Technical update

FASB

FASB has published an exposure draft, Share-based Payment, an Amendment of FASB Statements No 123 and 95. The proposed change in accounting would replace existing requirements under FAS 123, Accounting for Stock-based Compensation, and APB Opinion No 25, Accounting for Stock Issued to Employees. It would achieve substantial convergence between US and international accounting standards.

The exposure draft covers a wide range of equity-based compensation arrangements. Under the Board's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognising the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements.

The comment period for the exposure draft ends on 30 June 2004. The document is available on FASB's website (www.fasb.org).

FASB has established a Small Business Advisory Committee in an effort to increase involvement by the small business community in developing US accounting standards. Committee members will provide additional and ongoing input on accounting issues before the Board. Members of the committee represent lenders, investors and analysts, preparers of financial statements from a broad range of businesses, including controllers and chief financial officers, and auditors from the small business community.

IASB

The IASB has issued several new International Financial Reporting Standards.

IFRS 4, Insurance Contracts, provides - for the first time - guidance on accounting for insurance contracts. It marks the first step in the IASB's project to achieve convergence in insurance industry accounting practices around the world. In developing IFRS 4, the IASB recognised that consultation on a completely new international approach could not be completed in time to meet the European Union's 2005 starting date for use of international accounting standards by listed companies. IFRS 4 therefore completes only the first phase of the IASB's insurance project. It is aimed at introducing improved disclosures for insurance contracts, and 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. This second phase will address broader conceptual and practical issues related to insurance accounting.

IFRS 4 applies 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. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39, Financial Instruments: Recognition and Measurement. Furthermore, it does not address accounting by policyholders. The IFRS exempts an insurer temporarily (i.e. during phase I of this project) from some requirements of other IFRSs, including the requirement to consider the IASB's Framework in selecting accounting policies for insurance contracts. However, the IFRS:

• prohibits provisions for possible claims under contracts that are not in existence at the reporting date (such as catastrophe and equalisation provisions)
• requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets
• requires 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 IASB also published IFRS 5, Non-current Assets Held for Sale and Discontinued Operations - the first standard to arise from the IASB's joint project with FASB aimed at reducing the differences between IFRSs and US GAAP. IFRS 5 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.

IFRS 5 requires assets that are expected to be sold and meet specific criteria to be measured at the lower of carrying amount and fair value less costs to sell. Such assets should not be depreciated and should be presented separately in the balance sheet. It also requires operations that form a major line of business or area of geographical operations to be classified as discontinued when the assets in the operations are classified as held for sale. These requirements relating to assets held for sale, and the timing of the classification of discontinued operations, are substantially the same as the equivalent requirements in US GAAP. The type of operation that can be classified as discontinued is narrower than under US GAAP but the IASB intends to continue to work with the FASB in this area to achieve convergence soon.

Another step towards convergence between IFRSs and US GAAP was achieved by the publication of IFRS 3, Business Combinations, which makes the treatment of the acquisition if businesses are substantially the same under IFRSs and US GAAP. Alongside IFRS 3, the IASB also issued revised Standards IAS 36, Impairment of Assets, and IAS 38, Intangible Assets.

The main features of the new and revised Standards are:

• all business combinations within the scope of IFRS 3 must be accounted for using the purchase method. The pooling of interests method is prohibited
• costs expected to be incurred to restructure an acquired entity's (or the acquirer's) activities must be treated as post-combination expenses, unless the acquired entity has a pre-existing liability for restructuring its activities
• intangible items acquired in a business combination must be recognised as assets separately from goodwill if they meet the definition of an asset, are either separable or arise from contractual or other legal rights, and their fair value can be measure reliably
• identifiable assets acquired, and liabilities and contingent liabilities incurred or assumed, must be initially measured at fair value
• amortisation of goodwill and intangible assets with indefinite useful lives is prohibited. Instead they must be tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment.

One of the primary objectives of the subsequent phases of the project will be to eliminate remaining differences between international and national standards on business combinations. Matters to be addressed include:

• issues related to applying the purchase method of accounting. This is being run as a joint project with FASB
• the accounting for formations of joint ventures and business combinations involving entities under common control, and
• possible applications for 'fresh start' accounting.

