website (www.efrag.org).

EFRAG has also recommended endorsement of IFRS 4, Insurance Contracts. However, its letter of recommendation to the EC notes that concerns raised by the industry, users of financial statements, auditors, standard setters and EFRAG have not been fully satisfied in the final standard. The most critical areas are:

• the two different measurement principles for insurance assets (fair value concept) and liabilities (amortised cost concept based on regulatory requirements), which is often referred to as the 'mismatch' problem, and
• the deposit floor limitation for investment contracts with a demand feature, created by IASB's assumption in IAS 39, Financial Instruments: Recognition and Measurement, that the fair value of a financial liability with a demand feature (e.g. a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid (IAS 39, paragraph 49).

EFRAG acknowledges that IFRS 4 has not been developed as a long term standard, but has to be seen as a stepping stone towards a more comprehensive and conceptually sound standard dealing with the accounting for insurance contracts that meets the needs of all stakeholders.

EFRAG has also recommended endorsement of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

UK

Financial reporting

Accounting Standards Board (ASB)

The ASB has issued an exposure draft, Amendment to FRS 2 Accounting for Subsidiary Undertakings: Legal Changes. The exposure draft proposes amendments to FRS 2 to reflect the draft Regulations issued by the Department of Trade and Industry which, when finalised, will amend the law relating to group financial reporting.
The proposed changes to FRS 2 are:
- to delete references to participating interest in the definition of a subsidiary
- to reflect the proposed exemption from the preparation of consolidated accounts for intermediate parent undertakings whose immediate parents are not governed by the law of an European Economic Area state
- to remove the requirement for exclusion from consolidation of subsidiaries with dissimilar operations to the parent undertaking.
Comments are invited by 30 September.

In a letter to the European Financial Reporting Advisory Group, the ASB has unanimously agreed with those members of EFRAG who support the adoption of IAS 39 on financial instruments for use by Europe's listed companies in their group accounts from 1 January 2005. The letter follows publication of EFRAG's preliminary conclusions on the adoption into EU law of the amended version of IAS 39. Said ASB chairman, Mary Keegan: 'Although we recognise that concerns about the standard remain, our view is that none is of sufficient significance to outweigh the benefits that would result from adoption of IAS 39 in time for application from 1 January 2005.' She added: 'The widespread introduction of IAS 39 will strengthen financial reporting in Europe.'
A report issued by the British Institute of International and Comparative Law, which proposes a new capital maintenance regime, has been welcomed by the ASB. The report, Reforming Capital, demonstrates the problems caused by a rigid link between distributions by a company and the company's statutory accounts, especially where those accounts are drawn up in accordance with modern accounting standards which are increasingly focused on the needs of the capital markets. The report recommends that European and national authorities urgently consider an alternative that would make compliance more straightforward and provide superior protection for creditors. This would focus on the need to ensure maintenance of solvency rather than capital.

Employment law

Single equality commission
The Department of Trade and Industry has published a white paper concerning the proposed new single Commission for Equality & Human Rights. The DTI has been seeking views on the proposed structure and role of the new Commission, which will replace the Equal Opportunities Commission, the Commission for Racial Equality and the Disability Rights Commission. The new Commission will take over the powers of the existing bodies, but will also have extra powers and obligations. For example, it is to have the power to 'promote human rights', including the undertaking of general inquiries, and the promotion of good practice and enforcement of the law in new and relatively unfamiliar areas, i.e. with regard to discrimination on the grounds of sexual orientation, religion or belief, and age.

Reservists
The Ministry of Defence has adopted a new policy by which members of the volunteer reserve forces now have to agree to their employers being informed of their status as reservists. With effect from 1 April 2004, new recruits have been required, as a condition of joining up, to agree that their unit may inform their employers and, should a reservist change jobs, he or she must consent to the new employer being told of his or her status. Once consent is given, the reservist will have four weeks personally to broach the subject with the employer before the unit does so. In the past, reservists had been exhorted to inform their employers of their status and commitments, but not everyone has done. The recent conflicts in Afghanistan and Iraq have resulted in employer pressure for the change of policy. Since most reservists are engaged for three-year terms, the new policy will apply to existing reservists when they are next re-engaged.

Agency workers
The attractions of engaging agency 'temps' on a long-term basis seems to have been diminished by the Court of Appeal's ruling in Dacas v Brook Street Bureau (UK) Ltd. The Court of Appeal said that in cases involving 'triangular arrangements', the common sense view was that the individual worker had a contract of employment with the end-user, rather than with the employment agency. An employment tribunal had ruled that an agency cleaner was employed neither by the agency nor by the agency's client, but one member of the court said that conclusion was 'simply not credible'.

