Technical update

international

Although there has been little in the way of new pronouncements from the IASB in the past couple of months, the board continues to be very busy analysing responses to exposure drafts and working on new projects.
In the light of responses received, the IASB has decided not to proceed with the content of its exposure draft, Proposed Amendment to IFRS 3, Business Combinations: Combinations by Contract Alone or Involving Mutual Entities. The issues raised will instead be considered in Phase II of the business combinations project.
IAS 39, Financial Instruments: Recognition and Measurement, continues to occupy the IASB which has announced the formation of a working party to take a fresh look at the standard. The working party will be asked to question the fundamentals underlying the standard in the context of the IASB's framework. The focus of the review will therefore be on improving, simplifying and eventually replacing IAS 39, and it will also consider the applicability of the fair value model. Whilst it is anticipated that the review will take a number of years, the IASB has indicated it is willing to revise the existing standard if any immediate solutions arise from the discussions of the working party.
David Tweedie, chairman of the IASB, has also been before the Committee on Economic and Monetary Affairs of the European Parliament to discuss the status of work on IAS 39. This presentation was used as an opportunity both to explain the past and future development of IAS 39 and also to reiterate the IASB's view that IAS 39 should be endorsed by the EU in its entirety. However, the European Commission has now approved a modified version for use by European companies required to prepare IFRS compliant accounts in 2005. The amendments will restrict the use of the fair value option by banks and will also allow fair value hedging of bank's interest rate hedges of core deposits on a portfolio basis.
Following a lengthy review of the drafting conventions used in International Standards on Auditing (ISA), the International Auditing and Assurance Standards Board (IAASB) has issued an exposure draft of a proposed policy statement, Clarifying Professional Requirements in International Standards Issued by the IAASB, and a related consultation paper, Improving the Clarity and Structure of IAASB Standards and Related Considerations for Practice Statements.
In order to achieve clarity and achieve greater consistency of application, it is proposed that ISA will contain two categories of professional requirements: 'requirements' and 'presumptive requirements'. A requirement will be identified by the word 'shall' and auditors will need to apply it wherever the relevant circumstances arise. Presumptive requirements will be identified by the word 'should' and would usually be applied where the relevant circumstances arise, but could be departed from so long as the reasons for such departure are documented. It is proposed that the changes will be applied prospectively for all new exposure drafts and that existing standards will not be modified. The consultation paper is also seeking further input from respondents as to how the clarity of ISAs might be further improved.
The IAASB is also proposing changes to ISA 230, Audit Documentation, and consequent amendments to ISA 330, The Auditor's Procedures in Response to Assessed Risks, and ISQC 1. The changes are being made in an attempt to ensure that greater rigour and consistency is applied by auditors when preparing audit documentation in order to meet the requirements for quality control inspection imposed by ISQC 1. Amongst other things, the proposed ISA will require auditors to consider, in preparing audit documentation, the needs of an experienced auditor, having no previous connection with the audit, to understand the work performed, evidence obtained and conclusions reached. The proposed new standards will also require documentation of contradictory evidence found during the course of the audit and how those contradictions were resolved.

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

The UK's Accounting Standards Board has said it would like all UK companies to comply as far as possible with the full hedging provisions in IAS 39, Financial Instruments: Recognition and Measurement. This is despite the European Union's vote on 1 October to adopt an amended version of the standard in which certain elements of the original IAS have been carved out.
Under the amended IAS 39, companies are restricted in their use of the fair value option (which does not now apply to financial liabilities), while a wider range of hedge relationships can qualify for hedge accounting. The ASB believes the amended standard could lead to artificial volatility in reported profits, as well as application difficulties.
The EC has said member states can require companies reporting under the IAS Regulation to comply in full with IAS 39's hedge accounting requirements. However, the ASB understands that, as a consequence of the IAS Regulation, it may not currently have the power to mandate full compliance. It is therefore exploring all possible means of doing so as quickly as possible.
Given the urgent need to get IAS accounting systems in place, the ASB aims to issue guidance for companies reporting under EU-adopted IASs as soon as possible. It will also issue a UK standard implementing in full the measurement and hedge accounting requirements of the unamended IAS 39. This will apply to 2005 year-ends for all listed companies still following UK standards, and from 2006 for certain unlisted entities.

The Auditing Practices Board has pushed ahead with convergence projects, publishing proposed International Standard on Auditing (UK and Ireland) 700, The Auditor's Report on Financial Statements, and proposed ISA (UK and Ireland) 230 (Revised), Audit Documentation. It has also issued five finalised Ethical Standards and is consulting on potential exemptions for auditors of small entities.

Sarah Perrin, accountant and writer.

