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IASB
The IASB has published an exposure draft of proposals on aspects of pension cost accounting, in particular giving entities an option to show, in full, pension deficits and available surpluses. This proposal is similar to the requirements of the UK standard, FRS 17, Retirement Benefits. Approval of this proposed option would enable companies that already show the surplus or deficit in full under FRS 17 and are adopting International Financial Reporting Standards (IFRSs) to continue with their present policy.
Entities choosing the proposed option would recognise in the balance sheet the surplus or deficit in the plan at the balance sheet date and would show the best estimate for gains and costs of the plan in the income statement. The exposure draft includes proposals to extend the application of multi-employer plan accounting to entities within a consolidated group that meet specified criteria. It also proposes additional disclosures.
The IASB is also considering undertaking a comprehensive project on post-employment benefits, looking at fundamental aspects of measurement and recognition. Until the outcome of such a broader review of the accounting for post-employment benefits, the IASB would continue to permit the option under IAS 19, Employee Benefits, to recognise actuarial gains and losses (i.e. unexpected changes in value of the plan) in profit or loss, either in the period in which they occur or spread over the service lives of the employees. Almost all entities currently using IAS 19 choose to spread actuarial gains and losses.
The text of the ED is available from the IASB's website.
The IASB has published proposals for a limited amendment to IFRS 3, Business Combinations. Comments on the exposure draft, Combinations by Contract Alone or Involving Mutual Entities, are requested by 31 July. The amendments being proposed to IFRS 3 are an interim solution to the issue of the accounting for combinations involving mutual entities or combinations in which separate entities are brought together by contract alone. The IASB identified the problem while finalising IFRS 3, but decided that it could not provide an interim solution without first exposing that solution for public comment. Given that very few transactions are likely to be affected by this amendment, the IASB thought it important that the March 2004 publication of IFRS 3 should not be delayed while it addresses this issue.
The main features of the IASB's proposals are:
- to remove IFRS 3's scope exclusion for combinations involving two or more mutual entities or combinations in which separate entities are brought together to form a reporting entity by contract alone without the obtaining of an ownership interest. This includes combinations in which separate entities are brought together by contract to form a dual listed corporation
- that an acquirer should measure the cost of such a combination as: (a) the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities when the combination is one in which separate entities or businesses are brought together to form a reporting entity by contract alone without the obtaining of an ownership interest, (b) the aggregate of the following amounts when the combination is one in which the acquirer and acquiree are both mutual entities
- the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities, and
- the fair value, at the date of exchange, of any assets given, liabilities incurred or assumed, or equity instruments issued by the acquirer in exchange for control of the acquiree.
Therefore, until guidance on applying the purchase method to such transactions is developed by the IASB as part of a later phase of its Business Combinations project, the acquirer would recognise goodwill equal to the fair value of any consideration given by the acquirer in exchange for control of the acquiree.
The IASB intends that the amendments will take effect at the same time as IFRS 3 (as issued in March 2004) is applied. The text of the ED is available from the IASB's website.
The IASB has also published an exposure draft of a proposed limited amendment to IAS 39, Financial Instruments: Recognition and Measurement, on The Fair Value Option. The IASB says the publication is a direct response to concerns expressed by prudential supervisors of banks, securities companies and insurers that the fair value option might be used inappropriately. The ED proposes to limit the financial assets and financial liabilities to which the option may be applied, while preserving the key benefits of the option. In particular, the IASB proposes limiting the types of financial assets and financial liabilities to which the option may be applied to five specified categories:
- financial assets and financial liabilities that contain embedded derivatives
- financial liabilities whose cash flows are contractually linked to the performance of assets that are measured at fair value
- cases when the exposure to changes in the fair value of the financial asset or financial liability is substantially offset by the exposure to the changes in the fair value of another financial asset or financial liability, including a derivative
- financial assets other than loans and receivables, and
- items that other standards allow or require to be designated as at fair value through profit or loss.
Secondly, the IASB proposes requiring that the option may be applied only to financial assets and financial liabilities whose fair value is verifiable. The proposal that fair value must be verifiable would apply only when the fair value option is used, and not for other items measured at fair value (those classified as held for trading, derivatives and available-for-sale assets) or for the purposes of disclosing fair value. It is a stricter test (which more items will fail) than that of 'reliably measured' contained in other parts of IAS 39 and in other standards.
Comments are requested by 21 July.
The International Financial Reporting Interpretations Committee has released a draft Interpretation giving guidance on employee benefit plans that have more than one participating employer (multi-employer plans).
