Technical update
| by Various 30 Sep 2003 Topic: Technical update |
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IASB The IASB has published an exposure draft, Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk, proposing improvements to the implementation of IAS 39, Financial Instruments: Recognition and Measurement. If adopted, the proposals would enable fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk (sometimes referred to as 'macro hedging'). The ED retains the basic principles behind IAS 39 while aiming to reduce the cost of compliance. The exposure draft proposes the following:
The separate line items referred to in (a) and (b) above are to be presented in the financial statements next to financial assets or financial liabilities. Amounts contained in these line items will be removed from the balance sheet when the assets or liabilities to which they relate are derecognised. The release of the ED is part of the IASB's continuing process of improving and easing the implementation of IAS 39. The IASB published its first round of proposed improvements for public comment in June 2002. Based on the comments received and a series of public roundtable discussions held in March 2003, the IASB launched intensive discussions with interested parties, including banking representatives, to find a way within the principles of IAS 39 to accommodate macro hedging. Whilst the discussions did not produce complete agreement on the measurement of hedge ineffectiveness and deposit liabilities, the IASB's approach set out in the exposure draft would mark an important advance by permitting macro hedging. Furthermore, consistently with the IASB's established due process, the Basis for Conclusions on the Exposure Draft includes a discussion of all views considered, including those of the bank representatives. The Invitation to Comment raises questions about hedge ineffectiveness and deposit liabilities. The IASB invites comments on the exposure draft by 14 November 2003. The complete text of the exposure draft Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk is available from the IASB website. Copies of the ED (ISBN 1 904230 31 8) are also available, at £5 each (8 euros/US$7) including postage, from the on-line bookshop, or contact: IASCF Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, UK. Tel: +44 (0)20 7332 2730. E-mail: publications@iasb.org.uk. In September the International Financial Reporting Interpretations Committee (IFRIC) released Draft Interpretation D2, Changes in Decommissioning, Restoration and Similar Liabilities. The proposed Interpretation contains guidance on accounting for certain changes in decommissioning, restoration and similar liabilities that are recognised both as part of the cost of an item of property, plant and equipment in accordance with IAS 16, Property, Plant and Equipment, and as a liability in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The proposal addresses accounting for changes in:
The main changes dealt with in the Interpretation are those that arise from (i) the revision of estimated outflows of resources embodying economic benefits and (ii) revisions to the current market-assessed discount rate. Under the proposed Interpretation, these two changes are accounted for in the same manner as the initial estimated cost. Hence, amounts relating to the depreciation of the asset that would have been recognised to date are reflected in current period income or expense and amounts relating to future depreciation are capitalised. This approach views the asset, from the time the liability for decommissioning is initially incurred until the end of the asset's useful life, as the unit of account to which decommissioning costs relate. In the spirit of convergence, the IFRIC considered the US GAAP approach in Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations and, in particular, that changes in estimated cash flows are capitalised as part of the cost of the asset and depreciated prospectively, and the decommissioning obligation is not required to be revised to reflect the effect of a change in the current market-assessed discount rate. The IFRIC did not choose this approach because IAS 37, unlike SFAS 143, requires a decommissioning obligation to reflect the effect of a change in the current market-assessed discount rate. The IFRIC agreed that it was important that any Interpretation it developed should deal consistently with changes in estimated cash flows and changes in the discount rate. The complete text of the draft Interpretation is freely available from the IASB's website (www.iasb.org.uk). The proposal is open for public comment until 3 November 2003. IFAC IFAC's International Auditing and Assurance Standards Board (IAASB) has proposed that auditors take a more active role in seeking out fraud. Meeting in New York in July, the IAASB approved the release of an exposure draft of an International Standard of Auditing (ISA), entitled The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements (ISA 240). The ED sets out the auditor's responsibility to consider fraud in an audit of financial statements. It explains that the primary responsibility for the prevention and detection of fraud rests with both those charged with governance and management of the entity and describes the responsibilities of these parties. The exposure draft also alerts auditors to risks of material misstatement due to fraud they may encounter in the conduct of an audit and requires the auditor to assess the risks of material misstatement due to fraud and to respond to the assessed risk. The proposed ISA requires the auditor to respond to the presumed risk of improper revenue recognition and the risk of management override of controls. The response would include testing the appropriateness of journal entries, reviewing