Technical update, pt 1

FASB

FASB has issued for public comment an exposure draft, Qualifying Special-purpose Entities and Isolation of Transferred Assets, which would amend FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The ED aims to provide more specific guidance on the accounting for transfers of financial assets from a company to an off-balance sheet structure known as a qualifying special-purpose entity (QSPE).

The proposed approach would prohibit an entity from being a QSPE if a company that transfers assets to the entity enters into a commitment (such as a financial guarantee, liquidity commitment or total return swap) to provide additional cash or other assets to fulfil the QSPE�s obligations to its beneficial interest holders. In addition, if an entity can reissue beneficial interests, the proposed Statement would prohibit that entity from being a QSPE if any party involved with the entity has certain risks or combinations of risks and decision-making abilities. The proposed Statement would also prohibit an entity from being a QSPE if it holds equity instruments, such as shares or partnership interests. Finally, the proposed Statement would clarify some of the requirements in Statement 140 related to legally isolating assets and surrendering control of assets.

The ED is available on FASB�s website (www.fasb.org).

IASB

As reported in the July/August edition of accounting & business, the IASB has issued IFRS 1, First-time Adoption of International Financial Reporting Standards, which explains how an entity should make the transition to International Financial Reporting Standards (IFRSs) from another basis of accounting. The standard is based on the proposals published as an exposure draft (ED 1) in July last year, and contains changes that the IASB has made in the light of the 83 comment letters it received.

Under IFRS 1, entities must explain how the transition to IASB standards affects their reported financial position, financial performance and cash flows. To create a starting point for its later accounting under IFRSs, an entity adopting IFRSs for the first time (a first-time adopter) needs to prepare an opening IFRS balance sheet at the date of transition to IFRSs (the beginning of the earliest period for which it presents full comparative information under IFRSs in its first IFRS financial statements). For example, if an entity�s first IFRS financial statements are for the year ended 31 December 2005, it will need to prepare an opening IFRS balance sheet at 1 January 2004.

In general, IFRS 1 requires a first-time adopter to comply with each IFRS that has come into effect at the reporting date for its first IFRS financial statements (31 December 2005 in the above example). In particular, it requires a first-time adopter to do the following in its opening IFRS balance sheet:

• recognise all assets and liabilities whose recognition is required by IFRSs
• not recognise items as assets or liabilities if IFRSs do not permit such recognition
• classify all recognised assets and liabilities in accordance with IFRSs, and
• apply IFRSs in measuring all recognised assets and liabilities.

IFRS 1 grants a first-time adopter limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements.

IFRS 1 applies if an entity�s first IFRS financial statements are for a period beginning on or after 1 January 2004, although earlier application is encouraged. It replaces SIC-8, First-time Application of IASs, as the Primary Basis of Accounting. Like SIC-8, the IFRS requires retrospective application of IFRSs in most areas. Unlike SIC-8, the IFRS:

• includes some targeted exemptions
• clarifies that an entity applies the latest version of IFRSs and specifies that the transitional provisions in other IFRSs do not apply to a first-time adopter, except for transitional provisions in IAS 39, Financial Instruments: Recognition and Measurement, on hedge accounting and derecognition
• clarifies how a first-time adopter�s estimates under IFRSs relate to its estimates for the same date under previous GAAP, and
• requires enhanced disclosure to explain how the transition to IFRSs affected the entity�s reported financial position, financial performance and cash flows.

Copies of IFRS 1, First-time Adoption of International Financial Reporting Standards, are available at £15 each (24 euros/US$23) including postage, from: IASCF Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, UK.

The IASB has published exposure draft 5 on Insurance Contracts. The ED proposes guidance for insurance companies that will be expected to comply with IFRSs in 2005. At present there is no IFRS that addresses insurance contracts, and insurance contracts are excluded from some existing standards that would otherwise be relevant. Furthermore, accounting for insurance contracts varies widely throughout the world and is often inconsistent with accounting practices for other industries.

ED 5 marks only the first phase of the IASB�s insurance project and is aimed at introducing improved disclosures for insurance contracts. The proposals are also intended to introduce modest improvements to recognition and measurement practices, without requiring extensive changes that might need to be reversed when the IASB completes the second phase of this project.

In the second phase, the IASB will address broader conceptual and practical issues related to insurance accounting. These will be the subject of IASB deliberations and consultations with interested parties that will resume in the last quarter of 2003.

