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international
As 2004 draws to a close a number of the International Accounting Standards Board's (IASB) projects are also nearing completion. The first two new pronouncements will almost certainly be IFRS 6, Exploration for, and Evaluation of, Mineral Resources, and a revised version of the IFRIC statement SIC-12, Consolidation'Special Purpose Entities.
There is currently no IFRS which deals with exploration and evaluation of mineral resources and they are specifically excluded from the scope of other IFRS. As a consequence, differing views have evolved as to how such activities should be accounted for; there is widespread divergence of practice between standard setters and differences in treatment from other seemingly analogous sectors.
On initial recognition, exploration and evaluation assets should be recorded at cost and the entity will be required to develop a policy for identifying which assets it should recognise. Once technical feasibility and commercial viability have been determined, expenditure relating to development should cease to be recognised as exploration and evaluation assets. IAS 37, Provisions, Contingent Liabilities and Contingent Assets, is required to be applied with respect to any obligations in respect of removal or restoration as a consequence of the exploration work. After initial recognition, revaluation is permitted and this should be either in accordance with IAS 16, Property, Plant and Equipment, or IAS 38, Intangible Assets, dependent on the original classification of the assets. The new standard will permit an entity to continue to use its previous accounting policies, but will require an impairment test on exploration and evaluation assets where there are indicators of impairment.
The standard sets out specific indicators of impairment in the context of exploration and evaluation assets but allows the entity to determine an accounting policy for the allocation of impairment losses to cash-generating units or groups of cash-generating units without having to apply the detailed requirements of IAS 36, Impairment.
The revisions to SIC 12 are required as a consequence of the issue of IFRS 2, Share-based Payments. This standard will amend IAS 19, Employee Benefits, by removing from its scope employee benefits to which IFRS 2 applies together with all references to equity compensation benefits and equity compensation plans. Equity compensation plans will therefore be brought within the scope of SIC 12, but other long-term employee benefit plans will be excluded. The amendment will apply for periods beginning on or after 1 January 2005 and will have the effect of requiring consolidation of employee benefit trusts.
Amongst the most important of other projects currently in progress is the second phase of the business combinations project, an exposure draft of which is due before the end of the year. The exposure draft will address in more detail many of the principles introduced in IFRS 3, Business Combinations. It will also include material arising as a consequence of the US GAAP convergence programme.
The Ethics Committee of the International Federation of Accountants (IFAC) has issued an exposure draft of a Revised Code of Ethics for Professional Accountants. The revision clarifies the independence requirements for professional accountants in public practice who perform assurance engagements. The changes have been made in order to achieve conformity between the Code of Ethics and the International Framework for Assurance Engagements issued by the International Auditing and Assurance Standards Board. The exposure draft is also proposing a requirement to rotate the partner responsible for the engagement quality review of the audit of a listed company in addition to the existing requirement in respect of the engagement partner.
Yvonne Lang, a director at Smith & Williamson, the accountancy and financial advisory group, and technical adviser to the audit committee of Nexia International, an international network of accounting and consulting firms.
www.smith.williamson.co.uk
UK & Ireland
As accounting & business went to press, the Accounting Standards Board was gearing up to issue five new Financial Reporting Standards (FRS) in line with its strategy for convergence with International Financial Reporting Standards. The five standards are: FRS 22 (IAS 33), Earnings per Share; FRS 23, The Effects of Changes in Foreign Exchange Rates; FRS 24, Financial Reporting in Hyper-inflationary Economies; FRS 25 (IAS 32), Financial Instruments: Disclosure and Presentation; and FRS 26 (IAS 39), Financial Instruments: Measurement.
Notably, FRS 26 implements the measurement and hedging requirements of
IAS 39 in full, rather than following the EU-amended version. However, entities applying FRS 26 will still be subject to the provisions of the Companies Act, which restricts the use of fair value measurement for liabilities, so they will not be able to take full advantage of the fair value option in FRS 26. The ASB is including guidance in the standard on the extent to which liabilities may be accounted for at fair value and whether in some circumstances a true and fair override may be appropriate.
Before the end of the year, the ASB also hopes to publish amendments to FRS 2, Accounting for Subsidiary Undertakings, to reflect changes in UK company law stemming from the Modernisation Directive. Again, as accounting & business went to press, the ASB issued an exposure draft seeking comments on the first proposed reporting standard on the Operating and Financial Review. An exposure draft that focuses on updating the Financial Reporting Standard for Smaller Entities has also been issued.