Ian Drennan FCCA has been appointed the chief executive designate of the Irish Auditing and Accounting Supervisory Authority (IAASA). The authority is a new statutory body charged under the Companies (Auditing and Accounting) Act 2003 with the following remit:
- to supervise how the prescribed accountancy bodies regulate and monitor their members
- to promote adherence to high professional standards in the auditing and accountancy profession
- to monitor whether the accounts of certain classes of companies and other undertakings comply with the Companies Acts (a similar function to the FRRP in the UK), and
- to act as a specialist source of advice to the Minister on auditing and accounting matters.
IAASA was conceived following a Government sponsored review of the auditing profession and is 60% funded by the profession and 40% by the Government. IAASA is an independent authority that must prepare a work programme, have this programme approved by the Government, in consultation with the profession, and prepare a report on its activities annually. The authority takes over many of the functions previously discharged by civil servants in the Department of Enterprise, Trade and Employment. The auditing professions supervisory framework in Ireland is now analogous to the EU proposals in the draft amended 8th Directive.
Ireland has five long established and well respected recognised professional accounting bodies as well as one additional newer body, all entitled to grant registered auditor status to members and who will initially come under the supervision of IAASA. The bodies range in size from international bodies, such as ACCA, to one with just 130 registered auditors. One of the main difficulties for Ian Drennan will be to ensure that a consistent and appropriate standard of examination, training, audit monitoring, licensing and disciplinary procedures are applied across all of these diverse bodies.
With an annual expected budget of around 2.5m euros, the authority will be a substantial burden on a profession but it is one that ACCA hopes will assist in improving the public perception of the profession and raise standards overall.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong

The Financial Services and the Treasury Bureau issued a consultation on an estate duty review in July 2004 and invited comments by 20 October. The consultation was initiated by the Financial Secretary's proposal in his 2004/05 Budget Speech to attract foreign capital and to develop Hong Kong into a premier asset management centre for Asia.
Estate duty was firstly introduced in Hong Kong in 1915 with an aim to generate revenue and to 'enable the whole community to benefit upon the death of persons who had grown very rich partly through the appreciation in value of assets and the progress of Hong Kong to which the whole community contributed'. Based on the principle of territoriality under Hong Kong taxation, estate duty is only charged in respect of a deceased's properties located in Hong Kong at the time of his/her death. Estate duty is charged where the aggregate value of the estate exceeds HK$7.5m, and the rate varies from 5% to 15%, dependent on the value of the estate.
During previous years, the Hong Kong Government continuously received proposals to adjust the estate duty regime or even to abolish estate duty. These proposals were raised mainly due to the fact that estate duty could easily be avoided under the territorial principle and, as a result, only those who could not afford estate planning will be subject to estate duty upon his/her death. It was also considered that estate duty not only deters foreign investors from investing in local assets, especially in the absence of a double tax treaty between their country and Hong Kong, but also creates a disincentive to local investors to invest or retain assets in Hong Kong. The consultation seeks comments on whether estate duty should be abolished, how the abolition would affect different industries and the economy as a whole, and the costs and benefits of abolishing estate duty.

Sonia Khao, head of technical services, ACCA Hong Kong.

Malaysia

In September 2004, the Malaysian Accounting Standards Board (MASB) issued exposure draft ED 38 and ED 39 - the second and third batch of its improvement project. The first batch - ED 37 - was reported in the last issue. The fourth and final batch of revisions will be issued before the end of 2004.

If adopted, ED 38 will affect existing MASB standards as follows:
1. MASB 1 (Revised), Presentation of Financial Statements
- requires disclosure of the critical judgements made by management in applying accounting policies
- requires disclosure of the key assumptions about uncertainties made by management that could cause material adjustment to the carrying amounts of assets and liabilities in the financial statements
- prohibits disclosure of 'extraordinary items' in the financial statements.
2. MASB 3 (Revised), Net Profit or Loss, Fundamental Errors and Changes in Accounting Policies
- the allowed alternative treatment is removed. Requires retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors
- eliminates the concept of a fundamental error and, thus, the distinction between fundamental errors and other material errors
- requires, rather than encourages, disclosure of an impending change in accounting policy when an entity has yet to implement a new Standard that has been issued but not yet come into effect.
3. MASB 6 (Revised), The Effects of Changes Foreign Exchanges
- replaces the notion of 'reporting currency' with: functional currency - the currency of the primary economic environment in which the entity operates; and presentation currency - the currency in which financial statements are presented
- revises the requirements for distinguishing between foreign operations that are integral to the operations of the reporting entity, and foreign entities
- removes the limited option to capitalise exchange differences arising from severe devaluation or depreciation of a currency against which there is no means of hedging.

ED 39 is identical to IFRS 5, Non-current Assets Held For Sale and Discontinued Operations. If adopted, the proposed Standard will replace the existing MASB 28, Discontinuing Operations.

According to ED 39:
- assets meeting the criteria to be classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, are presented separately on the face of the balance sheet
- assets classified as held for sale must be available for immediate sale in its present condition and its sale must be highly probable
- assets or disposal groups that are classified as held for sale are carried at the lower of the carrying amount and fair value less costs to sell. Such assets or disposal groups are not depreciated.