The IASB has also finalised its macro hedging amendments to IAS 39 and published an Amendment to IAS 39, Financial Instruments: Recognition and Measurement on Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. The amendments simplify the implementation of IAS 39 by enabling fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk (or macro hedge) than under previous versions of IAS 39. In particular, for such a hedge, the amendments allow:

• the hedged item to be designated as an amount of a currency (e.g. an amount of dollars, euro or pounds) rather than as individual assets (or liabilities)
• the gain or loss attributable to the hedged item to be presented either (i) in a single separate line item within assets, for those repricing time periods for which the hedged item is an asset, or (ii) in a single separate line item within liabilities, for those repricing time periods for which the hedged item is a liability
• prepayment risk to be incorporated by scheduling prepayable items into repricing time periods based on expected, rather than contractual, repricing dates. However, when the portion hedged is based on expected repricing dates, the effect that changes in the hedged interest rate have on those expected repricing dates are included when determining the change in the fair value of the hedged item. Consequently, if a portfolio that contains prepayable items is hedged with a non-prepayable derivative, ineffectiveness arises if the dates on which items in the hedged portfolio are expected to prepay are revised, or actual prepayment dates differ from those expected
• a reduction in implementation and compliance costs because, previously, institutions would have to set up systems to track the relationship between either individual assets and liabilities and the hedging derivative.

The publication of this amendment means that macro hedging will be part of the IASB's set of standards to be adopted in 2005. The IASB notes that discussions will continue on another aspect of IAS 39, namely an additional hedging methodology and the balance sheet presentation of certain hedges - issues of particular concern to some banking institutions.

The International Financial Reporting Interpretations Committee (IFRIC) has released a Draft Interpretation - D5, Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time. The proposed Interpretation contains practical guidance on the initial application of hyperinflation accounting, including how to restate comparatives and how to calculate opening deferred tax balances. Most significantly, it requires that an entity restates its figures as if it had always restated its financial statements for the effects of inflation. The proposal is open for public comment until 14 May 2004.

The IASB has initiated an internal review of its own deliberative procedures, alongside the Trustees' Constitution Review. Based on the IASB's experience of its first three years and input from parties affected by standard setting, the IASB has identified several reforms that would enhance public confidence in its deliberations. It has therefore published a consultation paper, Strengthening the IASB's Deliberative Processes, setting out its preliminary findings and inviting public comment on improvements to its procedures. The deadline for comments is 25 June 2004.

The IASB notes that it has implemented various interim measures aimed at enhancing the accessibility and transparency of its deliberative process. For example, it now broadcasts its meetings over the Internet and posts extended observer notes on its website before meetings. The consultation paper also highlights the IASB's commitment to intensive consultations on its future work programme. When appropriate, consultations will include the use of expert advisory groups, discussion papers, and field-testing of proposals.

Australia

The Financial Reporting Council (FRC) of Australia has announced that it will proceed, in principle, with the requirement to adopt International Financial Reporting Standards for Australian reporting entities from 2005. The FRC's decision means that, subject to the clarification of certain issues, Australia will be adopting IFRSs within the same timeframe as the member states of the European Union.

IFAC

IFAC has issued a paper, Anti-money Laundering 2nd Edition, which addresses the increased expectations of legislators and regulators with respect to the profession's role in detecting money laundering and implementing controls and safeguards against it. This new edition expands on the original paper issued in January 2002 by addressing the professional accountants' role and ethical obligations, as well as recent best practices in auditing, anti-money laundering, and suspicious activity reporting programs. The new paper highlights both the causes and possible means of preventing money laundering. Sections of the paper focus on indications of money laundering, vulnerability of banks, non-bank financial institutions and other entities, and governance-related issues. It also includes a compendium of anti-money laundering guidance.

The paper may be downloaded from IFAC's website (www.ifac.org/store).

IFAC has also issued its 2004 Handbook of International Public Sector Accounting Pronouncements, in both print and downloadable PDF format. The new edition of the handbook features International Public Sector Accounting Standards (IPSASs) 1-20, along with a glossary of terms, summary of occasional papers and studies, and a selected bibliography. All guidance has been developed by IFAC's Public Sector Committee with input from various stakeholders.

IFAC's 2004 Handbook of International Auditing, Assurance, and Ethics Pronouncements is also now available, featuring all pronouncements issued by the International Auditing and Assurance Standards Board (IAASB) and the Ethics Committee until 31 December 2003. The handbook is available in print and in a new fully searchable, interactive electronic format.

FEE

FEE has responded to the European Commission's proposed revised Eighth EU Directive on Auditing, expressing concern that some provisions designed to improve oversight, audit standards, independence and liability are too weak. FEE has identified four areas where it believes the proposals can be improved.