The proposals in ED 5 would apply to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. The proposals would:

• eliminate catastrophe and equalisation provisions
• require a loss recognition test if no such test exists under an insurer�s existing accounting policies
• require an insurer to keep insurance liabilities in its balance sheet until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets.

The proposals would permit an insurer to change its accounting policies for insurance contracts only if that would mean that its financial statements present information that is more relevant and reliable.

When an insurer changes its accounting policies for insurance liabilities, ED 5 would permit it to reclassify some or all financial assets into the category of financial assets that are measured at fair value, with changes in fair value recognised in profit or loss.

The proposals would also:

• exempt an insurer from accounting for an embedded derivative separately at fair value if the embedded derivative meets the definition of an insurance contract
• require an insurer to unbundle (i.e. account separately for) deposit components of some insurance contracts, to avoid the omission of assets and liabilities from its balance sheet
• limit reporting anomalies when an insurer buys reinsurance
• permit an expanded presentation for insurance contracts acquired in a business combination or portfolio transfer, and
• address limited aspects of discretionary participation features contained in insurance contracts or financial instruments.

The proposals would require disclosure about the amounts in the insurer�s financial statements that arise from insurance contracts, and the estimated amount, timing and uncertainty of future cash flows from insurance contracts.

The proposals would come into effect for periods beginning on or after 1 January 2005 but earlier application would be encouraged. The requirement to disclose the fair value of insurance liabilities and insurance assets would apply from 31 December 2006.

The IASB invites comments on the exposure draft by 31 October 2003.

Copies of ED 5, Insurance Contracts, are available at £15 each (24 euros/US$23) including postage, from the IASCF Publications Department. The complete text of the exposure draft is also freely available from the IASB�s website (www.iasb.org.uk).

The IASB has also published for public comment proposals on reporting asset disposals and discontinued operations, set out in ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations. The proposals are the first to arise from the IASB�s joint short-term convergence project with FASB in the US. The exposure draft results from the IASB�s review of the FASB standard SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, which was issued in 2001. The exposure draft proposes that assets that are expected to be sold and meet specific criteria should be measured at the lower of carrying amount and fair value less costs to sell, should not be depreciated and should be presented separately in the balance sheet. It also proposes that any operation with separately identifiable cash flows should be classified as �discontinued� once the assets involved in the operation meet the criteria to be classified as held for sale if the cash flows of the operation will be eliminated from the ongoing operations of the entity and there will be no continuing involvement in the operation after its disposal. These proposals, when implemented, would achieve convergence with the equivalent requirements in US GAAP.

Copies of ED 4, Disposal of Non-current Assets and Presentation of Discontinued Operations, are available at £15 each (24 euros/US$23) including postage, from the IASCF Publications Department. The IASB invites comments on the exposure draft by 24 October 2003.

IFAC

A new report commissioned by IFAC from an independent task force, entitled Rebuilding Public Confidence in Financial Reporting: An International Perspective, includes recommendations for strengthening corporate governance, improving audit effectiveness, and raising the standard of regulation of issuers. It also presents an international perspective on the challenges facing not only the accountancy profession, but also those involved in regulating a profession that has such a significant involvement in capital markets worldwide.

The task force, chaired by John Crow, former governor of the Bank of Canada, included individuals with backgrounds in commercial banking, international economics, academia and law, as well as accounting and auditing, from six countries: Australia, Canada, France, Japan, the UK and the US.

The report�s recommendations are built on three basic assumptions:

• the credibility of financial reporting is both an issue in each country and an international issue, with action required at both levels
• to improve credibility in financial reporting, action will be necessary at all points in the supply chain that delivers financial information
• integrity - both individual, and institutional - is essential for building confidence in financial reporting, and, therefore, needs to be fostered.

Specific recommendations include the following:

• effective corporate ethics codes need to be in place and actively monitored; such codes should be supported by training
• codes of conduct need to be put in place for other participants in the financial reporting process - such as investment analysts and lawyers - and their compliance should be monitored
• incentives to misstate financial information need to be reduced, and companies must refrain from forecasting profits with an unrealistic level of precision
• audit effectiveness needs to be raised, primarily through greater attention to audit quality control processes.

The full report and complete list of recommendations can be accessed on-line from www.ifac.org/credibility.

