Technical update

international

It was a quiet start to 2005 as far as new accounting pronouncements were concerned. However, the IASB continues to have a full agenda for future developments.
The various refinements to IAS 39 covered in past columns continue to be the subject of discussion. In particular, the fair value option has elicited much debate, with the majority of respondents not agreeing with the IASB's suggested amendments. Equally, reverting to the existing unrestricted fair value option is not generally considered to address the concerns of regulators. The IASB has therefore been exploring an alternative approach with a preliminary first draft being issued in December 2004. Discussions are expected to continue and it is possible there will be one or more public forums to air all issues and see if a compromise can be reached which will satisfy all parties.
The short term convergence project with the US accounting standards body FASB also continues. An exposure draft suggesting amendments to IAS 12, Income Taxes, is likely to be published at the same time as proposals to amend its US equivalent, SFAS 109.
The convergence project is a key aspect of obtaining recognition for the use of IFRS in US markets. In 2005 there will be a significant increase in the number of non-US filers using IFRS as their introduction becomes mandatory in Europe. The SEC has said that it will monitor the content of the reconciliations between IFRS and US GAAP with the intention of removing the requirement by the end of the decade.
In a further step towards worldwide convergence, the IASB and the Accounting Standards Board of Japan have announced a joint project to reduce differences between IFRS and Japanese accounting standards.

The International Auditing and Assurance Standards Board (IAASB) has announced the withdrawal of the following four International Auditing Practice Statements (IAPS) effective 31 December 2004:
- IAPS 1001, IT Environments - Stand-alone Computers
- IAPS 1002, IT Environments - On-line Computer Systems
- IAPS 1003, Environments - Database Systems, and
- IAPS 1009, Computer-assisted Audit Techniques.
These IAPS have been withdrawn because the IAASB consider that the need for them has been superseded by the inclusion of computer processing in the revised standards on understanding the business and assessing the risks of misstatement. They are also generally outdated as a consequence of the continuing pace of innovation in information technology.

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

Following its publication of FRS 27, Life Assurance, the Accounting Standards Board is making a report to the Treasury on its review of life assurance accounting. The report includes the ASB's views on a more comprehensive framework for financial reporting for life assurance, which could help inform the International Accounting Standards Board's insurance project.
In February, the ASB issued an Urgent Issues Task Force Abstract on the topic of members' shares in co-operative entities, based on a draft issued for consultation in June 2004. The Abstract addresses questions about how the classification principles in International Accounting Standard 32, Financial Instruments: Disclosure and Presentation, apply to financial instruments issued by co-operative and other entities that give the holder the right to request redemption.
The UK's Auditing Practices Board has been bringing the UK in line with international auditing standards, issuing a batch of International Standards on Auditing (ISAs) (UK and Ireland) to replace the UK's Statements of Auditing Standards (SASs). Where necessary, the APB has augmented the international standards with additional standards and guidance in order to maintain the requirements and clarity of the UK and Irish SASs. The ISAs (UK and Ireland) apply to audits of financial statements for periods beginning on or after 15 December 2004. At the same time the APB published an International Standard on Quality Control (UK and Ireland) 1 with which audit firms must comply by 15 June 2005.
Subsequently, two proposed revised ISAs (UK and Ireland) have been issued for comment, entitled Materiality in the Identification and Evaluation of Misstatements and Auditing Accounting Estimates and Related Disclosures (Other Than Those Involving Fair Value Measurements and Disclosures). The APB has also published its finalised Ethical Standards with which auditors must comply when conducting audits of financial statements for periods beginning on or after 15 December 2004.

Sarah Perrin, accountant and writer.

The Finance Bill 2005, in addition to giving effect to the provisions of the 2004 budget, included a number of anti tax avoidance measures and a strengthening of the powers of the Irish tax authorities. Of greatest concern is the additional powers, which allow the tax authorities to prosecute any person who assists another with tax evasion or ''is knowingly concerned in, or is reckless as to whether or not the person is concerned in, directly or indirectly facilitating the fraudulent evasion of tax by any other person'.
The Irish tax authorities have recently collected a substantial amount of additional tax, interest and penalties from Irish taxpayers, who used the banking system to evade tax. Initially it was from holders of 'bogus non-resident' bank accounts. These are bank accounts held by Irish residents who claimed to be non-resident and, therefore, avoided deposit interest retention tax. The tax authorities then targeted offshore bank accounts, which are bank accounts held in offshore branches of Irish banks, usually in Northern Ireland, and often used to conceal income not declared for tax. Now the authorities are targeting single premium insurance policies. It is expected that overseas property and offshore credit cards will be targeted next. In most cases the unpaid tax relates to a period of 10 or more years ago, when Ireland was a high tax economy and there was a lax attitude to tax compliance generally.
Many individuals who were caught have accused bankers and insurance brokers of encouraging them to use these non-compliant products. Many of the non-compliant taxpayers are now in retirement and facing financial ruin with settlements in many cases well in excess of the total amount ever deposited with the banks. In one case, an allegation of collusion in evading tax has been proven in a civil court case. However, no criminal charges have been taken against bankers and other rogue tax advisers and the Government has belatedly addressed this by including the additional powers in the 2005 Finance Bill.
On the face of it the powers make sense. A banker or other adviser should not assist or collude with another person in the evasion of tax. However, if improperly used, the section could pose a risk to legitimate tax planning advice provided by a qualified accountant. Accountants will be reluctant to provide legitimate complex tax planning advice if there is a possibility of the plan being subsequently proven to be ineffective.
The money laundering regulations already impose a reporting obligation on accountants and bankers where they have a suspicion of tax evasion and collusion in tax evasion is money laundering. The additional powers contained in the Bill are simply a watered down duplication of the existing laws and are therefore unnecessary. ACCA and the other professional bodies in Ireland are lobbying to have the provision amended, although, with only two weeks between publication and enactment of the Bill, there is very short window of opportunity for a case to be made.