Firstly, FEE is not happy with the proposals for co-ordinated oversight of the audit profession, believing the proposed directive lacks clarity. It also disagrees with the EC's wish to exclude auditors of public interest entities from national oversight systems.

Secondly, FEE is concerned that the proposed directive's procedure for endorsing international standards in auditing and ethics would introduce an unnecessarily costly new procedure. It is also opposed to introducing a definition of the audit report in the law, saying that such issues should continue to be dealt with in auditing standards.

Thirdly, FEE expresses 'significant concern' over the EC's specific proposals for listed companies concerning the scope of services provided by auditors and the rotation of audit firms. The EC's explanatory memorandum raises the possibility of a general prohibition on provision of non-audit services to audit clients, which FEE would oppose. The proposed directive would also establish a special regime for public interest entities, including the possible option for member states to require audit firms to rotate every seven years. Again, FEE does not support such rotation.

Finally, FEE calls for the EC to accelerate its study of audit liability, arguing that 'the risk of catastrophic losses arising from huge claims in relation to audit is a most serious threat to the viability of the auditing profession".

UK

Financial reporting

Hot on the heels of the IASB issuing its revised versions of IAS 32 and IAS 39, the ASB has published a second supplement to FRED 30, which proposes the wider application of the two standards on financial instruments. In June 2002, when FRED 30 was first published, the ASB said that the IASB's two standards should apply to certain UK entities only. The position has now changed in the second supplement.
The new proposals will mean that:
- all listed entities using UK standards, and other entities choosing to adopt fair value accounting, should apply the measurement and hedge accounting requirements of IAS 39, Financial Instruments: Recognition and Measurement
- all entities should apply the requirements of IAS 32, Financial Instruments: Disclosure and Presentation.
FRED 30 will apply to accounting periods ending on or after 1 January 2005. Companies applying the Financial Reporting Standards for Smaller Entities will be exempt.

A new standard has been issued which implements in the UK the recently published IASB standard IFRS 2. FRS 20, Share-based Payment, requires companies to recognise an expense, measured at fair value, in respect of their employee share option plans, share purchase plans, and other share-based payments. The requirements of FRS 2 are identical to those of IFRS 2, except that implementation of the standard for unlisted companies has been deferred for one year: mandatory application is from 1 January 2006 for these companies. Listed companies, however, will apply the standard for accounting periods beginning on or after 1 January 2005.

Responding to requests from the HM Treasury to look into the accounting for with-profits business by life insurers, the ASB has established an advisory panel to provide recommendations to the Board and its Urgent Issues Task Force. The panel, which will be chaired by Julian Hance, former Group Finance Director of Royal & Sun Alliance Insurance Group Plc, will investigate and make recommendations for UK accounting standards relating to with-profits life assurance business for 2004 financial reporting.

Auditing

The APB has issued an exposure draft of Practice Note 12 (Revised) to reflect the requirements of the new anti-money laundering legislation which came into force on 1 March 2004. The legislation is expected to have a major impact on auditors who will be required to report money laundering suspicions. The Practice Note focuses on the impact of the legislation on auditors' responsibilities when auditing and reporting on financial statements but does not provide general guidance on the legislation. Comments are invited by 15 May.

Employment law

Employment tribunal forms
The Employment Tribunal Service is conducting a public consultation on proposed new claim and response forms for employment tribunal cases. Draft rules of procedure will, if brought into force, require the claimant to give more information about the claim. The forms have also been re-drafted so as to be more user-friendly. Currently it is expected that the new forms will be finalised during the summer and that their use was due to become compulsory from 6 April 2005.

TUPE
The Court of Appeal has upheld a tribunal's decision that TUPE applied to a transfer of part of an undertaking, even though the part transferred had not been an identifiable, stable economic entity prior to the transfer: Fairhurst Ward Abbotts Ltd v Botes Building Ltd. The tribunal was wrong, however, to decide that an employee who had been absent due to sickness at the time of the transfer of undertaking could not have been 'assigned' to the part transferred.

Pregnant workers
The Equal Opportunities Commission has published research showing that, in a typical year, over 1,000 women in England and Wales bring claims that they have been unfairly dismissed for a reason relating to pregnancy. It is suggested in the review, Pregnancy Discrimination at Work, that those women who do take legal action do not appear to enjoy much success, given that almost two-thirds of all pregnancy-related unfair dismissal claims registered in the years under review were settled or withdrawn. However, it is often the case that a settlement represents the most satisfactory way of resolving a dispute and the figures should be considered with that in mind. The EOC is now keen to hear from employers about their experiences in dealing with pregnant staff in order to help develop recommendations that are viable for both employers and individual employees. The findings of this consultation exercise are due to be published in June.

