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international
The use of the fair value option in IAS 39, Financial Instruments: Recognition and Measurement, has been the subject of considerable debate and, as anticipated, the IASB has now published its preliminary draft of a suggested revised approach.
This draft formed the basis of roundtable discussions, scheduled to have been held in March, aimed at trying to agree the way forward. IAS 39 currently allows a financial asset or financial liability to be classified at fair value through profit and loss where it is either held for trading or is designated as such on initial recognition. It is the application of the latter principle which has given cause for concern among some users of financial statements. In particular there have been fears that offering such a choice could be misused.
The IASB is, therefore, proposing that the initial designation at fair value should only be permitted where either:
- it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on a different basis, and
- a group of financial assets and/or liabilities are managed, and their performance evaluated, on a fair value basis in accordance with a documented risk management strategy.
In addition, where a contract contains one or more embedded derivatives, the entire combined contract could be designated at fair value through profit and loss.
US convergence
Of the four short-term convergence subjects consulted on by the US standard setter FASB in 2004, standards have been issued in the US that deal with two. In both cases this has resulted in amendments to the US standard to bring it in line with IFRS. First, FASB has converged with the requirements of IAS 16, Property, Plant and Equipment, in respect of exchanges of assets which have commercial substance and now requires that they be measured at fair value. Secondly, with respect to the valuation of inventory, FASB has now agreed that the cost of idle capacity or spoilage should not be included as part of the cost of inventory.
A meeting of IFAC in early February, which was also attended by representatives of the World Bank and the United Nations Conference on Trade and Development pledged commitment to the following:
- strengthening accountancy in developing nations
- addressing professional responsibility in financial reporting
- clarifying the role of accountants in corporate governance
- providing support and guidance for professional accountants in business, and
- focusing on supporting small and medium-sized enterprises and practices.
The IFAC 2005 Handbook of International Auditing, Assurance and Ethics Pronouncements is now available in print and also as a free downloadable PDF from the IFAC website (www.ifac.org).
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
The Accounting Standards Board's Urgent Issues Task Force has issued a draft UITF abstract on the topic of Changes in Contributions to Employee Share Purchase Plans.
The draft clarifies the accounting required by Financial Reporting Standard 20 (IFRS 2), Share-based Payment, when a member of a Save As You Earn scheme (or a similar employee share purchase plan) stops making contributions to the scheme and, as a result, is no longer able to buy shares in the scheme. The draft also clarifies the accounting when an employee changes from one scheme to another. The draft abstract is based on Draft Interpretation D11, Changes in Contributions to Employee Share Purchase Plans, issued by the IASB's International Financial Reporting Interpretations Committee (IFRIC) in December 2004.
Meanwhile the ASB's UITF has written to IFRIC commenting on this draft interpretation, warning that the accounting treatment it proposes is 'unsatisfactory'. IFRIC concluded that when an employee withdraws from an employee share purchase plan without starting a new plan, the whole of the expense that would have been recognised over the remaining vesting period should be recognised immediately in the P&L. The UITF wants this conclusion reconsidered, arguing that IFRIC's interpretation of IFRS 2, Share-based Payment is not the only interpretation that could reasonably be made.
The Auditing Practices Board has published supplementary guidance for auditors of charities. The guidance, contained in Bulletin 2005/01, addresses the issues of audit risk and fraud, and follows the publication in December 2004 of three International Standards on Auditing (UK and Ireland) on the same topics. The new guidance reflects those aspects of auditing that have changed most significantly, and replaces the relevant sections of Practice Note 11, The Audit of Charities in the United Kingdom (Revised). The APB plans to revise the whole practice note in due course.
Sarah Perrin, accountant and writer.
All limited companies in Ireland must submit to an annual audit unless they are exempt. Audit exemption was first made available in Ireland on the commencement of the Companies (Amendment) (No 2) Act 1999.
The act limited the availability of audit exemption to companies with a turnover of less than 317,000 euros and there were additional criteria as well. This limit was substantially out of line with many European countries including the UK where the limit is now £5.6m (8m euros approximately). The Companies (Auditing and Accounting) Act 2003 has now increased the limits as follows.