the accounting estimates for biases and obtaining an understanding of the business rationale of significant transactions that are outside the normal course of business for the entity. It also discusses auditor communications with management and those charged with governance, as well as auditor communications to regulatory and enforcement authorities. The IAASB has also taken action to strengthen and clarify the IAASB's international standard setting role and process by issuing amended terms of reference and a new Preface to International Standards on Quality Control, Auditing, Assurance and Related Services. The Preface includes new terms of reference for the Board, clarifying the IAASB's role as an independent standard setting body under the auspices of IFAC. It also highlights the Board's public-interest responsibilities and emphasises its objective of achieving convergence of standards by working closely with national standard setters. The IAASB's July meeting also resulted in approval for the release of a second exposure draft, entitled Planning the Audit (ISA 300). The ED complements the IAASB's proposed guidance on audit risk issued in October 2002. It includes basic principles and essential procedures on the considerations and activities applicable to planning an audit of financial statements. In particular, it provides new guidance on matters the auditor should consider prior to performing significant planning activities: client acceptance and retention; ethical requirements including independence and communications with prior auditors; and the terms of the audit engagement. The ED also incorporates more specific guidance regarding planning considerations in initial audits and includes a discussion of the planning considerations related to the direction, supervision and review of the work of engagement team members. The exposure drafts can be viewed via IFAC's website at www.ifac.org/EDs. Any comments must be submitted by 15 November 2003 to Edcomments@ifac.org, faxed to the IAASB technical director at +1 212 286 9570, or posted to the IAASB technical director at IFAC, 545 Fifth Avenue, 14th Floor, NY, NY 10017, USA. FEE In September FEE launched a Discussion Paper on the Financial Reporting and Auditing Aspects of Corporate Governance, offering practical recommendations designed to strengthen corporate governance and to increase confidence in financial reporting. The recommendations highlight the role that the audit committee should play within listed companies in future. FEE's key recommendations for sound corporate governance include the following:
The Discussion Paper can be downloaded free of charge from FEE's website (www.fee.be). UK Financial reporting
The ASB has issued a supplement to FRED 30, entitled Financial Instruments: Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. The supplement is based on an exposure draft published by the IASB that proposes changes to the hedge accounting requirements in IAS 39, Financial Instruments: Recognition and Measurement.
In September, the IASB's International Financial Reporting Interpretations Committee (IFRIC) published Draft Interpretation D2, Changes in Decommissioning, Restoration and Similar Liabilities. Entities in some industries have obligations to dismantle and remove plant and equipment and to restore property from environmental damage. UK and IFRS contain similar requirements for recognising and measuring such liabilities, which may be estimates of expenditure that will be incurred many years in the future. Employment law
Unfair dismissal and bankruptcy
Information and consultation directive The DTI has published a consultation document setting out draft legislative proposals in respect of the implementation of a European directive on informing and consulting employees. The agreed framework for implementation aims to avoid conflicting with existing arrangements between employers and employees, and also takes account of the varied nature of existing UK arrangements by:
Work-related stress The Court of Appeal ruled in Bonser v UK Coal Mining Ltd that in order to recover compensation from an employer for alleged work-related stress, an employee must have shown sufficient signs that stress at work was likely to result in injury to their health. Tribunal statistics The latest annual report of the Employment Tribunal Service shows that the number of registered applications fell by 12.1% in 2002-2003 to 98,617. However, the number of single applications registered (a more accurate reflection of the tribunal's systems workload) fell by a mere 3%. Furthermore, tribunals actually sat to hear cases on just over 30,200 occasions compared with 27,300 sittings in the previous year. Interestingly, costs were awarded in almost 1,000 cases - four times as many as a couple of years ago. In 350 cases, awards of over £1,000 were made. The number of appeals to the Employment Appeal Tribunal fell to 1,170. Finally, compensation awards tended to rise. The median award for unfair dismissal was £3,225, compared with £2,563 the previous year. The median race discrimination award of £7,942 was significantly higher than the figure of £5,263 in the previous year. The median award for sex discrimination remained at £5,000. Equal pay The Equal Pay Act 1970 has been amended by regulations which provide for arrears in pay to be recovered in a standard case for up to six years prior to the date on which proceedings are commenced. The European Court of Justice had ruled that legislation restricting the recovery of arrears to two years was incompatible with European law. Taxation
Inland Revenue publications