Aidan Clifford, advisory services manager, ACCA Ireland.

Asia Pacific

Hong Kong & China

The Financial Services and the Treasury Bureau (FSTB) has issued a second consultation on how to provide for exemption for offshore funds from profits tax under the Inland Revenue Ordinance (IRO). The aim of exempting offshore funds from profits tax is to reinforce the status of Hong Kong as an international financial centre.
In the first consultation exercise, it was proposed that in order to be eligible for the exemption, brokers/investment advisers would have the obligation of keeping the records to verify the non-resident status of the beneficial owners of the offshore fund. Concerns were raised about the heavy compliance burden placed on brokers/investment advisers.
The second consultative document therefore refined the approach of preventing abuse of the provisions. Under the revised approach, the recordkeeping requirement of the brokers/ investment advisers is removed. However, to overcome the possibility of round-tripping, it is proposed that where the resident investors' holding in the offshore fund exceeds a prescribed threshold, or where the resident is an associate with the offshore fund and holds any percentage in the fund directly or indirectly, profits derived from trading transactions conducted in Hong Kong will be deemed as taxable profits.

The revised regulations on the formation of investment companies by foreign investors, effective on 17 December 2004, allows holding companies by foreign investors to expand the scope of their business activities to include commission agents' services, wholesale activities, and the retail of goods. This provides foreign investors more flexibility in trading imported as well as locally sourced goods. The requirement of three or more intended investment projects for establishing a holding company is also eliminated.
The State Administration for Foreign Exchange issued a circular to allow entities in a MNC group to extend foreign exchange loans to other members in the same group located inside or outside China. This provides more flexibility for MNCs to manage the foreign exchange surplus of foreign invested enterprises established in China. Foreign exchange loans between member enterprises of MNC groups should carry interest at a rate consistent with the prevailing interest rate in the international commercial finance market.

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

Malaysia

1. New framework for perusal of circulars issued by listed companies
Effective 3 January 2005, Bursa Malaysia Securities Berhad implemented a new framework for perusal of circulars issued by listed companies. Bursa Securities will no longer conduct examination of all circulars issued by listed companies prior to their issuance, although it will conduct a limited review, or continue with a full review, of certain circulars. In a limited review, the focus will be on key disclosure areas.

2. Board of listed companies to be responsible for continuing education of directors
From 2005, the board of directors of listed companies will be responsible for evaluating and determining the specific and continuous training needs for its directors.
The Continuing Education Programme (CEP) implemented by Bursa Securities in July 2003, which was compulsory for 2003 and 2004, has created and enhanced the awareness of the need for continuous learning among directors of listed companies. However, with effect from 1 January 2005, the board will now have to evaluate and determine training that will aid directors in the performance of their duties.
In line with this requirement, the CEP, details of which are set under Practice Note 15/2003 for main board and second board companies and Guidance Notes 10 for MESDAQ market companies, has been repealed with effect from 1 January 2005.

Recently, the Malaysian Accounting Standards Board (MASB) issued exposure draft 46 as the final batch of its Improvement Project on existing Financial Reporting Standards (FRS). Together with ED 46, MASB also issued ED 47 First-time Adoption of Financial Reporting Standards.
ED 46, Proposed Improvements to Financial Reporting Standards, comprises revision to the following standards:
- FRS 127, Consolidated Financial Statements and Investments in Subsidiaries
- FRS 128, Investments in Associates
- FRS 131, Financial Reporting of Interests in Joint Ventures, and
- FRS 133, Earnings per Share.

Jennifer Lopez, manager of technical services, ACCA Malaysia.