Advising employees
In Crossley v Faithful & Gould Holdings Ltd, the Court of Appeal held that there was no implied term in a director's employment contract obliging the employer to take reasonable care of his economic well-being. He had argued that the company was required to alert him to the effect that resigning would have on his entitlement to benefits under a long-term disability insurance scheme. The Court of Appeal accepted that, if an employer assumes responsibility for giving financial advice to an employee, the employer is under a duty to take reasonable care in giving that advice. But it was quite different to say that the employer was under a duty to give financial advice in relation to benefits accruing from the employment.

Tax

Anti-avoidance: employment related securities
Certain schemes have recently been marketed which use shares or securities subject to restriction to reduce the liability to income tax and NIC.
The schemes avoided the legislation in FA 2003 relating to securities with artificially depressed or enhanced market values.
Because the schemes were marketed ahead of the deadline for the registration of anti-avoidance schemes, it has been decided to amend the Finance Bill to stop them. The intention to do so was announced on 7 May 2004 and the legislation will be effective from that date.

Anti-avoidance schemes: the disclosure requirements
Draft regulations and explanatory notes have been published for comment. The drafts are unsatisfactory in a number of ways, on grounds of complexity and resultant uncertainty and because of the proposed five-day reporting limit for most transactions, etc.
Comments can be sent to Angela Roach, Revenue Policy, Cross Cutting Policy, Room S23, West Wing, Somerset House, Strand, London WC2R 1LB.

Corporation tax'the duty to notify
Draft regulations prescribing the information to be provided in order to meet the statutory requirements have been published for comment by 16 July 2004.
The draft can be accessed on the Inland Revenue website.

Double tax agreements

UK/New Zealand
A protocol to the agreement has been announced. The protocol is quite far reaching and includes provisions on:
- business profits
- dividends
- interest
- royalties
- capital gains, and
- the exchange of information.
A press release published recently which stated that the protocol had entered into force was issued in error and has been withdrawn.
The text is in SI 1274/2004 and can be accessed on the Stationery Office website at www.hmso.gov.uk or obtained from the Stationery Office.

UK/Canada
The third protocol to the convention was signed on 7 May 2003 and entered into force on 4 May 2004. The text was published in SI 2619/2003 and can be obtained from the Stationery Office or accessed on the website at www.hmso.gov.uk.

UK/Italy
Discussions are to be held about a new comprehensive double taxation treaty between the UK and Italy.

The rate applicable to trusts
The Treasury has now posted an explanatory note on its website. The note, which should have been published with the Finance Bill notes on 8 April 2004, can be accessed on the Treasury website at www.hm-treasury.gov.uk/media/B4A16/fb04en_21_40_205.pdf#page=19.

The National Insurance Contributions and Statutory Payments Act 2004
The act which contains measures relating to NIC on securities-based remuneration, received the royal Assent on 13 May 2004.
The act does not change the principles of the contributions system for NI or the rates, but it does provide for the alignment of NIC with the tax regime.
The text of the act is available on the Stationery Office website. Some frequently asked questions can be found on the Inland Revenue's website at www.inlandrevenue.gov.uk/faqs.

Inland Revenue spring report
The Inland Revenue has published its Spring Departmental Report for 2004, which shows its progress for the year 2003-4 against targets and its targets for 2004-5.
The report can be accessed on the Inland Revenue website at www.inlandrevenue.gov.uk/about/dept-report04.pdf.

Energy savings expenditure
Draft regulations have now been published, which provide for a deduction of up to £1,500 per let property, in respect of expenditure by landlords on cavity wall and loft insulation. Clause 133 FB 2004 refers. The draft regulation can be accessed on the Inland Revenue website.

CIS deductions: directions relating to electronic payment
Directions made by the Commissioners of Inland Revenue for the electronic payment of CIS deductions took effect on 19 May 2004.
Payments can be made by BACS, CHAPS, debit card over the Internet, Paymaster, Bank, Giro and Alliance & Leicester.

Statutory Instruments
- Sl 1240/2004 The Child Benefit and Guardians Allowance (Administration) (Amendment) Regulations 2004 came into force on 1 May 2004. The regulations specify the form of birth or adoption certificate that must be provided where required.
- Sl 1241/2004 The Tax Credits (Miscellaneous Amendments No. 2 Regulations) came into force on 1 May 2004. The regulations specify to which parent the child care element of working tax credit should be paid and add to the list of notifiable changes in circumstances.
- SI 1243/2004 The Tax Credits (Residence) (Amendment) Regulations 2004 came into force on 1 May 2004. The regulations provide that an individual must be legally entitled to reside in the UK in order to claim the child tax credit.
- SI 1244/2004 The Child Benefit (General) (Amendment) Regulations 2004 came into force on 1 May 2004. Like SI 1243/2004 this regulation provides that an individual must be legally resident in the UK in order to claim the benefit.
- SI 1276/2004 The Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2004 came into force on 1 June 2004. The cases in which childcare qualifies for credit is extended. An explanatory memorandum has also been prepared.
- SI 1360/2004 The Income Tax (Professional Fees) Order 2004 which came into force on 17 May 2004 adds to the fees listed in S343 (2) ITEPA 2003 a fee payable for a license from the Security Industry Authority under the Private Security Industry Act 2001.
- SI 1361/2004 The Social Security (Crediting and Treatment of Contributions and National Insurance Numbers) Amendment Regulations 2004 have been made. They provide for certain class 3 contributions to be treated as made on specified date.
- SI 1362/2004 The Social Security (Contributions) (Amendment No. 3) Regulations 2004 have been made. They allow an extended period for payment of certain class 3 contributions for the years 1996-7 to 2001-2.
- SI 1363/2004 The Stamp Duty Land Tax (Appeals) Regulations 2004, which came into force on 11 June 2004, made provision for proceedings in front of general and special commissioners in relation to stamp duty land tax.

