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international
August saw further changes with respect to accounting for financial instruments when the International Accounting Standards Board (IASB) issued IFRS 7, Financial Instruments: Disclosures, and an amendment to IAS 1, Presentation of Financial Statements, dealing with disclosures about an entity’s capital.
IFRS 7 will supersede the disclosure requirements contained in IAS 32, Financial Instruments: Disclosure and Presentation, and will be effective for accounting periods beginning on or after 1 January 2007. Earlier implementation is encouraged. IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, will be withdrawn from the same date as IFRS 7 applies to all financial instruments and all entities. The parts of IAS 32 dealing with the presentation of financial instruments will continue to apply.
The disclosure requirements fall into two parts. Firstly, the entity will need to include disclosures about the significance of financial instruments on its position and performance. These disclosures cover many of the requirements currently included in IAS 32. In addition, both qualitative and quantitative information will need to be given in respect of the exposure to the risks arising from financial instruments. The standard specifies minimum disclosures in respect of credit risk, liquidity risk and market risk. The disclosures in respect of credit risk include details of financial assets that are either past due or impaired together with details of any collateral.
When an entity makes disclosures about market risk they will be required to include a sensitivity analysis. This sensitivity analysis can be based on any internal analysis which is used to manage risk if this reflects the interdependencies between risk variables. If the entity does not prepare such an internal analysis it is required to produce a sensitivity analysis for each type of risk to which it is exposed and which shows how profit or loss for the period and equity would have been affected by changes in that variable. In addition, the methods and assumptions used in preparing the sensitivity analysis, and any changes therein from the previous period, are also required to be disclosed.
The qualitative disclosure will include management’s objectives, policies and procedures to manage the identified risks.
The standard also contains application guidance within Appendix B, the content of which is also mandatory. Further, non-mandatory, implementation guidance has been produced to accompany the standard.
The amendment to IAS 1, issued at the same time as FRS 7, requires companies to disclose information about their objectives, policies and processes for managing capital. This disclosure will include any requirements with respect to capital that are placed on the entity by external parties - for example, regulators.
IFRIC 3, Emission Rights, was withdrawn in June with immediate effect. The reason for the withdrawal of this extract is that, at present, the markets for emission rights are not well established and some European countries have yet to issue emission rights to companies. The IASB did not, therefore, consider that there is an urgent need for such an extract.
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
Proposed new guidance for public benefit entities has been issued by the UK Accounting Standards Board. The exposure draft, Statement of Principles for Financial Reporting: Proposed Interpretation for Public Benefit Entities, aims to expand on how the ASB’s 1999 Statement of Principles should be interpreted for public benefit entities.
Public benefit entities are not just public sector or not-for-profit organisations. They may be private or public sector. However, a distinguishing factor is that any risk capital they have has been provided primarily to support the entity’s objective, rather than to provide a financial return to equity shareholders.
The exposure draft builds on an earlier discussion paper which the ASB says was “generally well received”. Some proposals have been developed further - for example, in relation to issues such as voluntary gifts, liabilities for commitments to provide public benefits and capital grants (for financing the purchase or construction of a fixed asset).
Meanwhile, as the mid-September deadline approached for responses to the ASB’s consultation over its future role, pressure appeared to be mounting for a pause in the standard setter’s IFRS convergence plan. The ASB has been following a phased approach to introducing new UK standards aligned with IFRS, rather than opting for a “big bang” adoption of new standards at one single future date. That decision may now need to be reviewed depending on the final analysis of responses.
Finally, following an analysis of new international accounting and auditing standards, the ASB’s overarching body, the Financial Reporting Council, has concluded that the “true and fair” view remains a cornerstone of financial reporting in the UK. This is despite the introduction of “fair presentation” as the overarching test that financial statements should satisfy. The FRC has also concluded that the need for professional judgement remains central to the work of preparers of accounts and auditors in the UK.
Sarah Perrin, accountant and writer.
The Minister for Enterprise, Trade and Employment has published the Employees (Provision of Information and Consultation) Bill 2005. The main purpose of the Bill is to implement the provisions of the European Union Directive 2002/14/EC, establishing a general framework for informing and consulting employees in the European Community.
