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international
Historically the IASB has cited strong arguments for International Financial Reporting standards (IFRS) to apply equally to all companies irrespective of their size. In response to those commentators who have called for exemptions and modifications for smaller or non-public entities, the IASB has issued a discussion paper seeking views on the approach to developing standards for small or medium-sized entities (SMEs). This initiative has strong support from the world's national standard setters.
Fundamental to the development of standards for SMEs is the need to determine the scope of entities to which the standards will apply. The IASB has tentatively concluded that any listed entity, or one in the process of listing, would have to use full IFRS. As a consequence, in considering the scope of standards for SMEs discussion will be limited to determining which unlisted entities which should be excluded from their scope.
In determining the parameters for the applicability of statements for SMEs, the IASB is mindful of the wide range of countries using IFRS and has formed the preliminary view that any definition should not include a quantitative 'size test'. The IASB is therefore looking to define those entities which may use the standards for SMEs based on the concept of public accountability. Public accountability is considered to exist where there is either a high degree of outside interest in the entity, and where the outside stakeholders depend primarily on the financial statements, or the entity has an essential public service responsibility or the entity is economically significant in its home country. However, even where an entity does not fall within any of
these criteria, before it would be able to use
the standards for SMEs, it would need to get
the assent of all 'owners'. Owners are defined
more broadly than shareholders and include all the key users of the financial statements.
Any entity choosing to follow the standards
for SMEs would also have to disclose the fact that they were following these standards.
The discussion paper continues by considering the fallback position when a standard for SMEs does not cover a particular accounting issue. The IASB is suggesting that there should be a mandatory fallback to the full IFRS rather than permitting the use of management judgement which could result in inconsistencies of application.
Even with the existence of standards for SMEs, it is possible that an entity able to follow the standards may wish to use the measurement basis or disclosures required by the relevant full IFRS. The IASB's preliminary view is that reversion to a full standard should be permitted on a standard by standard basis, but all aspects of that full standard would need to be applied.
The starting point for the development of standards for SMEs would be the full IFRS and there is a rebuttable presumption that there will be no modifications to the recognition and measurement modifications. It is, however, probable that there will be requirements to the level of disclosure.
In respect of how standards for SMEs will be published, the IASB is considering two alternatives - namely either as one volume or as separate sections of each individual IFRS. The separate volume is the favoured option with the standards being arranged by IAS/IFRS number rather than in topic order.
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
International issues continue to dominate the work of the Auditing Practices Board. In August the APB issued an exposure draft of its proposed International Standard on Auditing (UK and Ireland) 300, Planning an Audit of Financial Statements. The ED follows on from the APB's bumper consultation in June, when it published exposure drafts of 28 proposed ISAs.
The proposed UK and Ireland version of ISA 300 will supersede Statement of Auditing Standards 200, Planning. It revises the current standards and guidance on planning the audit in order to align them with the proposed new audit risk model that is also integrated into the other ISAs up for adoption in the UK. This latest consultation exercise by the APB follows the completion of the International Auditing and Assurance Standards Board's ISA 300 revision project.
Again with a view to developments on the wider stage, the APB has published a draft Bulletin providing auditors with interim guidance on issues that may arise when companies (and other audited entities) undertake the transition from UK accounting standards to International Financial Reporting Standards. The APB plans to finalise its guidance when the remaining uncertainties surrounding the adoption of IFRS in 2005 (by European listed companies) have been resolved. Such unresolved issues include, for example, the accounting for financial instruments.
Separate interim guidance comes in the form of Practice Note 12 (Revised), Money Laundering - Interim Guidance for Auditors in the United Kingdom, which focuses on the impact of the anti-money laundering legislation on auditors' responsibilities when auditing and reporting on financial statements. A final version of the guidance will be issued once approval has been received from the Treasury, as required by the Proceeds of Crime Act 2002. The APB felt that auditors would benefit from being given the latest guidance as soon as possible, even if in interim form. Sarah Perrin, accountant and writer.
The Companies (Auditing and Accounting) Act 2003 (the 2003 Act) imposes an obligation on Irish company directors of certain companies to detail on their annual financial statements:
- the policies and procedures operated by the company to ensure that they comply with relevant company law, tax and other legal obligations (the relevant obligations), and
- a statement to confirm that, in their opinion, all reasonable endeavours were made to ensure compliance with the relevant obligations.
The 2003 Act also requires that auditors carry out an annual review of both of the statements above, to determine if, in their opinion, each statement is fair and reasonable.
The requirement to prepare compliance statements applies to all public limited companies, whether listed or not, and to private companies where the turnover exceeds 15.2m euros or whose balance sheet total exceeds 7.6m euros. Within a group structure, the requirement extends to subsidiary companies once the subsidiary itself satisfies the criteria. The requirement does not extend to companies registered outside the state. The commencement of the part of the 2003 Act relating to compliance statements has been delayed pending the issue of professional guidance for both directors and auditors, although it is expected to apply to accounting periods beginning on or after 1 January 2005.