ACCA will submit its comments on the ED 38 and ED 39 with members' feedback on the drafts. Members who wish to submit their responses and comments may do so in writing to Jennifer.lopez@my.accaglobal.com on or before 30 November 2004.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Ministry of Finance is considering the merits of replacing the preceding year basis of assessment (PY Basis) with a current year basis of assessment (CY Basis) for taxation of income. Under the PY basis, income tax payable this year is based on income earned in the previous year. Under the CY basis, income tax payable this year is based on income earned in the current year. The Ministry has invited comments from the public. The period for public consultation ended on 30 October 2004.

Benefits of implementing CY basis
If the tax is paid in the same year as the income is earned, there will be better matching of income earned to tax paid. This will have a moderating effect on the economy as more tax will be paid in a boom year and less tax will be paid in a year when the economy is weak. This has been cited as a macro-economic benefit by the Ministry.

Costs of implementing CY basis
If tax is paid on the CY basis, however, there may be higher compliance (i.e. administrative) costs. For companies, the income has to be estimated at the beginning of the year under the 'Upfront Estimation' method, and adjustments may be required at the end of the year to compensate for differences between estimated and actual income. Alternatively, the company may submit quarterly returns based on income earned in the previous quarter (based on the 'Periodic Filing' method). Hence, there is likely to be more administrative work for employers. Also, payroll and IT systems would have to be modified to accommodate the proposed basis. The options for the self-employed are similar to that for companies.

Personal tax
For employees' personal tax, there are two methods to be considered if the CY basis is adopted. Either the tax will be paid directly by the employee to the tax authority based on his/her estimated income for the year determined at the beginning of the year ('Employee Declaration' method) or the employer will withhold the tax from the employee's salary based on his/her estimated income for the year ('Employer Withholding' method). In either case, the tax can be paid on an instalment basis during the year that the income is being earned.

Transitional issue
If a decision is made to switch to a CY basis of assessment, one of the problems the Government will face is to have to assess two years of income to tax in the year of transition. Commentators believe that if the CY basis is implemented, the Ministry would have to consider allowing a tax holiday for one year to avoid burdening taxpayers with two years of assessment that would have to be paid simultaneously.

Joseph Alfred, technical manager, ACCA Singapore.

Australia

The Australian Accounting Standards Board (AASB) has changed the controversial new standard for valuing executive options and perks to allow Australian listed companies to adopt the international rather than the local standard.
The AASB made the concession after widespread complaints from the business sector about differences in valuation methods used by the AASB, the Australian Stock Exchange and recently introduced corporate laws in Australia. The AASB is also looking at other changes to reduce conflicts concerning disclosure of executive pay.

Australian audit firms prepare for inspection
Australian audit firms are gearing up for their first inspections by The Australian Securities and Investments Commission (ASIC), with 10 inspectors ready to start conducting on-site assessments before the end of the year.
This is the first time ASIC has had responsibility for oversight of the audit profession, and forms part of a range of changes to Australian corporate laws introduced in July.

ATO backdown
The Australian Taxation Office (ATO) has backed down on plans to require boards of directors to sign-off tax planning strategies.
Conceding to heavy lobbing from the business community and tax advisers - who argued that the requirement would over-burden directors already loaded with many new laws and obligations - the ATO has said it won't proceed with the move. Instead, it will issue a practice statement detailing access to board documents to which it's entitled in special cases.

Richard Francis, head of ACCA Australia & New Zealand.

Americas

US

In September, FASB held a public roundtable to discuss issues related to fair value measurements.
The objective of the roundtable was to provide information to assist FASB in its redeliberations of its proposed statement on Fair Value Measurements. Representatives from major corporations, accountancy firms, the Securities and Exchange Commission, the insurance and banking sectors and the actuarial profession attended. Several issues were up for discussion, including the fair value definition and disclosure requirements.
During discussion of the fair value definition, one view called for the term 'market value' to be used instead of 'fair value' because the latter term was ambiguous. Several participants questioned whether a change in an entity's credit standing should be reflected in subsequent remeasurements of liabilities. Many of these participants said that liabilities should be adjusted for changes (decreases) in credit standing only when the resulting gain/loss is realisable. They suggested that the resulting measurement was not necessarily relevant if the issuer was not able to actually settle that liability at the lower value.
Turning to disclosures, many participants indicated support for the proposed summary disclosures about the techniques used to measure various assets and liabilities. However, many people objected to the proposed incomes statement disclosures relating to unrealised gains or losses because they believed that distinguishing between realised and unrealised gains and losses created a stigma for unrealised gains (or losses); it would make them seem of a lower quality than realised ones. The proposed disclosures would also create significant additional costs for preparers of financial statements, while the information provided would not be particularly meaningful to users or management.

FASB aims to publish an exposure document on Fair Value Measurements in the first quarter of 2005.

Sarah Perrin, accountant and writer.

Canada

Alison Arnot, freelance writer and editor, Ottawa.