Commission
In Peninsula Business Services Ltd v Sweeney, the Employment Appeal Tribunal ruled that a term in a signed contract which provided that, upon leaving the job, the employee forfeited any right to commission earned but not yet due to be paid, was enforceable. An employment tribunal had taken a different view, saying that the contractual clause was 'onerous' and had not been sufficiently drawn to the employee's attention. The tribunal also said that the clause was void under the Unfair Contract Terms Act 1977 and an unlawful restraint of trade. The EAT disagreed. The language of the contract was clear and the employee had been given the chance to read it before signing. The clause was neither void nor an unlawful restraint of trade.

Trade union ballots
The law relating to trade union ballots is notoriously technical and difficult to apply in practice. This point is underlined by a recent decision of the High Court in BT Plc v Communication Workers Union. The High Court decided that the employers were entitled to an injunction restraining the holding of a strike. Although there was a trade dispute, the notices of ballot and strike action were insufficient, because they merely referred to the total number of union members concerned, whereas the union had information as to the numbers employed in different categories and this was information which would help the employer to make plans to address the proposed strike action. The Employment Relations Bill introduced in Parliament in December will, if enacted, define more precisely the information that the union is required to supply in these cases.

Taxation

Finance Bill
The Finance Bill has now been published and runs to 574 pages and 40 schedules. More than half of the Bill is taken up with changes relating to pension contributions.
Clause 26-28 and Schedule 3 relate to distributions to small companies, and clause 28 introduces a non-corporate distribution rate of 19%. For this purpose, it is necessary to calculate the company's average rate of corporation tax, ignoring the new provisions. This is called the underlying rate of corporation tax. If this rate is less than 19% it will be necessary to pay additional corporation tax in respect of any distributions not made to companies.
There are also a number of provisions relating to the introduction of a new subcontractors scheme. The scheme is to be introduced from an appointed day, which is likely to be in 2006.
The requirement to register tax avoidance schemes is dealt with in clause 290 to 302. Unfortunately, the position is still by no means clear mainly because 'notifiable arrangements' is defined as any arrangement prescribed by Treasury regulations. Everything else depends on that definition.

Tax law rewrite
The draft bill on trading, property, savings, investment and miscellaneous income has been published by the rewrite project.
Copies can be obtained free-of-charge from Basil Rajamanic, Tax Law Rewrite Project, Room 826 Bush House, South West Wing, Strand, London, WC2B 4RD.

Partnership losses
Legislation with effect from 26 March 2004 will counter avoidance schemes which use partnerships trading in the exploitation of films. The schemes guaranteed partnership income whilst providing loss relief.
The legislation will not affect partnerships which make films, or acquire the master version of a film and are therefore entitled to the special statutory film reliefs.
Full details are on the Inland Revenue website at www.inlandrevenue.gov.uk/cksa/tackling-avoidance.pdf.

Construction industry status definitions
Representatives of the industry have asked the Government to consider redefining labour-only subcontractors as employees. While it is difficult to see how this could be done on an industry basis, the Inland Revenue is to discuss the possibility with industry representatives and report to Government before the pre-budget report later this year.
If labour-only subcontractors were re-classified as employees they would be subject to PAYE and Class 1 National Insurance.
A revised construction industry scheme effective from April 2006 had already been announced.

Double taxation agreements
- Discussions are to be held with Hungary and Poland about new comprehensive double taxation agreements.
- The new UK/Australia double taxation agreement entered into force on 17 December 2003.

National insurance - new EU members
The Inland Revenue has provided guidance on the National Insurance position of workers coming to the UK or going to work in the new EU States from 1 May 2004. General guidance and some examples are given in Tax Bulletin issue 70.

Inland Revenue - debt recovery
In a report published on 24 March 2004 the National Audit Office has criticised the Inland Revenue in relation to debt recovery.
The full report can be accessed at www.nao.org.uk/publications/nao_reports/03-04/0304363.pdf or obtained in hard copy from the Stationery Office.

