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international
As of 31 March 2004, the IASB has established its 'stable platform' of International Financial Reporting Standards. However, its programme of work continues apace and a number of exposure drafts have been issued proposing further clarification and amendment to two of the more complex aspects of IFRS - financial instruments and pensions. While the majority of these amendments will not apply for preparers until at least January 2006 they do indicate the extent of possible future change.
Financial instruments
Four proposed amendments to IAS 32 and 39 have been issued together with an exposure draft proposing a complete revision of the disclosure aspects of IAS 32.
Applying for periods beginning on or after
1 January 2005:
- at the time of initial recognition, IAS 39 currently allows any financial instrument to be identified for measurement at fair value with changes in those fair values going straight to profit and loss account. Concerns have, however, been raised that the option might be used inappropriately and, therefore, it is being proposed to restrict the use of fair values to specific instruments
- in response to comments about the difficulties associated with retrospective application of 'day 1' gain or loss recognition on first time application, a proposed amendment to IAS 39 would give the option to apply the 'day 1' gain or loss prospectively to transactions entered into after 25 October 2002. Subsequent measurement and recognition would then be in line with the requirements of IAS 39.
Applying for periods beginning on or after
1 January 2006:
- a further exposure draft would clarify the treatment of financial guarantee contracts (sometimes known as 'credit insurance') and bring them within the scope of IAS 32 and IAS 39 rather than IFRS 4, Insurance Contracts
- IAS 39 only permits hedge accounting for transactions involving an external party and this has ramifications for entities that use hedge accounting within groups. It is being proposed that cash flow hedge accounting could apply for intra-group transactions but only if the external transaction is in a currency other than the group presentation currency.
The IASB has also issued ED 7, Financial Instruments: Disclosures, which proposes introducing a new IFRS for periods beginning on or after 1 January 2007, amending the existing disclosure requirements of IAS 32. As the new standard will result in all disclosure requirements about financial instruments being in one place it will also supersede IAS 30, Disclosures in the Financial Statements of Banks and Other Financial Institutions. There are proposals to simplify disclosure in certain areas including concentrations of risk, credit risk and market risk, but additional disclosure requirements will include financial assets and liabilities and income statement amounts by classification. The exposure draft also suggests that where an entity has an exposure to market risk there should be disclosure of a sensitivity analysis.
Retirement benefits
Amendments to IAS 19 are being proposed with effect from 1 January 2006 in three areas:
- the introduction of an option for entities to recognise all actuarial gains and losses as they arise, outside the profit and loss account, in a statement of recognised income and expense
- an extension of the application of multi-employer plan accounting to entities within a consolidated group where they meet certain criteria
- the introduction of a number of additional disclosures.
Draft IFRIC pronouncement D6, Multi-employer Plans, provides an interpretation of the requirements of IAS 19 with respect to individual participating employers in multi-employer schemes and requires that 'every practicable effort' be used to apply defined benefit accounting.
IFAC
The IFAC ethics committee has revised the Ethics Code dealing with lead audit partner rotation. The existing wording requires rotation of lead audit partner on a listed audit client after a specified period of time (usually seven years) and that they should not resume that role for a further specified period of time. As worded, however, this could result in the partner returning as another partner on the engagement and the requirement has, therefore, been amended to state that the lead partner should not participate in the engagement for a specified period of time (usually two years).
The International Auditing and Assurance Standards Board (IAASB) has issued a revision to ISA 300, Planning an Audit of Financial Statements. This builds on the new audit risk standards and also places emphasis on planning being a continual process.
Yvonne Lang, a director at Smith & Williamson, the accountancy and financial advisory group, and technical adviser to the audit committee of Nexia International, an international network of accounting and consulting firms. www.smith.williamson.co.uk.
UK & Ireland
Accounting in the life assurance sector has come under the ASB's spotlight, being the subject of a Financial Reporting Exposure Draft issued in July. FRED 34, Life Assurance, reflects the new prudential regime announced earlier that month by the Financial Services Authority, which requires large UK firms writing with-profits business to make a new realistic calculation of their expected policyholder liabilities, and to include this in their publicly available regulatory returns for years ending 31 December 2004.
The ASB's proposals also respond to longstanding criticisms that life assurance business is reported in financial statements in fundamentally different ways by insurance groups and others. FRED 34 therefore proposes certain constraints on the reporting of future income and profit, in line with proposals made by the IASB in IFRS 4, Insurance Contracts. Despite industry pressure, the ASB proposes that its standard be applied to accounting periods ending on or after 23 December 2004, rather than being deferred until 2005.