Meanwhile, the Financial Reporting Council has published for comment a draft guide to UK and Irish companies registered with the US Securities and Exchange Commission on the use of the Turnbull report to comply with SEC requirements for reporting on internal controls over financial reporting.
Sarah Perrin, accountant and writer.
The Safety, Health and Welfare at Work Bill, 2004 (the 2004 Bill) has been published by the Minister for Enterprise, Trade and Employment with the stated purpose: ''to consolidate and update the Safety, Health and Welfare at Work Act 1989 (the 1989 Act) and to include relevant provisions of the Safety, Health and Welfare at Work (General Application) Regulations, 1993'' The 2004 Bill imposes obligations on employers and employees and ensures that Ireland complies with all relevant EU law in this area.
General duties of employees
In general, employees must:
- comply with relevant safety and health laws
- not be under the influence of drugs or alcohol at the place of work, and in that regard submit to an appropriate test, if reasonably required by their employer
- not engage in improper conduct or behaviour
- wear personal protective clothing where necessary
- co-operate with their employer and look out for one another, and
- not do anything which would place themselves or others at risk.
Employees may be tested for drugs or alcohol in the following situations:
- if an employee appears to be under the influence of an intoxicant and in such a state as to endanger their own safety or the safety of others, or
- where an employee is working in a safety critical situation.
General duties of employers
Every employer, in so far as is reasonably practicable, must ensure the safety, health and welfare of their employees. The employer must ensure that there is adequate instruction and training for employees without loss of earnings to employees. Employers are also required to:
- identify the hazards in the place of work,
- have a written safety statement and review this statement annually, and
- employers with less then three employees do not need a safety statement and can rely instead on industry-specific health and safety guidance.
The Bill allows for liaison with employees through 'safety representatives' and with joint safety and health agreements negotiated between unions and employers.
To enforce the requirements, a health and safety inspector can require a written improvement plan to be prepared by an employer where they identify unsafe work practices. Inspectors can also require all work to be stopped where they identify work activities which represent a serious risk of injury.
Section 12(6) of the 1989 Act included an obligation for the Directors' Report to specifically refer to the safety statement. This has not been retained within the new Bill.
Non-compliance with the requirements could lead to prosecution of an officer, director or manager, and the company itself. The legislation includes on-the-spot fines for employees or employers. The maximum penalty is a fine of 3m euros and imprisonment for up to two years.
Copies of the Bill can be downloaded at www.oireachtas.ie/documents/bills28/bills/2004/2804/b2804d.pdf.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong
Further to the double taxation arrangement with the Mainland in 1998 and other 25 double taxation avoidance arrangements on aircraft and shipping income with various countries, Hong Kong has entered into a double taxation agreement with Belgium. The agreement came into force on 7 October 2004.
This agreement is the first of its kind. Under the agreement, Hong Kong residents can claim tax relief on their income derived from Belgium from businesses, employment or investment starting from the year of assessment beginning on or after 1 April 2004. Reciprocally, Belgium residents could also claim a relief in respect of taxes charged in Hong Kong on or after
1 January 2004.
In some circumstances, tax rates are lowered, such as withholding tax rates on dividend and interest income derived from investment in Belgium and royalties income.
PRC taxation
The National Taxation Administration of the PRC issued Implementation Rules for Advance Pricing Agreement for Transactions between Related Parties, which allows a taxpayer to apply to the tax authority for the adoption of the principles and calculation methods in an advance pricing agreement involving related party transactions. These include purchase and sales of tangible assets, transfer of intangibles, and provision of services and loans with related parties. This regulation also sets out operational procedures, aiming to alleviate ambiguities in transfer pricing investigation and to resolve tax issues relating to transfer pricing between related parties.
Corporate governance rules in the PRC
The Chinese Securities Regulatory Commission of the PRC issued the consultation paper on Regulation to Enhance the Legitimate Rights of Public Shareholders. The proposed regulation includes provisions to enhance the role of independent directors in the appointment of auditors and in approving significant related party transactions, and the role of public shareholders in passing resolution on significant events/projects in the annual general meeting.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
In August 2004, the Malaysian Institute of Accountants (MIA), the local regulatory body governing accountants, issued Bylaw B1 relating to Professional Independence, which is applicable to all public practitioners in Malaysia. Bylaw B1 sets out principles that are required to be followed by public practitioners particularly when involved in assurance engagements so as to ensure their independence.
The Bylaw is divided into sections as follows:
- conceptual approach to independence
- threats to independence
- safeguards
- provisions, which deal with specific circumstances
Conceptual approach to independence
This section provides a framework of principles that members of assurance teams, firms and network firms should use to identify threats to independence, evaluate the significance of those threats and, if the threats are not clearly insignificant, identify and apply safeguards to eliminate the threats or reduce them to an acceptable level. Acceptable level means independence of mind and appearance is not compromised.