The Bill provides for rights to information and consultation for employers with more than 50 employees. It established, for the first time in Irish legislation, a general right to information and consultation for employees.
The significant provisions are:
- rights to information and consultation for employers with more than 50 employees
- the employer, or at least 10% of employees (minimum of 15 and a maximum of 150), can initiate negotiations to establish information and consultation arrangements
- the inclusion of a set of “standard rules” which will apply to where the employer refuses or fails to agree procedures with the employees
- employees can exercise their rights directly or collectively via employee representatives
- confidential information cannot be disclosed even after cessation of employment
- disputes on the negotiation, interpretation or operation of information and consultation agreements may be referred to the Labour Court for determination.
The penalties for non compliance ranges on summary conviction up to 3,000 euros and/or six months’ imprisonment, and on indictment to a fine of up to 30,000 euros and/or a three-year prison term.
The Bill can be downloaded from www.oireachtas.ie/documents/bills28/bills/2005/2605/b2605s.pdf.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong & Mainland China
The Hong Kong Institute of Certified Public Accountants issued a financial reporting framework and standard for small and medium-sized entities on 22 August.
The standard is applicable to Hong Kong private companies, which are eligible to prepare their financial statements under Section 141D of the Hong Kong Companies Ordinance. For overseas incorporated companies to apply the standard, they have to fulfil the criteria of not having public accountability and the size test. To fulfil the size test, the company has to meet any two of these requirements: (a) annual revenue not exceeding HK$50m; (b) total assets not exceeding HK$50m; and (c) total number of employees not exceeding 50. In addition, all the owners have to agree to adopt the standard.
The new standard is effective for qualifying entities with financial statements covering a period beginning on or after 1 January 2005.
The Ministry of Finance endeavours to speed up the convergence of China’s accounting practices with International Financial Reporting Standards.
Following the issuance of a number of exposure drafts in July, the Ministry of Finance issued a further six exposure drafts of accounting standards for public consultation. These include: insurance contract; re-insurance contract; employee benefits; enterprise’s annuity fund; earnings per share; and income taxes. These standards were drafted by reference to the International Financial Reporting Standards with due consideration of China’s commercial and regulatory practices.
A draft of revised individual income tax law was submitted to the Standing Committee of the National People Congress for review and approval. The revised law streamlines the taxation for employment income and income from other sources. It also proposes to raise the personal allowance and to lower the tax rates. The law is expected to be passed in October and become effective in January 2006.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
The Malaysian Accounting Standards Board recently announced the adoption of the financial instruments standard IAS 39, one of the most complex standards issued to date by the IASB. The adoption follows the approval recently by the MASB of IAS 39, known as FRS 139 in Malaysia. FRS 139 is identical to IAS 39 issued by IASB. The standard comes into force with effect from 1 January 2006.
FRS 139 is adopted after five years of lengthy deliberation involving major stakeholders such as bankers, auditors, investment analysts, professional bodies, the unit trust industry and insurance industry and consultation process with the public. The financial instruments standard has also been adopted after taking into consideration the various changes to IAS 39 by IASB over the years, as well as the ongoing changes.
The MASB chairman, Dato’ Zainal Abidin Putih, points out that FRS 139 is part of MASB’s plans to issue 21 financial reporting standards in Malaysia in the current year to serve the investing community better through greater transparency in financial reporting. So far, the Board has approved 20 of those standards. Putih says embracing FRS 139 will have implications in terms of systems changes, risk management and skills building, though the impact of the financial instruments standard will vary from company to company.
Considering the far-reaching implications of the FRS 139, companies are advised to start preparing.
MASB recently issued an exposure draft on the amendment to employee benefits which covers the accounting treatment for actuarial gains and losses, group plans and disclosures regarding such benefits.
The exposure draft, MASB ED 49 Amendment to FRS 119 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures, is identical to the amendment to IAS 19 on employee benefits which was issued by the IASB in December 2004.