Further summer reading matter came in the form of FRED 33, Financial Instruments: Disclosures, proposing a UK standard based on the IASB's exposure draft (ED 7) of the same name. FRED 30, Third Supplement: Further Amendments to the Proposed Standard on Financial Instruments, also follows on from IASB proposals. It covers cash flow hedge accounting issues, the treatment of financial guarantees, the limiting of the availability of the fair value option when accounting for financial instruments, and other issues to do with the initial determination of fair values.
Meanwhile, the Urgent Issues Task Force has also been productive, issuing two draft UITF Abstracts ' Members' Shares in Co-operative Entities (issued 30 June), which looks at whether financial instruments issued by such entities should be classified as either liabilities or equity, and Retirement Benefit Schemes with a Promised Return on Contributions or Notional Contributions (16 July), which draws on a draft interpretation of IAS 19, Employee Benefits (IFRIC D9).
The Auditing Practices Board is consulting on the adoption in the UK and Ireland of 28 International Standards on Auditing, and an International Standard on Quality Control. When finalised, these will replace the APB's existing Statements of Auditing Standards. The APB intends the new standards to apply to the audits of financial statements for periods beginning on or after 15 December 2004.
Sarah Perrin, accountant and writer.
Charities are currently not regulated in the Republic of Ireland. There is, however, an optional 'charitable status' for taxation purposes, which gives the charity tax free status, and a requirement for incorporated charities to file financial statements annually on a public register. But the form and content of the financial statements is not regulated and issues such as corporate governance, internal controls and fundraising remain unregulated.
Prompted by the accounting profession in Ireland, and the sector itself, the Irish Government has published proposals to establish a statutory regulatory body to oversee the charity sector. The regulator will develop: a regulatory framework for the registration of charities; a standard form and content for charity financial statements; corporate governance requirements; allowable fundraising procedures; and address issues such as training and development and best practice in administration and accountability. ACCA has supported the proposals and has made some suggestions for improvements, such as ensuring that the regulations are not overly burdensome for very small charities while still being appropriate for larger entities.
ACCA Ireland has also initiated a pilot scheme to strengthen corporate governance in charities. The scheme involves matching ACCA members and other professionals with an interest in a particular charitable sector to charities with a specific specialist need (e.g. financial planning, internal audit, marketing and treasury). The scheme includes corporate governance training for ACCA members. The scheme can also serve as a springboard for younger members to prove their abilities before joining the board of a commercial entity. Further details of the board match project are at www.boardmatch.org and www.accaglobal.com/doc/ireland/boardmatch.doc.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong
A set of the new Hong Kong Accounting Standards (HKAS) will be effective for financial statements beginning on or after 1 January 2005. These standards, incorporating the recent revisions of international accounting standards as part of the International Accounting Standards Board's (IASB) improvement project, are developed under the convergence project of Hong Kong accounting standards with IAS. Up to date, the new standards cover:
- HKAS1, Presentation of Financial Statements
- HKAS2, Inventories
- HKAS8, Accounting, Policies, Changes in Accounting Estimates and Errors
- HKAS10, Events after the Balance Sheet Date
- HKAS16, Property, Plant and Equipment
- HKAS21, The Effects of Changes in Foreign Exchange Rates
- HKAS27, Consolidated and Separate Financial Statements
- HKAS28, Investments in Associates
- HKAS29, Financial Reporting in Hyperinflationary Economies
- HKAS32, Financial Instruments: Disclosure and Presentation
- HKAS33, Earnings per Share
- HKAS39, Financial Instruments: Recognition and Measurement
- HKAS-Int-12, Consolidation - Special Purpose Entities.
Meanwhile, exposure drafts have been issued in June 2004 for convergence of Hong Kong accounting standards with IAS. These include cash flow statement, leases, borrowing costs, related party disclosures, disclosures in the financial statements of banks and similar financial institutions, interests in joint ventures, and investment property.
HKFRS2 on share-based payment was also issued, which is converged with the equivalent standard issued by IASB: IFRS2, Share-based Payments.