Audit exemption is now available to companies with an accounting year beginning on or after 1 July 2004, and who meet the following criteria for the current and proceeding year:
- turnover does not exceed 1,500,000 euros
- the balance sheet total does not exceed 1,904,607 euros (the total of fixed assets and current assets before any deduction for liabilities)
- the average number of employees does not exceed 50
- the company is not a parent or subsidiary
- the company is not regulated under financial, banking, insurance, investment or trade union legislation, and
- the Company Registration Office annual returns are up to date.
Each of the first three criteria must be met in full and not two of the three, which is more commonly used in other Company Acts where exemptions are granted. Public limited companies, companies limited by guarantee, companies not trading for a profit, charities, and unlimited companies are not entitled to audit exemption. Holders of 10% or more of the share capital can demand an audit.
Irish auditors apply Auditing Standards promulgated by the UK Auditing Practices Board (APB). The APB Ethical Standards inadequately address small company audit and, because Irish auditors continue to have to audit very small entities due to the low thresholds, the restrictions in the Ethical Standards will be particularly felt in Ireland.
A useful publication is available from the Irish Companies Registration Office website at www.cro.ie/_uploads/downloads/AuditExv2.pdf where the procedure for availing of audit exemption is detailed. The document also contains an example set of abridged financial statements including the specific additional disclosures and directors statements required for audit exempt companies.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & China
In February 2005, a new Hong Kong Financial Reporting Standard and various interpretations were issued:
- HKFRS 6, Exploration for and Evaluation of Mineral Resources
- HKFRS-Int 2, Members' Shares in
Co-operative Entities and Similar Instruments
- HKFRS-Int 3, Emission Rights
- HKFRS-Int 4, Determining whether an Arrangement contains a Lease
- HKFRS-Int 5, Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds.
In addition, amendments were made to the following Hong Kong Accounting Standards and interpretation:
- HKAS 19, Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures
- HKAS 39, Financial Instruments: Recognition and Measurement - Transition and Initial Recognition of Financial Assets and Financial Liabilities
- HKAS-Int 12, Scope of HKAS-Int 12. Consolidation - Special Purpose Entities.
Subsequent to two rounds of consultation, an exposure draft on the Proposed Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard was issued for comment by 30 April. It is expected that the final framework and standard will be issued in June 2005, and those qualified companies can adopt the new standard for financial reporting periods beginning on or after 1 January 2005.
The China Banking Regulatory Commission issued Provisional Rules on Information Disclosure by Trust and Investment Companies, specifying the principles, contents and methods of information disclosure by a trust and investment company (TIC).
It requires a TIC to disclose material information reflecting its operating situation, including, among others, financial statements, information on risk management, corporate governance, significant related party transactions and major events of the year. Information to be disclosed by a TIC shall comprise two parts, i.e. information about its trust businesses and information about its own operations.
The China Securities Regulatory Commission revised The Content and Format of Information Disclosure Standard No. 2 -
The Content and Format of Annual Report of Companies with Public Issuance of Shares. The revised standard requires a detailed explanation where a company decides not to distribute dividends, and an explanation of any related party relationship between the company and the top 10 shareholders who hold tradable shares.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Institute of Accountants (MIA), the local regulatory body governing accountants, issued a new bylaw on Continuing Professional Education (CPE) for Accountants in Malaysia. The new bylaw, which took effect from 1 January 2005, is in compliance with the International Education Standard (IES) 7 on continuing professional education issued by IFAC, of which MIA is a member body.
The new bylaw shall apply to all MIA members as follows:
- it is mandatory to complete at least 120 CPE credit hours of relevant CPE learning for each CPE cycle of three consecutive calendar years, of which 60 CPE credit hours shall be structured and verifiable. There is no longer any distinction in respect of the CPE requirements for members in public practice and those members not in public practice
- at least 20 CPE credit hours of structured and verifiable CPE learning each year is required
- structured CPE learning activities are those activities that have a clear set of objectives and a logical framework. Verifiable CPE learning means that such CPE learning should be objectively verified by a competent source. Examples given of evidence for verification include attendance certificates, course outlines and materials, qualification or assessment reports, and employer's reports or confirmations of participation in in-house CPE activities or training programmes
- members are required to maintain records of their compliance with CPE requirements and shall tender the appropriate evidence of such compliance if called upon to do so by the Institute.
Non compliance to the provisions of this bylaw or to respond to the Institute's enquiries will amount to 'unprofessional conduct' because this is a violation of one of the fundamental principles of the profession (to maintain and update professional competence). More information on the bylaw is at www.mia.org.my.