IAS 19, Employee Benefits, allows participants in defined benefit multi-employer plans to use defined contribution accounting and provide additional disclosures if the information necessary for defined benefit accounting is not available. The draft Interpretation, D6, Multi-employer Plans, proposes guidance on when a plan meets the definition of a multi-employer plan, how defined benefit accounting should be applied to such plans and, in the light of that guidance, when the necessary information might not be available.
The proposals are open for public comment until 9 July.
The International Accounting Standards Committee Foundation has published its annual report for 2003. It presents a report by Paul A Volcker, chairman of the IASC Foundation Trustees, surveying the past year and the opportunities that lie ahead. It also contains a report by Sir David Tweedie, IASB chairman, giving an overview of the improved and new standards that constitute the IASB's 'stable platform' of standards for application from 2005.
IFAC
The International Federation of Accountants has issued a new International Education Standard (IES) calling on every professional accountant to develop and maintain competence relevant and appropriate for their work and professional responsibilities. Developed by IFAC's Education Committee, the new standard, IES 7, Continuing Professional Development (CPD): A Program of Lifelong Learning and Continuing Development of Professional Competence, emphasises the profession's commitment to serving the worldwide public interest and presents CPD as a key means of meeting this commitment.
The standard prescribes mandatory CPD for all members of the profession, including those working in public practice, in commercial, governmental, academic and not-for-profit entities, as well as those who may no longer work in traditional accounting roles. It also calls on IFAC member bodies to facilitate access to CPD opportunities and resources to assist professional accountants in meeting their responsibility for lifelong learning.
The standard does not specify subject areas in which professional accountants must maintain competence, as these will vary depending on the accountant's role and area of employment and focus. Instead, it focuses on the principle that appropriate development opportunities should be relevant to the individual's current and future professional responsibilities and should be able to be objectively verified.
All IFAC member bodies are expected to comply with the standard, from the effective date of 1 January 2006. The standard may be downloaded from the IFAC website (www.ifac.org/store).
IFAC has welcomed the Organisation for Economic Cooperation and Development's (OECD's) revised Principles of Corporate Governance. The new principles, approved by the OECD's 30 member countries, are designed to strengthen corporate governance practices in companies around the world and urge strengthened transparency and disclosure to protect investors and to strengthen capital markets. The principles emphasise that auditors should be accountable to shareholders, not management, and that boards of directors should effectively oversee the financial reporting function, ensuring that appropriate systems of control are in place. The OECD document also identifies the need to ensure audit competence in all countries.
The principles may be downloaded from the OECD's website (www.oecd.org/document).
IFAC's Board has approved seven Statements of Membership Obligations (SMOs) designed to assist and direct IFAC's 158 member organisations and potential members in ensuring high quality performance by professional accountants. The SMOs cover a member body's obligations to support the work of IFAC, the work of the IASB, and obligations regarding quality assurance and investigation and discipline.
The specific SMOs, which may be downloaded from the IFAC website (www.ifac.org), cover the following areas:
- quality assurance
- international education standards for professional accountants and other EDCOM guidance
- IFAC code of ethics for professional accountants
- international standards related practice statements and other papers issued by the International Auditing and Assurance Standards Board
- international public sector accounting standards and other PSC guidance
- investigation and discipline, and
- international financial reporting standards.
EFRAG
EFRAG's finalised paper proposing the enhancement of its role and working process is available on its website (www.efrag.org). The paper outlines suggested changes to EFRAG's consultation process, involving the establishment of an advisory forum with the following key objectives:
- enabling wider consultation of stakeholders at high senior level
- ensuring that all dimensions, including economic, legal and practical aspects of important proposed standards are fully discussed in the context of the 'European public good' at an early stage, and
- ensuring that all significant alternative accounting and disclosure policies are fully evaluated.
The paper comments on the need for closer links with all EU national standard setters and the development of EFRAG's working relationship with the IASB. It also outlines how visibility and transparency in its operations could be increased, for example, through opening the meetings of EFRAG's Technical Experts Group (TEG) to the public. In the short term it notes that further transparency could be achieved by the publication of a monthly newsletter setting out EFRAG's main activities and decisions.
EFRAG has written to the EC's directorate-general for the Internal Market endorsing the adoption of IFRS 2, Share-based Payment. EFRAG notes that while there is valid concern about the sensitivity and reliability of the currently available valuation techniques needed to estimate fair values, the absence of a standard on the recognition and measurement of
share-based payment transactions would continue to impair not only the relevance and reliability of financial statements, but also their comparability and credibility by omitting a potentially significant component of the total cost of employee services. EFRAG concludes that the concerns regarding the reliability of the existing option pricing models are mitigated by IFRS 2's extensive disclosure requirements and do not outweigh the relevance criterion of having share-based transactions recognised in the income statement and balance sheet.