The IFAC Board has published an exposure draft proposing changes to its Code of Ethics for Professional Accountants, expanding both the guidance and authority of the Code, which is applicable to all member bodies and to accountants worldwide.

The ED, available from IFAC�s website at www.ifac.org/EDs, proposes that the Code be elevated from a �model code� on which to base national requirements to a �standard�, requiring IFAC member body compliance. The proposed revised Code specifically expands guidance for all individual accountants addressing integrity, objectivity, professional competence, confidentiality, and professional behaviour. Clearer identification of threats and safeguards are set out for professional accountants in public practice in the areas of second opinions, fees and remuneration, and custody of client assets.

The revised Code also provides new and in-depth guidance for professional accountants in business by addressing issues such as potential conflicts, preparing and reporting information, financial interests, inducements, and disclosing of information.

Comments are requested by 30 November 2003. They may be submitted to Edcomments@ifac.org or faxed (+1 212 286 9570) to the attention of the IAASB technical director. Comments may also be mailed to the technical director�s attention at IFAC, 545 Fifth Avenue, 14th Floor, New York, NY 10017.

IFAC�s International Auditing and Assurance Standards Board (IAASB) has published a proposed International Standard on Auditing (ISA) designed to establish standards for auditors when performing reviews of an entity�s interim financial information. The exposure draft, Review of Interim Financial Information Performed by the Auditor of the Entity, applies to engagements to review interim financial information when all of the following criteria are met:

• the review is performed by an entity�s auditor
• the interim financial information is prepared in accordance with an identified financial reporting framework
• the entity is required or permitted under legislation, regulation, or equivalent authority to issue such interim financial information, and
• the audited financial statements of the entity are required to be filed with a regulatory authority, or equivalent, and are publicly available.

The exposure draft features guidance on determining the terms of the engagements, procedures, evaluation of misstatements, management representations, and reporting the results of the interim review. In addition, an appendix includes examples of analytical procedures the auditor may consider, and provides illustrative review reports, modified review reports, and a management representation letter.

EC

The European Commission has welcomed the Accounting Regulatory Committee�s unanimous vote in July in favour of adopting International Accounting Standards (IASs), including related interpretations (SICs). This adoption includes all existing IASs and SICs, except for IASs 32 and 39 and related SICs 5, 16 and 17, all of which deal with the accounting and disclosure of financial instruments and which the IASB is still revising. The endorsement of standards is a crucial element of the IAS Regulation requiring listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with IASs from 2005 onwards.

The Accounting Regulatory Committee has taken the key first step in the process of endorsing IASs. It does not prejudge in any way the IASB�s due process on IASs 32 and 39, and gives the IASB and its constituents time to improve and refine both accounting standards on financial instruments by 1 January 2005. In a second step, the Commission and the ARC will consider revised IAS 32 and 39 for endorsement as soon as available, i.e. at the latest in March 2004. Heads of government have made clear at successive European Councils that they want the conditions for the creation of an integrated capital market in place by 2005.

EFRAG

EFRAG has completed its due process regarding the endorsement advice on IFRS 1, First-time Adoption of International Financial Reporting Standards, and its final advice has been sent to the European Commission�s Directorate-General for the Internal Market. EFRAG supports the adoption of IFRS 1 as an important step for the adoption of IFRSs in Europe. It believes the standard accommodates the needs of EU-listed companies, which will be applying IASs for the first time for financial years beginning on or after 1 January 2005. The comments received by EFRAG and the final letter can be accessed via EFRAG�s website (www.efrag.org).

FEE

FEE has written to the SEC on the topic of the Public Company Accounting Oversight Board (PCAOB) and the proposed rules relating to auditor registration systems. FEE has said it strongly supports the transatlantic regulatory dialogue between the EC and the US authorities aiming to establish principles and criteria for auditors, addressing issues such as inspection, investigation and discipline. FEE considers that home-country regulation is the most consistent and effective approach in terms of auditor oversight. It notes that the PCAOB has addressed some of FEE�s concerns from earlier consultation, but is disappointed that the PCAOB has not taken into consideration arguments that the requirement to register is unnecessarily burdensome and costly when an audit firm is subject in its home country to similar obligations related to oversight and matters such as inspection, investigation and discipline.