The Securities Commission (SC) recently released a guide to encourage the use of plain English in prospectuses. This is in line with the SC's ongoing efforts to ensure that the information in offer documents are easily understood by investors. The Plain Language Guide for Prospectuses outlines several approaches on how to provide clearer disclosures in prospectuses and is available on the SC website at www.sc.com.my.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The Singapore Budget was unveiled in February. The highlights included the following:
Basis of tax assessment not to be changed
The Ministry of Finance has decided not to implement the current-year basis of assessment for income tax at this stage. Under the current year basis of assessment, income tax is payable on income as it is earned, instead of being based on income earned in the previous year, which is the practice today. The Ministry felt that there were macroeconomic as well as cash-flow benefits to making the switch. With current year assessment, when earnings go down, income tax payments will go down at the same time, rather than one year later. This would provide fiscal support to the economy in a downturn, while helping companies and individuals with their cash-flow. However, many respondents in a recent public consultation exercise highlighted the administrative burden and compliance costs of the proposed system. In view of this, the Ministry re-examined the benefits of its proposal against these costs, and concluded that it was not worth the imposition on businesses and individuals to restructure the tax system in this way - at least for the time being.
Carry-back of losses allowed
Currently, Singapore's corporate tax regime allows companies to either carry forward their unutilised capital allowances (CAs) and trade losses to offset future incomes (i.e. loss carry-forward) or transfer these unutilised CAs and trade losses to related companies (i.e. group relief). However, these schemes may not provide adequate or timely support to smaller businesses that run into cash flow problems, particularly during a cyclical downturn. To address the needs of smaller businesses, a one-year carry-back of current year unutilised CAs and trade losses will be introduced with effect from Year of Assessment (YA) 2006. An aggregate amount of $100,000 of current year unutilised CAs and trade losses can be carried back on due claim.
Personal tax rates to go down
The top personal income tax rate will be lowered to 20% in two steps: first from 22% to 21% in YA 2006, and then to 20% in YA 2007. The marginal tax rates for all the other income brackets will also be reduced, so that all taxpayers will benefit.
Joseph Alfred, technical manager,
ACCA Singapore.
Australia & New Zealand
In the face of conflicting obligations on audit independence, the Australian Securities and Investments Commission (ASIC) has been forced to issue new rules covering auditors and company financial reporting.
Under a recent class order from ASIC, an auditor's report can now be signed after the auditor's independence declaration is given to directors, rather than the current situation where both documents are to be completed at the same time for inclusion in the financial report.
The conflicting obligations arose when the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 introduced new requirements that auditors must provide a declaration about whether they were aware of any contravention of the audit independence provisions of the act and the codes of professional conduct.
The legislation prescribes that the auditor's independence declaration must be included in the directors' report and that the auditor is required to sign the declaration and provide it with the auditor's report. This meant the auditor's report needed to be signed before the directors' report.
However, Australian auditing standards legally bind auditors to provide comments in the auditor's report about any material inconsistencies between the directors' report and the financial report, and to consider the impact of any material misstatements of fact in the directors' report.
The conflict between these two obligations made it difficult for the auditor to sign the audit report and provide these comments before the directors' report had been signed.
ASIC's new class order resolves the conflict by providing auditors with relief where:
- the independence declaration is given to the directors before they resolve to make the directors' report and less than seven days before the directors' report is signed
- the auditor's report is made within seven days after the directors' report is signed, and it discusses whether the declaration would be the same if it was given to the directors at the time the auditor's report is made, or if circumstances have changed, how the declaration would differ if it was given to the directors at the same time as the auditor's report.
Janine Mace, Australian freelance finance and business journalist.
Americas
US
Further discussion has taken place on the joint project between FASB and the IASB to converge the two bodies' own conceptual frameworks into a unified, complete and improved version.
FASB has considered the suggested order of work, which divides the project into seven phases; the first considers the objectives of financial reporting and qualitative characteristics of accounting information, and the last addresses the framework's applicability to the not-for-profit sector. FASB has approved and refined the suggested plan. For efficiency, FASB wants the work to focus on changes in the environment since its original framework was issued, and omissions and errors in the original. It has also requested work on the 'reporting entity' concept to be begun earlier than was originally planned. FASB has also asked the technical directors of the IASB and FASB to work together to determine whether the project should be supported by a joint international working group.