EFRAG says it is pleased that the IASB adopted its proposal not to refer to any specific option pricing model (such as Black-Scholes-Merton) or any specific kind of option pricing model (e.g. binomial model) in the body of the standard. EFRAG also says that while the IFRS 2 disclosure requirements remain extensive, it is happy to note an elimination of certain proposed disclosure requirements that it considered burdensome for preparers and which could have obscured the key messages to the users of financial statements.
EC
The European Commission has adopted IFRS 1, First-time Adoption
of IFRSs, according to the Regulation (EC) No 1606/2002 of the European Parliament and of the Council.
The new Regulation has been published in the Official Journal L111 of 17 April.
UK
Financial reporting
ASB
The ASB has just issued FRS 21, Events After the Balance Sheet Date. The standard, which is based on IAS 10, will apply for years beginning on or after 1 January 2005.
The principal difference from SSAP 17, which FRS 21 replaces from 2005, is to remove the requirement to report dividends proposed after the balance sheet date in the profit and loss account and instead to require disclosures in the notes to the financial statements. This is in accordance with the now generally accepted view that dividends declared after the balance sheet date should not be reported as liabilities. The Department of Trade and Industry has announced a parallel change in the law to take effect in 2005.
The publication in May of the Government's consultation document Draft Regulations on the Operating and Financial Review and Directors' Report, which contains a proposal that quoted companies should prepare a statutory Operating and Financial Review for the first time for financial years beginning on or after 1 January 2005, has led to an announcement from the ASB on how it intends to develop the first standards of the OFR. To assist the Board, an advisory committee has been established. The committee will consider current national and international guidance and review the ASB's current statement of best practice on the OFR in order to make recommendations for any changes to meet the requirements of the OFR Regulations, taking account of what is realistic and practicable to introduce for financial years beginning 1 January 2005. The first OFR standard is expected to be issued in the second half of 2004, to be finalised in 2005.
The IASB's proposed amendments to its standard on employee benefits have been welcomed by the ASB. The proposed changes to IAS 19, Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosure, will bring the international accounting standard into line with requirements of FRS 17. Mary Keegan, the ASB chairman said: 'This will enable companies using international accounting standards in their financial statements from 2005 to follow the lead of FRS 17 in bringing much needed transparency to a subject with potentially enormous financial implications.' Comments on a UK consultation paper are invited by
31 July.
APB
The Auditing Practices Board has announced that it intends to adopt International Auditing Standards for 2005. Exposure drafts of 29 new standards are expected to be issued in June 2004. However, the APB has stressed that with the exception of the new audit risk and fraud statements (ISAs 315, 330 and 240), the standards will not involve significant changes of substance to existing UK standards or the work currently undertaken by auditors as the ISA requirements are similar in nature to existing SASs. Commenting on the announcement, Richard Fleck, APB chairman, said: 'International standards are in the process of being significantly strengthened and several key ISAs have recently been revised. The APB has contributed substantially to this work and believes that it results in improved standards for all audits which should be applied with the minimum delay.'
The APB urges auditors to start familiarising themselves with the latest ISAs in advance of their introduction in 2005.
Employment law
Illegal employment contracts
The long-established principle that a party cannot benefit from his or her own wrongdoing applies in the context of modern employment law. If an employment contract was unlawful when it was formed, or if there was an intention to perform it unlawfully from the outset, then the contract cannot be enforced before a court or tribunal. However, the Court of Appeal has ruled in Colen & Another v Cebrian (UK) Ltd, that if at the outset the contract was lawful and was not intended to be performed unlawfully, the effect of some act of illegal performance does not automatically render the contract unenforceable. If a person seeking to enforce the contract has to rely on his illegal action in order to succeed, the court will not assist him. But if he does not have to do so, the question is whether the method of performance chosen and the degree of participation in illegality is such as to turn the contract into an illegal contract that will not be enforced. This principle is especially relevant in cases involving allegations of tax evasion.
Termination date
The Court of Appeal ruled in Fitzgerald v University of Kent at Canterbury that the effective date of termination of employment is a statutory concept that cannot be fixed by a deal between the employer and employee. On the basis of the date of termination agreed by the parties in this case, the employee's unfair dismissal claim was 'out of time'. But he was allowed to pursue it nonetheless.
Equal pay
The DTI has published a consultation document, Towards Equal Pay: A Consultation on Proposals to Streamline Equal Value Tribunal Procedures. Amongst other matters, the DTI proposes that only employment tribunal panels with specialist knowledge should be used in 'equal value' cases, because of the complexity of such litigation. The tribunal is also to have much wider case management powers. The DTI's aim is that new regulations should come into effect in October.