Threats to independence
This part addresses the types of threats members of which assurance teams need to be aware when considering whether to accept or continue an assurance engagement.
a) Self interest threat
Such a threat occurs when a firm or a member of the assurance team is likely to benefit from a financial interest or has any other self-interest conflict with an assurance client.
b) Self review threat
Occurs when any product or judgment of an engagement needs to be re-evaluated in reaching conclusions on the assurance engagement, e.g. preparation of original data used to generate the financial statements that are subject to the assurance engagement.
c) Advocacy threat
Occurs when a firm or a member of the assurance team promotes, or may be perceived to promote, an assurance client's position or opinion to the point that objectivity may, or may be perceived to be, compromised.
d) Familiarity threat
Such a threat arises by virtue of a close relationship with an assurance client; its directors, officers or employees, a firm or a member of the assurance team becomes too sympathetic to the client's interest.
c) Intimidation threat
Occurs when a member of the assurance team may be deterred from acting objectively and exercising professional scepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client.
Safeguards
The safeguards that can be applied, fall into three broad categories:
- those created by the profession, legislation or regulation
- those within the assurance client, and
- those within the firm's own systems and procedures
The Bylaw sets out example of safeguards for each category above. However, these examples are not intended to be exhaustive.
Provisions, which deal with specific circumstances
Some of such circumstances that may give arise to various threats to independence are:
a) financial interests
b) loan and guarantees
c) close business relationships with assurance clients
d) family and personal relationships
e) employment with assurance clients
f) fees and pricing
g) gifts and hospitality, and
h) provision of non assurance services to assurance clients.
Taxation services such as compliance, planning, provision of formal taxation opinions and assistance in the resolution of tax disputes are generally not seen to create threats to independence.
The Bylaw provides a detailed explanation on the above circumstances, arising threats and safeguards to apply.
Conclusion
The Bylaw shall apply to all assurance engagements for which the financial period commences on or after 1 July 2004. For non-assurance engagements, the Bylaw is already applicable. Public Practitioners in Malaysia are advised to familiarise themselves with the full provisions of the new Bylaw B1 to ensure compliance.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The Council on Governance of Institutions of a Public Character (IPCs) has made proposals for minimum standards and best practices on corporate governance, fund-raising practices, internal financial controls and accountability of IPCs to be incorporated into the Income Tax Regulations and made mandatory for all IPCs.
All IPCs will be required to provide key information to their prospective donors when they solicit funds, such as their cause, their beneficiaries, their fund-raising target and an estimate of the fund-raising expenditure. After each fund-raising event, they are required to update their donors on the amount raised; the expenses incurred and intended uses of the funds. A template has been provided for the disclosure of fund-raising donations, sponsorships and expenses. IPCs will be required to prepare, and make available on-line, an annual report containing organisational and financial information, including key information such as:
- the annual remuneration of top three executives. The number of executives with annual remuneration in the following bands must be disclosed: $0-$100,000 as first band, followed by bands of $50,000, starting from $100,000
- the annual remuneration of each Board member. If larger than $5,000, the number of board members with annual remuneration in the following bands must be disclosed: $5,000-$15,000 as first band, followed by bands of $10,000, starting from $5,000
- the ratio of reserves to annual expenses.
Three-tiered approach
For the purpose of implementing the proposals, the Council has classified three categories of IPCs:
- large IPCs with total annual income* of $5m and greater
- medium IPCs with total annual income of less than $5m but at least $500,000, and
- small IPCs with total annual income of less than $500,000.
* Total income includes grants, donations, sponsorships, membership fees, investment income and gains. As total income may vary from year-to-year, IPCs would only cross tiers if their total income crosses the cut-off for two consecutive years, starting from the third year onwards.
Large and medium IPCs will be required to prepare their financial statements using the Financial Reporting Standards (FRS) while small IPCs need only prepare their financial statements on a cash basis. The Council has also drawn up a Code of Governance for IPCs based on 'basic' good practices and 'enhanced' good practices. Small and medium IPCs will be required to disclose the extent of their compliance with 'basic' good practices in their annual reports, while large IPCs with 'enhanced' good practices. Those who fall short of standards may have their IPC status publicly revoked.
Joseph Alfred, technical manager,
ACCA Singapore.
Americas
US
Revenue recognition should be the top issue for FASB, according to the latest annual survey conducted by the Financial Accounting Standards Advisory Council (FASAC), which advises FASB on issues related to Board projects.