Foreign exchange rates The average rates for the years ended 31 December 2002 and 31 March 2003 have been published on the Inland Revenues website. Research and development A consultation document on the definition of research and development has been issued. The document is on the Treasury website (www.hm-treasury.gov.uk). Company thresholds The DTI proposes to raise the small and medium sized company thresholds from £2.8m and £11.2m to £5.6m and £22.8m respectively. Pension contributions: EC action The European Commission has decided to issue formal requests for information to the UK and Ireland, on the basis that the relevant law may discriminate against contributions paid in other states. UK law only gives relief for contributions if there is a representative in the member state where payment is made to fulfil administrative duties. The Commission has also pointed out that mobile workers should be allowed a tax deduction for pension scheme contributions made to their original scheme, since their rights of free movement are otherwise restricted. Share schemes FA 2003 Sch. 22. The Inland Revenue has published information on its website (www.inlandrevenue.gov.uk) in respect of the new share scheme provisions. Sandler investment products Details of proposals for single low cost products (to be known as stakeholder products) have been announced, following consultation. These will go on sale in 2005. The proposed products are:
The following statutory instruments have been made:
Extra statutory concessions Technically civilian employment ceases when a reservist is called up for active service, but with effect from 7 January 2003 ESC A103 will allow an employer to continue to contribute to an approved share scheme on behalf of an employee while he is on active service. R v Gill and Anor In this case the Inland Revenue conducted an interview with the taxpayers under the Hansard procedure. In answer to the Hansard questions, the taxpayers said that nothing had been omitted from their accounts and their returns were correct. The Inland Revenue subsequently commenced a criminal investigation and the taxpayers were charged with cheating the Inland Revenue and convicted. At the trial the Inland Revenue included in evidence the answers to the Hansard questions, as showing that the defendants were not telling the truth. The Court of Appeal held that the Inland Revenue was in breach of Code C of PACE (the police and criminal evidence act) because prior to the meeting the defendants were suspected of serious fraud. It followed that they should have been cautioned and the interview should have been recorded. However, the convictions for cheating the Inland Revenue were held to be safe because the evidence would not have had such an adverse effect on the fairness of proceedings such that the Court ought not to have admitted it. The Inland Revenue is understood to have cancelled all pending Hansard hearings for the time being, while it considers what changes need to be made to procedure. Camas Plc v Atkinson In this case the High Court held that an investment company was entitled to include in management expenses the expenses and professional costs incurred in relation to an abandoned takeover. The company was the holding company of a group which traded in a range of construction industry products. They proposed the acquisition of the holding company of another group in the same area, but did not ultimately go ahead with the acquisition. The Inland Revenue rejected a claim for management expenses on the grounds that the expenses were not incurred in managing the company's investments but related directly to a proposed acquisition. The special commissioners found for the Inland Revenue, but, in the High Court, Judge Patten held that the payments could be properly regarded as expenses of management. In reaching this decision he took the view that expenses were incurred in order to allow the company to decide whether or not to make an acquisition and were not a part of the purchase price. New Angel Court Ltd v Adam (HMIT) In this case properties were transferred intra group from a property investment company to a property, trading company prior to sale. Losses were sustained but the Inland Revenue did not consider them to be trading losses. The special commissioners and, subsequently, the High Court upheld the Inland Revenue view that the properties had not been acquired by the trading company as trading stock and therefore the losses were not trading losses. Scottish Provident Institution v IRC The company entered into a tax scheme designed to generate losses which involved cross options. There is now anti avoidance legislation which prevents such a scheme, but this was not in place at the time of the transactions. The Inland Revenue argued that transactions should be viewed as a single composite transaction but the special commissioner and, subsequently, the Court of Session found that the transactions should be considered separately and as a result there were available tax losses. Shove (HMIT) v Lingfield Park 1991 The installation of an all weather track was held by the High Court to be part of the premises on which business was conducted and was therefore not plant on which capital allowances could be claimed. Deutsche Morgan Grenfell Group Plc v IRC Commissioners and Anor In this case a UK Company paid dividends to its German parent. At the time the UK Inland Revenue took the view that a group income election could not be made in these circumstances and ACT was therefore paid. Subsequently, in the case of Metallgesellschaft Ltd v IRC and Hoechst AG v IRC, the ECJ held that UK law could not deny companies the right to make such an election in cases where the parent company was resident in an EC state outside the UK. The taxpayer company took action for restitution or compensation of ACT paid, and the High Court held that such a claim could be made against a Revenue authority even though the sum paid was thought at the time to be in respect of a tax liability. | |