Tax
Stamp duty land tax
Where the vendor agrees to carry out works on the land sold, the Inland Revenue view is that the stamp duty case of Prudential Assurance Company Limited v IRC still applies. As a result, where there is in substance one bargain, there must be a just and reasonable apportionment of the total consideration in order to arrive at the chargeable consideration for stamp duty land tax purposes. Statement of Practice SD 8/93 will continue to apply.
Budget report
The House of Commons Treasury Committee has published its report on the 2004 Budget. The report is available as a pdf file at www.publications.parliament.uk/pa/cm200304/cmselect/cm/treasy/479/ 479.pdf.
The Civil Partnership Bill (now published) includes provisions which will:
- amend the tax credits act so that registered same sex couples will be required to make joint tax credit claims
- extend entitlement to the adult element of the Working Tax Credit, and
- amend the Child Benefit and Guardians Allowance to apply to same sex couples where
appropriate.
The interest and royalties directive
The EU has proposed that the Czech Republic, Latvia, Lithuania, Poland and Slovakia should be exempt from the provisions of the Interest and Royalties Directive (49/2003) for a transitional period.
OECD model tax convention
The OECD has published a discussion document containing draft proposals intended to clarify article 15 para 2 of the Model Convention.
The paragraph relates to individuals performing services in a country in which they are not resident and therefore, in certain circumstances, not subject to taxation. Clarification has been sought in respect of those cases where services are provided through an intermediary.
The document can be accessed on the OECD website at: www.oecd.org/ dataoecd/52/61/31413358.pdf.
Lords committee on Finance Bill
A sub-committee of the House of Lords Select Committee on Economic Affairs is examining certain aspects of this year's Finance Bill and will report shortly.
This is the second year for which the sub-committee will consider technical issues, clarification, or simplification related to:
- disclosure of avoidance schemes
l pension schemes
- small business taxation (distributions to non-corporates by small companies)
- stamp duty land tax, and
- duty stamps for spirits.
The sub-committee will not comment on the rates or incidence of taxation.
Employer compliance reviews
The Inland Revenue has announced that it will in future notify authorised tax advisers that it intends to carry out a compliance review at the same time that it notifies the employer.
The notification to the employer will include the sentence 'I have notified your professional adviser(s)... who you have authorised to act on your behalf that we intend to review your records.'
University participation in
start-up companies
The Inland Revenue and UNICO (the University Companies Association) have reached agreement on the tax treatment of shareholdings acquired by university academics in spin out companies.
The agreement is set out in a memorandum of understanding. The effect of the agreement is that no tax will be payable until such time as the shares are cashed in.
OECD discussion document
The OECD has published a discussion draft in response to suggestions that the commentary update the interpretation of 'permanent establishment'. Changes are also proposed in relation to income from the operation of ships and aircraft.
The document can be accessed at www.oecd.org/dataoecd/34/9/31483903.pdf and comments are invited before 30 June.
Company car reform
The Inland Revenue has published an evaluation report on the effect on the environment of the present company car tax regime.
The report is available on the Inland Revenue website at www.inlandrevenue.gov.uk/cars/cct_eval_rep.pdf.
The main findings are:
- in 2003 the reform saved around 0.15 to 0.2m tonnes of carbon (equal to 0.5% of the CO2 emissions from all road transport)
- business travel in company cars was reduced by an estimated 300-400m miles in 2003, and
- the reduction in employer compliance costs is estimated at £35m per year after the initial costs of implementation.
Tax avoidance task force
The UK, US, Australia and Canada have set up a joint tax force to counter what are described as 'abusive tax transactions'. A memorandum of understanding was signed in Williamsburg Virginia on 23 April 2004.
The task force will focus initially on the ways in which financial products and derivative arrangements are used by individuals and companies to avoid taxation and will also seek to identify promoters developing and marketing those products and arrangements.
The task force will operate initially in Washington DC and details of UK tax officials seconded to the task force will be announced. The operation will be reviewed in a year's time.
EU directive on tax fraud
An EU directive has been adopted which will make it possible for member states to co-ordinate their efforts to prevent cross border tax fraud and also allows member states to carry out certain procedures on behalf of each other.
The directive applies to income tax, capital gains tax, company taxation and the insurance premium tax and contains four elements:
- the opportunity to conduct simultaneous control checks in several EU countries
- enquiries will be treated as though the country making them did so on its own behalf
- where member states have provided information they will, if requested, carry out administrative functions such as serving amended assessments, and
- certain ambiguities in directive no 77/799EEC are clarified in order to prevent different interpretations in some member states.