While the IASB is seeking comments on its Discussion Paper on Preliminary Views on Accounting Standards for Small and Medium-sized Entities, the Hong Kong Society of Accountants (HKSA) (at the time of writing renamed as Hong Kong Institute of Certified Public Accountants (HKICPA)) also issued its consultation paper on Proposed Implementation of a Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard and invited comments by 31 August. It was proposed that companies currently qualifying under Section 141D of the Hong Kong Companies Ordinance, which are private companies without either a holding company or subsidiary and with the agreement of all owners to apply the section, would qualify to apply this particular set of accounting standards. It also proposed a quantitative size test to determine whether an entity is eligible. However, in this consultation, it suggested that once an entity adopts such a set of standards, its financial statements will not be opined as presenting a 'true and fair view'.
Audit and Assurance Standards in Hong Kong
HKSA (HKICPA) has undergone a process of developing standards and guidance on the preparation of accountants' reports on financial information by listing applicants/listed companies for inclusion in investment circulars. The proposed standards, Hong Kong Standards on Investment Circular Reporting Engagements (HKSIRs), aims at providing guidance on the general principles governing reporting accountants' engagements in the context of investment circulars. However, the effective day of the proposed new reporting framework is subject to any changes required in the Listing Rules and market practices.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
Come 30 September 2004, the coverage under the Anti-money Laundering Act 2001 will be extended to include accountants, lawyers and company secretaries.
An accountant who provides relevant services as prescribed in the Act to his clients will automatically fall within the ambit of the Act and, therefore, will be required to comply with its requirements. These new requirements effectively necessitate an accountant to implement the key elements of the anti-money laundering framework, which will assist him to recognise, detect and promptly report on any suspicious money laundering transactions to the Financial Intelligence Unit (FIU) of Bank Negara Malaysia (the Central Bank). FIU facilitates and co-ordinates the implementation and enforcement of the Act nationwide and co-operates with other countries to combat this crime.
What are relevant services?
Accountants will have to report any suspicious transactions in their capacity as an accountant in public practice when they prepare for, or carry out, the following activities for their clients:
- buying or selling of immovable property
- managing of client money, securities or other property
- managing of accounts including savings and securities accounts
- organising of contributions for the creation, operation or management of companies, or
- creating, operating or managing of legal entities or arrangements, and buying and selling of business entities.
However, the FIU has clarified in a public
forum that even if the services provided by
an accountant does not fall within the scope
of relevant services, an accountant is
obligated under the general provisions of the
Act to report suspicious transactions.
Failure to comply with the obligations under the Act is punishable upon conviction by a fine not exceeding RM100,000 or a term of imprisonment not exceeding six months or both. If convicted, accountants would also be liable to disciplinary action by the Malaysia Institute of Accountants, the local regulatory body governing accountants, resulting in loss of practising license.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Australia & New Zealand
Barring a last minute veto in the Australian Federal Parliament, international accounting standards will have the force of law for all Australian companies on or after 1 January next year.
This has come about thanks to a successful vote by the Australian Accounting Standards Board (AASB) to turn all international standards that were finalised by 31 March into Australian accounting standards.
Formal adoption of the new standards by the AASB means that Australian companies will now be able to quantify the effect of the new standards on financial results.
With harmonisation of auditing standards on the cards, Australia is expected to commit to transitioning to international auditing standards following recent changes to corporate laws.
The enacting of the Corporate Law Economic Reform Programme (CLERP 9) legislation in June, which ratified a change to the regulatory structure governing accountants in Australia, has cleared the path for the move to international auditing standards.
CLERP 9 legally recognises a new oversight body known as the Financial Reporting Council (FRC), which will now be responsible for setting the direction of forthcoming audit standards.
With the FRC in place, Australia is now ready to commit to international auditing standards.
Australia encourages cross border flows
Australian companies will be able to repatriate foreign profits free of Australian tax after major reforms were passed by the Australian Parliament recently.
Thanks to the reforms, local companies will be able to restructure and sell their foreign operations without paying Australian capital gains tax.
Many groups, including ACCA, have lobbied for changes to Australia's international tax regime in recent years, arguing the reforms will reduce the cost of capital and help locally based companies expand overseas.
Richard Francis, head of ACCA Australia &
New Zealand.
Americas
US
FASB has published proposals to establish a framework for measuring fair value that would apply broadly to both financial and non-financial assets and liabilities. It began its fair value project just over a year ago, with a view to creating general guidance for measuring fair value that could be used consistently by accounts preparers, auditors and valuation professionals. FASB's exposure draft, Fair Value Measurements, is therefore aimed at improving the consistency, comparability and reliability of such fair value measurements.