The 2004 survey asked FASAC members (who include CEOs, CFOs, senior partners of accounting firms, academics and analysts) what FASB's proprieties should be. For the third consecutive year, revenue recognition topped the list. In addition, fair value and financial performance reporting were also expected to occupy the Board's attention well into the future. Survey respondents also speculated that financial reporting issues may arise in the areas of accounting for employee benefits and off-balance sheet transactions.
The survey also sought opinions on international convergence of accounting standards. The results show that FASAC members generally would not automatically assign a higher priority to projects that provide international convergence opportunities, nor do they believe that FASB should always add a project to its agenda because the International Accounting Standards Board does.
Not surprisingly, given the survey results, FASB has been pushing ahead with work on revenue recognition issues. In October, it discussed how to apply guidance contained in its exposure draft on Fair Value Measurements in the context of measuring performance obligations in contracts with customers.
FASB has also been continuing to work with the IASB on convergence work. In October, members of both boards met to discuss the complexities surrounding the calculation of a deferred tax liability for permanently reinvested unremitted earnings of foreign subsidiaries and joint ventures. The boards noted the practical difficulties in calculating the amount of deferred taxes for such items. They therefore decided to retain the exceptions in IAS 12, Income Taxes, and FASB Statement No 109, Accounting for Income Taxes, for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries or joint ventures.
Sarah Perrin, accountant and writer.
Canada
The Accounting Standards Board has established a User Advisory Council (UAC) to increase the participation of financial statement users in the accounting standard setting process. The UAC will be a forum for discussion of any concerns and observations related to current and potential accounting standards. Its initial membership of 25 will include representatives from banks, securities dealers, money manager firms, regulators, independent research firms, insurance companies, pension funds, and rating agencies.
Recognising that its standard on inventories (Handbook section 3030, Inventories) is one of its oldest and briefest standards, the AcSB plans to develop a new one with more extensive guidance on the recognition and measurement of inventories and related disclosures. It will address various aspects of cost-based measurements, including the types of cost that should be included in inventory, and the treatment of trade discounts, rebates, and other similar items, as well as how inventory impairment should be measured. The project will take into account the IASB's recently amended IAS 2, Inventories. The AcSB plans to release an exposure draft in 2005.
In response to the increased use of outsourcing, as well as the increased scrutiny of internal control by securities regulators and other stakeholders, the Auditing and Assurance Standards Board (AASB) plans to update and expand the standards and guidance for engagements to provide assurance on controls at a service organisation. It has approved in principle an exposure draft to amend existing sections 5900, Opinions on Control Procedures at a Service Organisation, and 5310, Audit Evidence of Considerations When an Enterprise Uses a Service Organisation. The proposed amendments will harmonise the Canadian standards with the American Institute of Certified Public Accountants (AICPA) Statement of Auditing Standards No 70, Service Organisations (SAS 70). Responses to the exposure draft are due in December 2004, and the AASB plans to approve final recommendations in January 2005.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
In the wake of the recent auditing scandals, and as a part of the changeover of South Africa from an Apartheid state to a democracy, the public sector has introduced new legislation to take it into a new era of transparency and accountability.
The current phase of reforms is concerned with improving financial reporting by moving from cash accounting to accrual accounting. The Accounting Standards Board is developing the rules, which will be codified as Generally Recognised Accounting Practice (GRAP) and will apply to all spheres of government.
The switch will be onerous as cash accounting ignores the use of assets, stock consumption, debtors and creditors and timing differences. Stock will have to be valued, asset registers will need to be constructed and new accounting systems will have to be implemented. Cash accounting measures input and ignore outputs; however, outputs provide better information for management decision-making and external stakeholders. In this regard, the Public Finance Management Act was designed to modernise budgeting and financial management, by shifting the focus from inputs towards results and, hence, into improved accountability. Other benefits of accrual accounting are that the true costs of goods and services rendered can be determined and an assessment can be made of the level of borrowings and other liabilities, as well as the extent of guarantees provided by government.
Commercial style accounts will now be produced, which will include a balance sheet, an operating cost statement and a cash flow statement. This will achieve consistency, reliability and comparability in financial reporting within entities, whether they are in the public or private sector.
Despite the reforms, progress is slow due to a skills shortage in the public sector, particularly in financial accounting and financial management. The Institute for Public Finance and Auditing in South Africa has been assigned the task of rolling out a programme for the training of public accountants to improve the quality of financial management in the public sector.
Irene Christopher, head of policy
development, ACCA South Africa. |