Singapore

The Council on Corporate Disclosure and Governance (CCDG) has adopted FRS 40, Investment Property. It will become effective for annual periods beginning on or after 1 January 2007. The later date was decided by the CCDG to allow companies more time to review their business models and valuation methods, and also provides more time for the investing community to better understand the impact of FRS 40 on companies' financial statements. Companies, however, can choose to apply FRS 40 before the effective date of the standard. FRS 40 will supersede FRS 25, Accounting for Investments, in matters relating to investment properties.
The objective of FRS 40 is to prescribe the accounting treatment for investment properties and the related disclosure requirements. Under FRS 40, companies can choose to value their investment properties using the 'fair value model' or the 'cost model'. Under the cost model, investment properties will be stated at cost less depreciation (less any impairment losses).
The fair value model allowed under FRS 40 must be distinguished from the 'revaluation model' which is used by many companies in Singapore applying FRS 16, Property, Plant and Equipment. While under the 'revaluation model' revaluation surpluses are taken to the balance sheet and losses to the P&L (when there are no offsetting revaluation surpluses or deficits); under the fair value model all changes in fair value (i.e. effectively both unrealised gains and losses) are recognised in the profit or loss statement. Also, under the fair value model, the fair value of an investment property must reflect market conditions at each balance sheet date. Hence, more frequent revaluations may be required under the fair value model than under the revaluation model.
The choice between the cost and fair value models is not available to a lessee accounting for a property interest held under an operating lease that it has elected to classify and account for as an investment property. The standard requires that such an investment property be measured using the fair value model. Hence, in land-scarce Singapore, where leasehold interests are common, these properties must be fair-valued at each balance sheet date.
There is additional guidance in FRS 40 in dealing with transfers between investment and owner-occupied property classifications and the treatment of properties which have separate elements that can be treated as either type of property.

Joseph Alfred, technical manager, ACCA Singapore.

Americas

To improve an auditor's risk assessments, the Auditing and Assurance Standards Board (AASB) plans to upgrade the CICA Handbook - Assurance sections related to the auditor's understanding of the entity and its internal controls. The AASB has approved, subject to written ballot, the adoption of the following International Standards on Auditing: ISA 500, Audit Evidence; ISA 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement; and ISA 330, The Auditor's Procedures in Response to Assessed Risks. This will require changes to other existing Canadian standards and the addition of a new section, Reasonable Assurance and Audit Risk, to define the basic audit risk model.
The proposed standards are based on the auditor performing a combined risk assessment, which differs from existing standards that require the auditor to separate inherent and control risk assessments. Guidance on the auditor's ability to rely on evidence gathered in prior audits has also been clarified, and documentation requirements are now more specific. The standards and related conforming changes will be released in May, and will be effective for years beginning on or after 1 June 2005.

The Accounting Standards Board (AcSB) issued its new standards on financial instruments on 27 January 2005. They are described as a hybrid of US GAAP and international standards (based on FASB statement 113, Accounting for Derivative Instruments and Hedging Activities, and IAS 39, Financial Instruments - Recognition and Measurement), adapted for Canadian needs. Until now, the AcSB did not have standards that comprehensively address when an entity should recognise a financial instrument on its balance sheet, nor how it should measure the financial instrument once recognised. One key impact of the new standards is that all derivatives and most equity investments, such as common shares, will need to be recognised and measured at fair value. The mandatory effective date for adoption of the standards is for annual and interim periods beginning on or after 1 October 2006, although early adoption is permitted.

Alison Arnot, freelance writer and editor, Ottawa.

South Africa

The proposal to regulate tax consultants was first announced by the Minister of Finance in the 2002 Budget Review. The aim is to promote better compliance and to ensure that taxpayers receive advice consistent with tax legislation, while staying in line with international best practice. Following the refinement of the original concept paper, the Income Tax Act was amended to give effect to the registration of all tax practitioners with the South African Receiver of Revenue (SARS) by 30 June 2005. This includes persons who give tax advice or complete or assist in completing any documents for submission to SARS. Excluded from this obligation are persons who provide advice for no consideration, where the advice is merely incidental to the provision of other services and where advocates and lawyers who advise clients in anticipation of litigation. Employees themselves do not need to register as the obligation to register lies with the employer.
The lack of technical ability of some unqualified practitioners is a concern for both the taxpayer for whom they act and for the Revenue authorities. The lack of ability of some unqualified individuals potentially affects the reputation of all who practise tax. In addition, neither taxpayers nor governments have recourse to a complaints procedure against an unqualified individual because there is no professional body to approach. A further cause for concern is that the unqualified practitioner has an unfair competitive advantage because in an area where clients are unlikely to appreciate differences in service quality, pricing is a major factor. Unqualified practitioners have no compliance costs and can cut back on systems and controls, enabling them to undercut professionally qualified practitioners providing a reputable quality service. Currently, in South Africa, there is no minimum standard of qualification and experience for tax practitioners and no code of professional conduct. In all likelihood, a board independent from SARS will be established to regulate tax practitioners.
The objective is to create an environment in which qualified individuals are excluded from undertaking 'full practice' tax work unless they can demonstrate that they have the requisite level of experience and skill and, at the same time, doing away with fly-by-nights. The penalty for non-registration is a fine or imprisonment not exceeding 24 months.
This change of legislation means that all ACCA members in South Africa who offer tax services for their own account will need to register before the 30 June 2005. Application forms (TP-1) are available from SARS' head office from 1 April 2005.

Irene Christopher, head of policy development, ACCA South Africa.