The Auditing Practices Board (APB) has published a draft Bulletin entitled Directors' Compliance Statements: Reports by Auditors under Company Law in the Republic of Ireland. The draft Bulletin provides guidance to assist auditors in undertaking the requirement to review the directors' compliance statements to determine whether they are 'fair and reasonable'. Copies of the draft bulletin can be downloaded from www.asb.co.uk/images/uploaded/documents/ACF26B0.pdf.
The Bulletin has been prepared in consultation with the Office of the Director of Corporate Enforcement (ODCE). The ODCE has recently issued draft guidance for directors - Guidance on the Obligation of Company Directors to Prepare Compliance Policy and Annual Compliance Statements under the Companies (Auditing and Accounting) Act 2003 - which can be accessed from its website at www.odce.ie/publications/consultation.
Aidan Clifford, advisory services manager, ACCA Ireland.
Asia Pacific
Hong Kong
In August 2004, HKAS 36, Impairment of Assets, and HKAS 38, Intangible Assets, together with HKFRS 3, Business Combinations, have been issued. These standards form part of the business combination project. Where there's a business combination with an agreement date on or after 1 January 2005, these accounting standards need to be adopted.
In addition, the following standards have been issued in August 2004:
- HKFRS 4, Insurance Contracts
- HKFRS 5, Non-current Assets Held for Sale and Discontinued Operations
- HKFRS-Int-1, Change in Existing Decommissioning, Restorations Similar Liabilities
- HKAS 26, Accounting and Reporting by Retirement Benefit Plans.
All the above standards will be effective for accounting periods beginning on or after
1 January 2005, while the interpretation will be effective for annual periods beginning on or after 1 September 2004.
Audit and assurance standards in Hong Kong
The revised ISA 300, Planning an Audit of Financial Statements, issued by the
International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) in July 2004 requiring auditors to be more rigorous in the planning of their audits, will be adopted in Hong Kong.
Financial reporting for small enterprises in mainland China
The Ministry of Finance of the People's Republic of China issued Accounting System for Small Enterprises, which will be effective on
1 January 2005. This system is applicable to enterprises of relatively small scale operation and not raising capital publicly by issue of shares or debentures. These enterprises can choose to adopt the main Enterprise Accounting System or the Accounting System for Small Enterprises, but not a hybrid of these two systems. Where an enterprise originally classified as a small enterprise fails to meet the 'small' criteria for three consecutive years due to business expansion, it should move quickly to adopt the Enterprise Accounting System. Also, a 'small' enterprise should apply Enterprise Accounting System on issue of shares or debentures publicly. A 'small' subsidiary in a group should adopt the Enterprise Accounting System to achieve consistency with that adopted by the parent and other enterprises in the group.
Sonia Khao, head of technical services,
ACCA Hong Kong.
Malaysia
In accordance with its policy of convergence with International Accounting Standards, the Malaysian Accounting Standards Board is reviewing 13 of its existing MASB standards. This review or improvements project is in line with the revisions to IASs by the IASB. Revisions to the 13 MASB standards will be issued in four batches.
MASB recently published the first batch of this project in form of exposure draft (ED) 37 comprising revisions to four existing MASB standards for public comment. ED 37 proposes improvements to the following standards:
- MASB 2, Inventories
- MASB 8, Related Party Disclosures
- MASB 15, Property, Plant and Equipment
- MASB 19, Events After the Balance Sheet Date.
The revisions are meant to eliminate alternatives, redundancies and conflicts within the standards, and as improvements to these standards.
IASB standards have been used as the basis for this ED. The wordings in IASB standards are maintained strictly and would only be changed if it is absolutely necessary. Any additions to the wordings in IASB standards are clearly identified and would be made in a manner that preserves the format and structure of the IASB standards. Changes would be made with the sole objective of enhancing the quality of reporting, without altering the intent or meaning of the original standard. Areas of potential enhancements would be those that deal with: (i) specific issues that are not dealt within the IASB standards; (ii) illustrations or additional clarification for better understanding of the context of the standard; or (iii) compliance with local laws and regulations.
The public and other interested parties are invited to submit comments in writing by 26 October 2004.
MASB proposes second Islamic
Accounting Standard
The MASB recently issued proposed MASB ED i-2, Ijarah, which is on Islamic leasing, a contract similar to a rental or operating lease. The proposed standard, which is expected to be issued in the first quarter of 2005, will provide guidance for Islamic leases such as those undertaken by the leasing industry and financial institutions.