Meanwhile the US body has issued a FASB Staff Position (FSP) entitled Implicit Variable Interests under FASB Interpretation No 46 (revised December 2003), Consolidation of Variable Interest Entities. The FSP addresses whether a reporting enterprise should consider whether it holds an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. The identification of variable interests (implicit and explicit) may affect a number of matters, including the calculation or expected losses and residual returns.
A proposed FSP has also been issued, entitled Determining Whether Operating Segments Have 'Similar Economic Characteristics' under Paragraph 17 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The FSP answers a number of questions, such as whether both quantitative and qualitative factors should be considered when determining whether the economic characteristics of two or more operating segments are similar. The FASB staff believes they should.
Sarah Perrin, accountant and writer.
Canada
A report on the effectiveness of a company's internal control over financial reporting should include both a report on management's assertion of internal control and the auditor's report of its effectiveness over financial reporting.
So, to provide auditors with the guidance necessary to issue such a report, the Auditing and Assurance Standards Board has approved, subject to written ballot, a new standard -
An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. The intent with the new standard is to harmonise Canadian standards with US auditing standards approved by the Public Company Accounting Oversight Board and the Securities Exchange Commission in June 2004.
The new standard is also consistent with recently proposed Canadian Securities Administrators (CSA) requirements. The CSA issued a request for comments on 4 February 2005, on a proposed multilateral instrument and companion policy dealing with reporting on, and the audit of, internal control over financial reporting. These requirements are in line with SEC requirements in implementing the Sarbanes-Oxley Act of 2002, which requires management to provide an assessment of its internal control and for the auditor to attest to management's assertion.
The CSA may modify its proposed internal control reporting requirements in response to comments it receives by its 6 June deadline, which may require the AASB to revise the approved standard to reflect these possible changes. For this reason, the AASB has not yet set an effective date for the standard. It recognises, however, that the new standard needs to be in place to meet the needs of Canadian practitioners and entities that must comply with Sarbanes-Oxley. Canadian filers under the Multi-jurisdictional Disclosure System would need to comply for year ends after 15 April 2005. The AASB aims at meeting this date.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
The Draft Auditing Profession Bill (the 'Bill') addresses the offences of registered auditors in Chapter VI.
False statements in connection with audits
A registered auditor who, in connection with an audit of any financial statement, knowingly or recklessly expresses an opinion which is false shall be guilty of an offence. The Independent Regulatory Board of Auditors (IRBA), the body which will be replacing the Public Accountants and Auditors Board (PAAB), can take action against a firm in addition to or instead of the registered auditor who is conducting the audit. A person convicted of an offence under this section is liable to a fine or imprisonment for a term not exceeding 10 years, or both.
Offences relating to disciplinary hearings
- failure to attend a disciplinary hearing
- failure to take the oath or to affirm as a witness
- failure to present a document or book when required
- making a false statement or giving a false answer
- wilful hindrance of persons conducting the disciplinary process
A person convicted of such an offence will be subject to a fine.
Offences relating to practice by auditors
- employment of persons who have been suspended or disqualified from practice
- practise under a firm name or title unless on every letterhead bearing the firm name and title, there appears the details of the partner
- sign any account, statement, report or other document which purports to represent work performed by the auditor unless the work was done by him or under his supervision. This provision does not apply where the work was performed by another registered auditor
- perform professional work in connection with any matter which is the subject of a dispute or litigation, on condition that payment for the work may be made only if the dispute or litigation ends favourably for the party for whom it was performed
- engage in practice whilst under suspension
- engage in practice without prescribed indemnity insurance.
A person convicted of such an offence will be liable to a fine or in default of payment, to imprisonment not exceeding five years, or both.
One relevant matter which is not addressed in the Bill is whether the law should provide for sanctions for company directors who knowingly mislead auditors. Another alternative would be to follow the example of Sarbanes-Oxley and require CEOs to vouch personally for their companies' financial reports. Consideration should also be given to requiring each listed company to appoint a qualified accountant (not necessarily the CEO) as the designated person reporting to the audit committee and charged with ensuring the adequacy of disclosure.
Irene Christopher, head of policy
development, ACCA South Africa. |