FEE has written to the EC responding to the EC Communication on Modernising Company Law and Enhancing Corporate Governance in the European Union - A Plan To Move Forward. FEE welcomes the modernisation initiative and supports the key policy objectives identified as strengthening shareholders� rights and third party protection and fostering efficiency and competitiveness of business. FEE says the accountancy profession has a valuable contribution to make to the expert consultation on company law and corporate governance. FEE�s full comments are accessible via its website (www.fee.be).

FEE has also written to the EC to provide substantial input to the modernisation of the Eighth Directive, which concerns the approval of persons responsible for carrying out the statutory audits of accounting documents. FEE has set out its thoughts on the main principles that need to be included in the revision. FEE will follow-up on this initiative with a more detailed response, to be submitted to the EC in October.

UK

Financial reporting

Draft UITF Abstract
The ASB has published a draft UITF Abstract on accounting for purchases and sales of own shares. The draft reflects a change to the draft Abstract on accounting for treasury shares that was published for consultation in May, in response to respondents� requests for its scope to be clarified. The UITF decided that, in consolidated accounts, the Abstract should cover all interests in the holding company�s shares (i.e. shares held by the holding company itself as treasury shares and any shares held by subsidiaries).
The UITF�s proposals are consistent with the accounting treatment that is required by existing International Accounting Standards and would require own shares to be accounted for as a deduction from shareholders� funds.

Exposure draft issued
FRED 32, Disposal of Non-current Assets and Presentation of Discontinued Operations, has been issued by the ASB. The FRED presents proposals for a UK accounting standard based on the IASB�s exposure draft, ED 4, which was published at the same time.
The key principles of the IASB�s proposals on the measurement and presentation of discontinued operations are consistent with existing US GAAP.
These include:

• the classification �held for sale� for non-current assets meeting certain criteria
• the concept of a disposal group
• the requirement that assets and disposal groups held for sale should be measured at the lower of carrying value and fair value less costs to sell
• non-depreciation of assets held for sale, either individually or within a disposal group
• separate presentation on the face of the balance of assets held for sale and the assets and liabilities within a disposal group
• the definition of discontinued operations.

Views sought on IASB�s ED
The ASB is seeking views on the IASB�s ED 5, Insurance Contracts. The international proposals in ED 5 (labelled Phase I by the IASB) are an interim step towards a radical reshaping of accounting for insurance contracts which will be taken forward over the next few years.
The ASB supports the IASB�s proposed move to a principled, comprehensive insurance model although notes that there are many difficult conceptual and practical issues to be considered before the IASB can achieve and implement Phase II of its programme, which will seek to recognise directly the asset or liability created by an insurance contract, measuring it at fair value.
Meanwhile, the IASB is proposing that, for accounting periods beginning before 1 January 2007, the financial reporting of insurance contracts should be exempted from certain basic guidance in other standards, including a requirement that accounting information should be relevant and reliable.
Although the ASB is concerned that ED 5, if implemented, would allow considerable flexibility in the timing of the recognition and measurement of profiles on insurance contracts, it also notes the positive in that, if the proposed Phase I standard were adopted, it would introduce an increase in reporting disclosures, and assist international transparency of the various forms of insurance accounting likely to be used in the interim phase.

Employment law

New equality regulations
Major changes in UK discrimination law are on the way, as a result of the need to comply with European law. The general framework directive on equal treatment sets out a regime for equal treatment in both employment and vocational training. It contains provisions on sexual orientation, which are to be implemented in the UK by 1 December 2003. The provisions on �religion or belief� come into effect the next day. The provisions relating to disability will be implemented in October 2004. Finally, it is anticipated that regulations concerning discrimination on the ground of age will be laid before Parliament in 2004, but the part of the framework directive dealing with age has a later deadline for implementation, i.e. December 2006.
Following two formal consultation exercises, three sets of regulations have been laid before Parliament in draft form. The draft Employment Equality (Religion or Belief) Regulations 2003 makes it unlawful to discriminate on grounds of religion or belief in employment and vocational training. �Religion or belief� is defined as meaning any religion, religious belief or similar philosophical belief. Differences relating to national security, positive action and for the protection of Sikhs in connection with wearing safety helmets are permissible.
The draft Employment Equality (Sexual Orientation) Regulations 2003 makes it unlawful to discriminate on the grounds of sexual orientation, which is defined as a sexual orientation towards persons of the same sex, persons of the opposite sex or persons of the same sex and of the opposite sex. Differences of treatment are, however, permissible if related to national security, benefits dependent on marital status and positive action. In both sets of regulations there are exceptions if it is a genuine and determining occupational requirement to a post-holder to be of a particular sexual orientation, and for employment purposes of organised regulations. The draft regulations do not, however, deal with various issues concerning pensions.
Finally, the draft Disability Discrimination Act 1995 (Amendment) Regulations 2003 includes a revised definition of discrimination; define �harassment�; and includes provisions to remove the exemption from the 1995 Act in respect of small businesses. There are more extensive provisions on the duty to make �reasonable adjustments�, including examples of steps which may need to be taken. Later this year, a disability bill is expected to deal with other matters, not deriving from the general framework directive. The definition of �disability� will be widened and the scope of the legislative regime will be extended to cover membership of large private clubs.