The proposed standard is MASB's second project on Islamic standards. Its first Islamic standard, MASB i-1, Presentation of Financial Statements of Islamic Institutions, came into effect in 2003. The proposed MASB ED i-2, Ijarah, is very timely considering the growing importance of Islamic finance in Malaysia.
Jennifer Lopez, manager of technical services, ACCA Malaysia.
Singapore
In July, Singapore's Council of Corporate Disclosure & Governance (CCDG) issued IASB's discussion paper, Preliminary views on Accounting Standards for Small and Medium-Sized Entities, for comment in Singapore. The proposal aims to develop a separate set of International Financial Reporting Standards for small and medium-sized entities (SMEs). Also in July, CCDG adopted the following four Financial Reporting Standards (FRSs):
- FRS 102, Share-based Payment, ensures that an entity recognises all share-based payment transactions (including employee stock options) in its financial statements, measured at fair value. For listed companies, FRS 102 is effective for financial statements covering periods beginning on or after 1 January 2005. For all other companies, FRS 102 is effective from 1 January 2006.
- FRS 103, Business Combinations, introduces new accounting methods for business combinations for annual periods beginning on or after 1 July 2004. FRS 22, of the same title, has been withdrawn as a consequence.
- FRS 104, Insurance Contracts, provides guidance on accounting for insurance contracts. FRS 104 will apply to all companies for annual periods beginning on or after 1 January 2005.
- FRS 105, Non-current Assets Held for Sale and Discontinued Operations, introduces new accounting methods for assets held for sale, and the presentation and disclosure of discontinued operations. FRS 35, Discontinuing Operations, has been withdrawn as a consequence. FRS 105 will apply to all companies for annual periods beginning on or after 1 January 2005.
Also, revisions to FRS 39, Financial Instruments - Recognition and Measurement, has been adopted in respect of a fair value portfolio hedge of interest rate risk (or 'macro hedging') to simplify the implementation of FRS 39. The revisions will apply to all companies for annual periods beginning on or after 1 January 2005.
In August, the CCDG issued INT FRS 101, Changes in Existing Decommissioning, Restoration and Similar Liabilities. FRS 37, Provisions, Contingent Liabilities and Contingent Assets, contains requirements on how to measure decommissioning, restoration and similar liabilities. This interpretation provides guidance on how to account for the effect of changes in the measurement of existing decommissioning, restoration and similar liabilities.
Audit
The Institute of Certified Public Accountants of Singapore (ICPAS) has issued the following new Singapore Standards on Auditing (SSA):
- SSA 315, Understanding the Entity and its Environment and Assessing the Risk of
Material Misstatement, and
- SSA 330, The Auditor's Procedures in Response to Assessed Risks.
Conforming changes have been made to SSA 200, Objective and General Principles Governing an Audit of Financial Statements, which will supersede SSA 1 of the same title.
SSA 500 has been amended to provide additional guidance about the auditor's use of assertions and the qualitative aspects of audit evidence.
Statement of Auditing Practice (SAP) 1005, The Special Considerations in the Audit of Small Entities (previously SAP 21), has been revised to take into account SSAs issued since March 1999 through March 2003.
A new sample auditor's report for a corporate entity with a holding company, incorporating amendments in the Companies (Amendment) Act 2004, has been issued.
Joseph Alfred is technical manager of
ACCA Singapore.
Americas
US
FASB has welcomed the recommendations of a report to Congress by the Securities and Exchange Commission that considered the adoption by the United States of a principles-based accounting system.
The SEC recommended that FASB should issue 'principles-based or objectives-oriented' standards. Such standards would be based on an improved and consistently applied conceptual framework, would clearly state the accounting objective of the standard, and would provide sufficient (but not too much) detail and structure so as to allow consistent application. The report recommended that FASB should perform a comprehensive review of its literature to identify standards that are more rules-based and adopt a transition plan to change them.
The SEC also said FASB should address deficiencies in the conceptual framework, and should continue its convergence efforts. In response FASB said it was 'committed to working with the IASB and others towards the goal of producing a single set of high-quality accounting standards that can be used both domestically and internationally to support healthy global capital markets'.
Meanwhile, FASB has published a summary of its 'tentative decisions' on non-controlling interests, aka minority interests. The summary addresses when entities should be included in consolidated financial statements and establishes standards for the accounting and reporting of non-controlling interests in consolidated financial statements. It also deals with accounting for the loss of control of subsidiaries.
FASB is aiming to improve the consistency of US accounting and reporting of non-controlling interests by specifying that non-controlling interests in subsidiaries are part of equity. Considerable diversity in practice currently exists, with non-controlling interests reported as liabilities, as equity, or as 'mezzanine' items in a separate line between liabilities and equity. FASB also hopes its work will improve international comparability of accounting, as the summary is being issued as part of a joint project with the IASB. Sarah Perrin, accountant and writer.