The amendment to IAS 19 introduces an additional recognition option for actuarial gains and losses arising in post-employment defined benefit plans. This option allows an entity to recognise actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of recognised income and expense.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
The foreign currency risk of a highly probable forecast intragroup transaction may now qualify as a hedged item in consolidated financial statements, provided the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction, and the foreign currency risk will affect consolidated profit or loss. The amendment will become effective for annual periods beginning on or after 1 January 2006. Earlier application is encouraged.
An example of a hedged item qualifying under the amendment would include a forecast sale or purchase of inventories between members of the same group if there is an onward sale of the inventory to a party external to the group. Similarly, a forecast intragroup sale of plant and equipment from the group entity which manufactured it to a group entity - which will use the plant and equipment in its operations - may affect consolidated profit or loss. This could occur, for example, because the plant and equipment will be depreciated by the purchasing entity, and the amount initially recognised for the plant and equipment may change if the forecast intragroup transaction is denominated in a currency other than the functional currency of the purchasing entity. If the foreign currency risk of a forecast intragroup transaction does not affect consolidated profit or loss, the intragroup transaction cannot qualify as a hedged item.
CCDG (Council on Corporate Disclosure and Governance) has issued FRS 106, Exploration for and Evaluation of Mineral Resources. The standard applies for annual periods beginning on or after 1 January 2006. Earlier application is encouraged.
Until now, there has been no FRS that specifically addresses the accounting on exploration for, and evaluation of, mineral resources in Singapore. In addition, “mineral rights and mineral resources such as oil, natural gas and similar non-regenerative resources” are excluded from the scope of FRS 16, Property, Plant and Equipment. Accounting practices for exploration and evaluation assets under the requirements of other standard setting bodies are also diverse and often differ from practices in other sectors for expenditures that may be considered similar.
FRS 106 now requires an entity to determine a policy specifying which expenditures are recognised as exploration and evaluation assets, and to apply that policy consistently. In making this determination, an entity is required to consider the degree to which the expenditure can be associated with finding specific mineral resources. After recognition, an entity shall apply either the cost model or the revaluation model to the exploration and evaluation assets.
The details relating to the amendments to FRS 39 and FRS 106 may be viewed on CCDG’s website at www.ccdg.gov.sg.
Joseph Alfred, technical manager,
ACCA Singapore.
Australia & New Zealand
After ongoing concerns about bankrupts being able to use loopholes in existing legislation to escape paying their creditors, the Australian Government has announced another round of proposals for changes to the Bankruptcy Act.
The amendments are designed to strengthen the “clawback” provisions within the act and were developed following consultation with various stakeholders, including the local accountancy profession.
After some embarrassing cases in recent years of high profile bankrupts maintaining their lifestyle through assets held in other entities, the Australian Government announced it was going to crackdown in the area, stating that it was “committed to preventing unscrupulous debtors from avoiding their obligations to creditors”.
Last year, the federal attorney-general released the Bankruptcy Legislation Amendment (Anti-Avoidance and Other Measures) Bill as an exposure draft, but concerns expressed by accountants and other professional groups about the unintended consequences of the proposals on an individual’s ability to undertake legitimate asset protection arrangements led to the Bill being withdrawn.
Following the backdown, the Government issued a discussion paper and its Insolvency and Trustee Services Australia agency has now issued a new set of recommendations for the amendments.
Under these proposals:
- the transfer of undervalued assets will be declared void if the transfer took place four years or less before the bankruptcy. Currently, the time period to prove solvency is two years or less before the bankruptcy
- trustees will have the power to recover property transferred to related parties for less than market value in the four years prior to bankruptcy. Related parties include business partners, parents, children, relatives and trustees and beneficiaries of trusts related to the bankrupt or the bankrupt’s spouse
- trustees will have increased powers to recover property disposed of with the intention to defeat creditors
- transferees will no longer be able to be “wilfully blind” to the rationale for assets transferred to them as a means of defeating creditors.
Draft legislation covering the new proposals is expected to be introduced into the Australian Federal Parliament during the current sitting.
Janine Mace, Australian freelance finance and business journalist.
Americas
US
FASB has been busy, issuing a series of new proposals relating to financial assets and financial instruments.