Statutory instruments
SI 575/2004 - (The Taxation of Benefits under Government Pilot Schemes) came into force on 6 April 2004.
SI 674/2004 - (Recovery of Duties and Taxes, etc, due in other member states) came into force on 1 April 2004. Together with S134 and Sch.39 FA 02, it implements the EC agreement for mutual assistance and recovery of taxes and other duties.
SI 712/2004 - provides a new definition of research and development which is effective from 1 April 2004 for companies and 6 April 2004 for individuals. The new definition follows the guidelines issued by the DTI on 5 March 2004.
SI 761/2004 - (The Child Benefit and Guardians Allowance) (Miscellaneous Amendments Regulations) provides that an asylum seeker who claims child benefit or guardians allowance within three months of notification that he has been given refugee status will be able to have his claim backdated to the date he claimed asylum.
SI 762/2004 - (The Tax Credits) (Miscellaneous Amendments Regulations) came into force on 6 April 2004. These amend various statutory instruments made in 2002 and 2003 including the Polygamous Marriages Regulations.
SI 771/2004 - fixes the IHT threshold as £263,000 for chargeable transfers after 5 April 2004.
SI 772/2004 - fixes the upper limit of the 10% starting rate as £2,020 and of the 22% basic rate as £31,400 from 6 April 2004.
SI 773/2004 - fixes the earnings cap for pension contributions at £102,000 for 2004-05.
SI 774/2004 - fixes the capital gains tax annual exempt amount at £8,200 for the year 2004-05.
SI 851/2004 - the Income Tax (PAYE) (Amendment) Regulations came into force on 12 April 2004. In cases where Inland Revenue directions absolve an employer from liability on under-deducted tax and, as a result, the employee loses credit for the tax not deducted, the direction must be in the form of a written notice.
SI 889/2004 - the Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order came into force on 6 April 2004. It increases various NI rates and thresholds for 2004-5 as already announced.
SI 941/2004 - the tax credit uprating regulations came into force on 6 April 2004. The regulations give effect to various increases announced in December 2003 in the pre-budget report. SI 942/2004 - the Child Benefit and Guardian Allowance uprating Order came into force on 12 April 2004 and increases the weekly rates of child benefit and guardians allowance as already announced.

Jackman v Powell
In this case, the High Court found that a self-employed milk roundsman was not entitled to a deduction for the cost of travelling from his home to the milk depot to collect his float and milk.
The special commissioner had previously allowed the expenses on the grounds that his home was his base of operations and that he was therefore entitled to claim his expenses from that base.
Lewison J in the High Court held that it was necessary to apply the statutory formula, i.e. was the expenditure incurred wholly and exclusively for the purpose of the trade? He took the view that this test could not be met and the expenditure was therefore disallowable.

Christensen v Vasili
In this case, an employee owned 5% of the car he used and his employer owned the other 95%. The car was used partly for the purpose of the employment and partly privately by the employee. The private mileage was significantly more than 5% of the total use.
The object of the arrangement was to take the car out of the special car benefit provisions in S157 ICTA 1988 and bring it within the ordinary benefit provisions in S154.
The High Court found for the Inland Revenue in finding that S157 still applied.

New Angel Court Ltd v Adam
In this case, a property dealing company acquired properties from a number of other group companies. None of these properties had formed trading stock of any trade of the transferor companies and, if the properties had been sold outside the group by those companies, the result would have been a capital gains loss of about £68m.
The property dealing company sold all of the properties fairly soon after the intra group transfers and claimed a trading loss on the grounds that the properties were received as trading stock within S173 (1) (a) TCGA 1992. The Inland Revenue denied the loss relief and the special commissioners concurred.
The Appeal Court held that the requirements of S173 were satisfied and loss relief was due, not withstanding the fact that the intra group transfers might have been dictated by fiscal considerations - i.e. to convert what would otherwise have been capital losses to a group trading loss.

Murat v Ornoch
This case, in front of a special commissioner, concerned a chartered accountant who failed to comply with a notice under S19A (2) TMA 70 to produce specified documents to the Inland Revenue in connection with an enquiry into his own tax affairs.
He agreed that the S9A notice, on which the S19A notice depended, was invalid because it did not state that it was a notice under S9A.
The notice under S9A was held to be valid, but the amount of the penalties was reduced on the basis that they were very substantial for a small business and excessive in view of the amount of tax involved.

Allcock v King
In this case, an employee of a firm of accountants used a company credit card to buy petrol. It was held by a special commissioner that both the amounts actually paid by the company on the company credit card and the national car fuel benefit chargeable under S158 ICTA 88 had to be taken into account in determining whether the employee was over the £8,500 threshold for higher paid employees.
This was clearly anomalous, but was what the legislation provided and, as a result, the employee was subject to tax on benefits-in-kind. There is no double counting as far as the benefit charge itself is concerned.