Publications
The following tax credit leaflets have been published:
- TC 600, How to Complete Your Tax Credit Form for 2004
- TC 602, Your Tax Credit Award
- TC 603R, Notes to Go with Your Annual Review
- TC 603RD, Notes to Go with Your Annual Review and Declaration Forms.

EC directives
Two new directives 93/2003 and 56/2004 amend the EC's mutual assistance directive No. 77/799. The exchange of information powers have been extended to taxes on insurance premiums.

Camas Plc v Atkinson
In this case, the holding company of a group, which included US and UK trading companies, decided to acquire other companies in the same area of activity. The holding company attempted to claim, as management expenses, the abortive costs relating to a proposed acquisition which was abandoned. The expenditure mainly related to professional advice from lawyers, bankers, accountants, etc.
The Inland Revenue argued that the cost of expenditure to enable the board to decide whether to make an offer did not relate to the management of the company's investment business and was, in any case, capital.
The special commissions had found that the expenses were not allowable, but the company was successful in the High Court.
The Appeal Court upheld the High Court decision on the basis that the costs were not 'expenses of purchase', which would have been excluded from expenses of management, but were expenses of taking managerial decisions. It was a significant factor that at no stage had the company ever reached a firm intention to make an offer.

Jerome v Kelly
This case concerned the operation of S27 (1) CGTA 79 which deemed a disposal to take place at the time contracts were exchanged, provided that the sale was ultimately completed.
In 1987 the taxpayer, his wife and brother agreed to sell land to a developer with completion no later than May 1994, if planning permission could be obtained.
In 1988, before the contract was completed, some of the land was transferred to two Bermudan settlements. Planning permission was obtained in 1990 and the sale was completed in two tranches in 1990-1, 1991-2 and 1992-3.
The Inland Revenue raised capital gains tax assessments on the taxpayer based on the proceeds of sale received by the trustees.
The taxpayer appealed on the grounds that, at the time, there was a strong likelihood that the contract would be rescinded and that his transfer to trustees was a connected person disposal which should be treated as made at the market value at that time.
The special commission dismissed the appeal, but the High Court found for the appellant. Subsequently the Appeal Court upheld an appeal by the Inland Revenue and, ultimately, the House of Lords upheld the taxpayers appeal.
The House of Lords held that while S27 (1) was intended to provide a simple rule, it did not do so where a taxpayer entered into a contract to sell an asset with delayed completion. The Inland Revenue agreed that there was a flaw in the legislation.

Mars UK Ltd v Small; William Grant & Sons Distillers Ltd v IRC (2004)
In this case, the Inland Revenue accepted that both the appellants in the case had computed their profits in accordance with generally acceptable accounting principles, but contended that 'gross' depreciation, including depreciation in stock, had been deducted from profit in the accounting period and should be added back.
The question for decision by the special commissioners (Dr Nuala Brice and John Walters QC) was whether the gross amount of depreciation should be added back, or whether only the net amount (after adjusting for the depreciation in opening and closing stock) should be disallowed.
In arguing that the gross depreciation should be added back the Inland Revenue relied on S74(1) (F) ICTA 1988 which provided that in computing the amount of profits to be charged to tax, no amount should be deduced in respect of 'any sum, employed or intended to be employed, as capital in the trade'.
Not surprisingly the special commissioners held that the amount to be added back in order to arrive at the taxable profits was the net amount of depreciation.

Morris & Anor v Roberts
In this case, the special commissioners confirmed daily penalties totalling £5,250 on taxpayers who failed to comply with a notice requiring the production of documents under S20 TMA 70.
The taxpayer had claimed to be both resident in Spain and in the UK and therefore exempt from UK Capital Gains Tax under the terms of the US/Spain double tax treaty.
The taxpayers had produced a letter from the Spanish tax authorities, stating that they were resident in Spain and needed to do nothing more.
The special commissioner (Dr John Avery-Jones) supported the Inland Revenue view that all of the documents it had required should be produced because, in the inspector's reasonable opinion, they might contain information relating to their tax liability. In particular the information was required in order to consider the tie-breakers under the treaty.
A further penalty of £500 under regulation 24, together with costs, was imposed.