An August exposure draft, Accounting for Transfers of Financial Assets, aims to clarify the derecognition requirements for financial assets developed initially in FASB Statement No. 125 and revised in Statement 140. In particular, the proposed statement seeks to specify clearly the circumstances requiring the use of a qualifying special purpose entity (SPE) in order to derecognise all or a portion of financial assets. It also provides extra guidance on permitted activities of qualifying SPEs and aims to change and simplify the initial measurement of interests related to transferred financial assets held by a transferor. The proposed changes apply mainly to securitisations and loan participations.
Simultaneously, FASB issued two other EDs - Accounting for Servicing of Financial Assets and Accounting for Certain Hybrid Financial Instruments. Both exposure drafts provide optional accounting treatments that would simplify the accounting in what FASB notes are “complex areas”. The proposed changes in all three exposure drafts are intended to address some practical issues that have arisen in applying existing standards, while also reducing accounting volatility.
Meanwhile, FASB has been continuing its work on the hierarchy of Generally Accepted Accounting Principles, taking account of comments received in response to its April 2005 ED on the topic. It has also decided to add a project to its agenda to establish general standards of accounting for, and reporting of, events that occur subsequent to the balance sheet date. One aim of the project will be to consider whether certain minor differences between US GAAP and the corresponding international standard, IFRS 10, Events After the Balance Sheet Date, could be eliminated or minimised. Areas for attention will include the date until which subsequent events are considered in relation to making adjustments to, or disclosures in, the financial statements.
Sarah Perrin, accountant and writer.
Canada
Canada’s certified general accountants (CGAs) hope to soon be able to practise public accounting across the country after an internal trade panel found current restrictions in one province unfair. A recent report by an Agreement on Internal Trade (AIT) panel found the current law in the province of Quebec, which denies CGAs from the neighbouring province of New Brunswick the right to provide auditing services in Quebec, are inconsistent with the AIT. The panel called on Quebec to remove restrictions to the practise of public accounting by non-chartered accountants, noting that chartered accountants (CAs) are not the only accountants qualified to provide these services. It also noted that current restrictions have impaired internal trade and are a barrier to mobility within Canada.
The panel report, issued in August, follows a challenge under the AIT launched by CGA-New Brunswick (the provincial affiliate of the national Certified General Accountants Association of Canada) on behalf of its members who are unable to provide auditing services to clients located in Quebec. The association argued that accountants should be able to practise public accounting in Quebec based on competence, not on which professional accounting designation they held. “CGA requirements are as demanding as those of any other accounting designation,” said Terry LeBlanc, spokesperson for CGA-New Brunswick. “The time has come for Quebec laws to fully recognise this.”
The AIT, signed by all Canadian provinces and territories in 1995, commits all signatories to reduce trade barriers within Canada. Quebec is the only jurisdiction that continues to restrict the right to perform audits to CAs only. A similar AIT panel concluded in 2001 that Ontario’s public accountant licensing regime unfairly denied CGAs from Manitoba the right to practise public accounting in Ontario. Revised legislation is expected to come into effect in that province this year.
Alison Arnot, freelance writer and editor, Ottawa.
South Africa
In South Africa, most companies have been accounting for lease income and expenses on a cashflow basis when they should have been accounted for on a straight-line basis over a lease’s term.
The International Accounting Standard on operating leases (IAS 17) and the South African equivalent (AC 105) are identical; however, it appears that South African companies have misinterpreted the standard. The market has been alerted, through a circular issued by SAICA on 4 August, that points out the correct interpretation of operating leases.
SAICA says that many South African companies have lease or rental agreements that contain fixed escalation clauses, implying
that the lease payments or receipts increase over the lease period. The total cash flows
are therefore fixed in terms of the lease agreement.
Companies have reflected varying amounts over the term of the lease in their financial statements depending on the time and percentage of escalation, whereas now they will have to reflect the average paid/received over the lease’s term.
As the change in interpretation has no cash impact, it will have no effect on distributable earnings - however, it will have a material effect on profits.
Property companies are concerned that the confusion created by the change will have a negative impact on the sector.
Irene Christopher, head of policy development, ACCA South Africa. |