Minimum wage
The National Minimum Wage (Enforcement Notices) Act 2003 came into form on 8 July 2003. It arose as a result of a decision of the Employment Appeal Tribunal which highlighted a gap in the regime concerning the national minimum wage, i.e. that �enforcement notices� can only be issued in respect of current employees. The new Act ensures that an enforcement notice may be served on an employer who has not paid an employee at a rate at least equivalent to the minimum wage, whether or not the individual was still on the payroll.

Dismissal of chief executive
In Cobley v Forward Technology Industries Ltd, a tribunal ruled that the dismissal of a chief executive, following a hostile takeover bid, and after he had led a competing bid for control of the company, was fair. The Court of Appeal upheld that ruling. The mere fact that the chief executive�s continued employment did not necessarily harm the employer�s interests did not prevent dismissal being justified.

Health & Safety
The Health & Safety Executive has published a new pilot project on stress management called Management Standards for Stress. The HSE is inviting employers to undertake the project and feedback with comments by November this year. In the light of the response, it will consider whether and how to launch the standards formally in 2004. There are six components to the standards, which seek to reduce workplace stress:

• making sure that staff can cope with job demands
• giving staff adequate control over their work
• making sure that staff are given support by their colleagues
• combating unacceptable behaviour such as bullying
• making sure that staff understand their roles and responsibilities
• involving staff in organisational change.

Employers interested in taking part in the pilot project should refer to the HSE website - www.hse.gov.uk. It is worth noting that, although the standards do not currently have any legal force, complying with them - even at this stage - enables an employer more effectively to resist claims in respect of work-related stress.

Taxation

Finance Act 2003
The Finance Bill has now received the Royal Assent. Prior to assent further anti avoidance clauses were added at report stage on the following subjects.

• Corporation tax relief on intangible assets, and
• l IHT gifts with reservation.

Group loss claims
A group litigation order was made in the High Court on 23 May 2003, which will apply to various types of loss claim made on a cross border basis, within the EU. Test cases will be selected and the results will be binding on all claimants on the group register.

Unapproved retirement benefit schemes
Following the case of Tullet and Tokyo Forex International Ltd and others the Inland Revenue has reconsidered its position in relation to NI Contributions on payments to funded unapproved pension schemes (FURBS) and have concluded that their existing view was correct, i.e. the contributions were liable to class 1 NI. They said: �After full and careful consideration, the Revenue does not accept the High Court�s reasoning as applying to a payment into a FURBS.�

Electronic dividend vouchers and tax certificate
Consultation is taking place on proposals to allow dividend vouchers and tax deduction certificates to be issued electronically where both issuer and recipient agree.
Comments on the proposals should be sent to the Inland Revenue by 12 September 2003.

Pension taxation
There will be consultation in the autumn on �a radical new simplified regime� for pensions, with a view to implementing the new regime in April 2005.
This follows the consultation paper issued in December 2002 and responses to that document.

Double taxation agreements
Discussions are to be held soon with Iran to institute a comprehensive double taxation agreement.
Protocols to the UK/Canada DTA and the UK/Mauritius DTA have been signed.
The USA agreement has been ratified and takes effect from April 2003 for most purposes.

Payroll giving
Payroll giving increased by £13m to £86m in 2002/3 according to an Inland Revenue announcement.

Inheritance tax reporting requirements
The excepted estate limit which allows simplified IHT reporting has been increased from £220,000 to £240,000 by SI 1658/2003.
The statutory instrument came into force on 1 August for deaths on or after 6 April 2003.