The text of the directive will be available on the Europa website at europa.en.int/comm/taxation_customs/whatsnew.htm.
Cross border transfer pricing
The European Commission has put forward a proposal for a code of conduct intended to eliminate double taxation in cross border transfer pricing situations.
The code sets out rules to be followed in relation to the dispute settlement procedures which are designed to make them operate more efficiently.
The aim is to establish common procedures in respect of:
- the starting point of the three-year period during which a company suffering double taxation can present a case to a competent authority
- the starting point of the two-year period during which the tax administrations of member states must attempt to reach agreement for the elimination of double taxation
- the arrangements to be followed during the mutual agreement procedure
- the practical arrangements for the procedure if there is no agreement during the two-year period, and
- the suspension of tax collection during the dispute procedures.
The full text of the report is available on the Europa website at europa.en.int/comm/taxation_customs/whatsnew.htm.
Double taxation agreements
Discussions are to be held about a new comprehensive agreement between the UK and Thailand.
Representations should be sent to:
Charlotte Enever, Revenue Policy International, Inland Revenue, Victory House, 30-34 Kingsway, London WC2B 6ES. Or send by e-mail to Charlotte.Enever@ir.gsi.gov.uk.
Publications
- IHT 200, Inland Revenue Account for Inheritance Tax updated
- IHT 215, Practitioners Guide (contains all the guides to completing IHT Forms.
l The IHT grossing up calculator has been amended to take account of the increased IHT threshold.
Statutory instruments
- SI 2682/2003. Makes directives for approved methods of electronic filing and electronic payments of tax with effect from 6 April and consolidates a number of existing regulations on electronic delivery of information.
The regulations relate to student loan repayments, social security contributions, and PAYE.
- SI 960/2004. The Child Benefit and Guardian's Allowance Up-rating Order came into force on 12 April.
- SI 1075/2004. The Income Tax (sub-contractors in the Construction Industry) (Amendments) Regulations 2004 came into force on 28 April. The regulations extend the payment date for sums deducted by three days and also extends the reckonable date for interest by three days, where payment is made by e-mail. Where an e-payment notice has been issued to contractors, they will be required to make payment electronically.
- SI 1069/2004. The Stamp Duty Land Tax (Amendment of Part 4 of the Finance Act 2003) Regulations 2004 came into force on 7 April. The computations of chargeable consideration for arrangements involving public or educational bodies is amended.
Gascoines Group Ltd and others v HMIT
In this case, W owned 71% of the shares in Gascoines Group Limited which had a wholly owned subsidiary, N Ltd. In addition, W was the settlor of a Trust which owned 99% of S Ltd.
The taxpayers appealed against a special commissioner's decision that all three companies were associated for the purposes of the small companies rate.
The High Court confirmed the special commissioner's decision on the basis that the definition of associated companies for the purpose of S13 was that given in S416, which led to the conclusion that where a person was held to have control of a company for the purposes of S416, that must also follow for the purposes of S13.
Ahajot v Waller HMIT
In this case, a special commissioner held that a taxpayer who had been declared bankrupt in 1990 was unable to pursue his tax appeals in front of the special commissioners.
In fact, in this particular case, the trustee had already settled the appeals by agreement.
Wilson v Clayton
In this case, general commissioners had decided that the taxpayer was not assessable to income tax on £5,060 received from his employer for unfair dismissal, on the basis that the payment fell within S148 ICTA 1988 and, since it fell below the £30,000 threshold, it was not taxable.
The Inland Revenue appealed to the High Court on the grounds that the employment tribunal which awarded the payment had no power to do so and, therefore, the payment fell outside S148 and was taxable either as an emolument or a benefit in kind.
The High Court upheld the decision of the general commissioners on the grounds that the payment was in connection with the termination of the taxpayer's employment and, therefore, fell within S148.
Future Online Ltd v Faulds
In this case, an individual (R) provided his services to a company (FOL) owned by him and his wife. FOL contracted with an agency (Elan) to provide services to EDS. Elan agreed to provide EDS with the services of various contractors on receipt of a purchase order from EDS.
FOL could provide a substitute, but only with the written consent of EDS. Throughout a three-year period, R worked full time for EDS as deputy to the test manager on the CSR project.
He was held to be an employee on the grounds that he was part and parcel of the EDS organisation and was well integrated into the structure set up to carry out the project. Whilst R or FOL could offer a substitute, EDS was not obliged to accept, so, in fact, EDS obtained the personal professional services of R. | 