FASB's proposals expand current disclosures about the use of fair value to measure assets and liabilities. The disclosures focus on the methods used for the measurements and would apply whether the assets and liabilities are measured at fair value in all periods, such as trading securities, or in only some periods, such as impaired assets. FASB believes its proposals will help investors evaluate the extent to which fair value is being used in financial statements and the effect its use has on earnings.
In a separate project, FASB wants to clarify accounting guidance concerning the timing of liability recognition for conditional asset retirement obligations. It recognises that diverse accounting practices have developed in this area and wants to improve consistency. Its ED, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143, says that an entity would be required to recognise a liability for the fair value of an asset retirement obligation that is conditional on a future event if the liability's fair value can be estimated reasonably. Just because an entity can defer settlement of the obligation indefinitely, or can sell the asset before its retirement, does not relieve it of its obligation. Any uncertainty about the timing and method of settlement would be factored into the measurement of the liability rather than its recognition.
Sarah Perrin, accountant and writer.
Canada
Public opinion has been sought by the Accounting Standards Board (AcSB) in a bid to determine the body's future direction over a five-year period from 2005-2010. In particular, the Board is addressing four key issues on whether Canada should:
- maintain its own standard setting
capability
- maintain its own GAAP or adopt either US GAAP or IFRS
- consider modifying current GAAP requirements to provide better information to the users of financial statements of different types of entities through, for example, a wider application of differential reporting
- maintain the status quo.
The Board is currently pursuing a two-pronged approach to standard setting in Canada. From the mid-1990s, the AcSB has been harmonising 'principles-based' Canadian standards with 'rules-based' US standards. Specific GAAP differences related to a number of categories, including income taxes, employee future benefits and business combinations, have since been eliminated while work is continuing on other topics. The AcSB has not moved to adopt US GAAP in instances where the US standard is considered of insufficient quality.
Meanwhile, the Board has been working with the IASB and other international accounting standard setting bodies to agree on improvements to existing standards and the development of new standards.
The consultation is likely to have a significant impact on how corporate Canada will report on its financial performance. The trend to global convergence of accounting standards has been well received but, on a practical level, US GAAP is still viewed with interest by many Canadian entities that want easier access to US capital markets.
The AcSB expects to finalise and publish its plan in mid-2005 after seeking advice from the Accounting Standards Oversight Council; a body that oversees the activities of the AcSB. -
Linda F Mezon, Vice President, accounting policy, RBC Financial Group, was appointed to the AcSB in July. She joins a board of nine voting members including a full-time chair. Members volunteer for a three-year term.
Colette Steckel ACA, assistant editor, accounting & business.
South Africa
Auditors in South Africa currently operate in an environment that is not conducive to enhancing its independence. In light of recent international developments in this field, the Minister of Finance has established the ministerial panel for the review of the Draft Accountancy Profession Bill, inviting the public to comment before finalisation.
Self-regulation
The bill recommends that self-regulation is no longer appropriate in South Africa. A public/private partnership combining both skills and expertise of both government and profession would add some non-executive government appointees to a regulatory board for auditors which is run by the profession. This is, in fact, not very different from the current situation as the profession still shares in the control of the process rather than merely contributing expertise to it. ACCA's preferred model involves the creation of a strong central regulator, to which the audit profession contributes expertise but which it does not dominate.
Separation of consulting from auditing
The bill proposes an Ethics Board, representative of various stakeholders, with the power to issue strict guidelines setting out which services should be restricted and the circumstances in which they should be allowed. ACCA believes that there should be an outright prohibition on certain services and audit committees should pre-approve all services that are not expressly banned, an approach similar to that taken in the US with the Sarbanes-Oxley Act.
Rotation of auditors
This is not a question of whether but how often. The bill argues that compulsory firm rotation is undesirable, but that partner rotation should be required for listed and large company audits. It does not specify frequency of rotation, stressing the need to stay in line with emerging international practice. ACCA considers a minimum of five years to be acceptable for the rotation of audit partners and that the compulsory rotation of audit firms should not be compulsory in all cases, but the reasons for re-appointment after five years should be stated in a public report. Following the recent corporate scandal at European dairy group Parmalat, both the EU and UK are expected soon to announce measures to rotate audit firms rather than partners.
Irene Christopher, head of policy development, ACCA South Africa. |