Canada
Two new standards, both of which tackle quality control, were issued by the Auditing and Assurance Standards Board in August. General Standards of Quality Control for Firms Performing Assurance Engagements and Quality Control Procedures for Assurance Engagements will be effective from 1 December 2005, although the Canadian Public Accountability Board has set an implementation date of
1 January 2005 for its participating audit firms.
According to Practice Advice, a non-authoritative bulletin prepared by the staff of the Auditing and Assurance Standards Department at the CICA, quality control needs to be dealt with at two levels: the firm level and the engagement level. The firm standard forms part of generally accepted standards of practice for the profession while the engagement standard considers the quality control procedures that should be performed by the assurance team, led by a practitioner, on individual assurance engagements. There is, however, some overlap between the material in the two standards because both cover similar topics.
The quality control standards follow the recent implementation in Canada of rules of professional conduct related to independence. The AASB has stressed that its final standards do not impose requirements that go beyond, or conflict with, the independence rules.
For smaller firms attempting to get to grips with the new standards, the CICA is expected to issue guidance that will address specific issues for smaller firms and sole practitioners.
The Canadian Securities Administrators are seeking public comment on proposed amendments to the current rules regarding mining disclosure. The proposed amendments to National Instrument 43-101, Standards of Disclosure for Mineral Projects, reflect changes that have occurred in the mining industry and provide exemptions in specified circumstances. The aim of the amendments is to simplify the standard and make it more user-friendly. If all the amendments are accepted, around 90% of the disclosure obligations and filing requirements under NI 43-101 will remain the same. Public comments should be submitted by 10 December.
Colette Steckel ACA, assistant editor, accounting & business.
South Africa
The Department of Trade and Industry is currently undertaking a long overdue reform of the Company's Act. Internationally, company law reform is a continuous process that ensures that the laws are reflective of market practices and societal needs. The South African companies Act, 1973, is 30-years-old and has not undergone a comprehensive review to reflect fundamental changes that have taken place in South Africa. Currently, the framework of company law in South Africa is primarily built on foundations which were put in place by the British in the 19th century.
The draft policy aims to simplify the law for small companies. ACCA believes that creditor protection should remain a core concern of company law: without reasonable levels of transparent public reporting and effective legal measures to apply in the case of malpractice or non-payment, companies will be less reluctant to conduct business activity with each other. Such a consequence would clearly be in the interests of no-one. For this reason ACCA has urged the DTI to proceed with caution when considering possible reforms to existing statutory requirements, such as the independent audit, which offer important protections for the interests of shareholders and creditors. Measures such as the audit must be viewed in the light of the contributions they make to good corporate governance and effective financial management, and not seen simply as compliance burdens.
Close corporations are also set to disappear as a result of the simplification process. ACCA encourages the DTI to consider reforms to the company law in the context of the understanding of the wider business framework in South Africa. Instrumental to this wider understanding has to be an appreciation that different forms of business vehicles are appropriate to businesses of different sizes and purposes. The review should therefore aim to reform company law, not on the basis that all businesses should be companies, but on the basis that the company format will only be suitable for a particular type of business operation. Those businesses which are not suited to the company format, or incapable of complying with reasonable legal demands, should be encouraged to adopt other formats.
The core issue of to whom companies owe their legal duties is explored by the draft policy. This is an issue which has become central to company law given the expansion over the years of share ownership and given evolving concerns in society that companies should not be allowed to pursue economic gain on an unconditional basis and in isolation from their responsibilities to other elements in society.
The commitment that the review will consider the position of the company in the modern environment is, therefore, something which ACCA warmly supports, although any proposal to reform the law on this question should bear in mind that the incentive for individuals to form and run companies is and should remain for those companies to become profitable means of carrying out economic activity. If the entrepreneurs concerned do not have a profit motive, their preferred mode of business format will be the non-profit-making vehicle. Further, if entrepreneurs do not consider that the company format offers them a realistic possibility of operating profitably, because of legal, fiscal or other obligations which are imposed on them, they will not be encouraged to form companies at all, or at least not in South Africa. The effects of radical reform on outside investors and prospective investors is also highly relevant: if companies were to owe financial and other responsibilities to stakeholders other than to those who provide the finance on which companies operate, the incentive to invest will be diminished.
The DTI will need to be cautious when imposing responsibilities on companies, and those who run them, which have the potential to become onerous and an actual deterrence to the operation of corporate activity. The solution may be for the law to call on company directors to act in the best interests of their company as represented by its investors, but to require them to consider, within this context, the significance to the company of wider 'stakeholder' issues. This appears to be an attractive model and worthy of consideration in the SA context.
Irene Christopher, head of policy development, ACCA South Africa. |
