GAAP ALERT No. 12/2008 To read on line click here
15 July 2008
By Colin Parker B.Bus FCA MAICD
Principal, GAAP Consulting, colin@gaap.com.au
Member of the Australian Accounting Standards Board
Hot Spot: Fair Value Disclosures – Is There an Active Market?
New Standard on Valuation Services by APESB
Revised Ethical Standard on Compilations
Compiled Code of Ethics Released by APESB
New Auditing Standard on Compliance Engagements
Guidance on New Section in Auditor’s Report on Remuneration Disclosures Issued by AUASB
ASIC Proposals to Improve Disclosure by Unlisted Mortgage and Property Schemes
IASB June Meeting Highlights
IASB July Meeting Agenda
IFRIC Interpretation on Agreements for Construction of Real Estate
IFRIC Interpretation on Hedges of a Net Investment in a Foreign Operation
IFRIC July Meeting Agenda
Good Practice Guide for Audit Committees
Revised Supplementary Guidance to Principle 7 ‘Recognise and Manage Risk’
Former Company Secretary Charged
Governance and Costing EDs Released by IFAC
Hot Spot: Fair Value Disclosures – Is There an Active Market?
David Sauer, Chartered Accountant, Member of GAAP Consulting Network
You may have read a series of reports from analysts and commentators in recent weeks confirming declines in market activity. These include areas such as commercial property, fundraising, and mortgage lending; all influenced by the consequences of the reduced availability of credit and other market conditions.
Financial statement preparers should be on alert for a range of issues associated with fair value accounting in current financial statements. One of these is the specific basis of measurement. The accounting standards incorporate a notion of a hierarchy of sources of fair value. In the absence of an arms-length offer to acquire an owned asset at balance date, substitutes including a price quoted from an active market, or evidence of a recent sale of the same or a similar asset are to be used.
The specific source of fair value used for any given class of asset or liability is to be disclosed in the financial statements. For example, AASB 7 requires the method of determining fair value, and if it includes a valuation technique, the assumptions applied. Also, where the assumptions used are not based on observable market data, disclosure is required of that fact.
Some entities that determined fair value by reference to market activity last year will not be able to do so this year. In such cases, preparers should take care to update their basis of valuation disclosures. This may require showing one basis for 2008, and having a different one repeated from 2007.
This experience of market volatility may prompt some preparers to be more cautious in their disclosure of valuation basis in future. Stating that the fair value is determined by reference to observable similar transactions can incorporate references to an active market, but does not require change in periods when such transactions do not exist.
New Standard on Valuation Services by APESB
A new professional standard APES 225 ‘Valuation Services’ has been released by the Accounting Professional & Ethical Standards Board (APESB) which specifies accountants’ mandatory requirements in business and public practice in areas, including independence, professional engagement requirements and minimum reporting requirements for a valuation report. It includes a range of scenarios that identifies when accountants need to adhere to the standard. The new standard is effective from 1 January 2009, with early adoption permitted. It will be enforced by the three Australian professional accounting bodies.
The new standard applies to members of the professional accounting bodies in Australia who perform an engagement or assignment that estimates the value of a business, business interest, security or intangible asset for numerous purposes, including sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management and financial planning, and litigation.
“The APESB developed the valuation standard to improve the consistency, transparency and quality of practice among professional accountants who perform valuation services. The new standard will help both business and the accounting profession to produce consistent valuation reports”, APESB Chairperson Kate Spargo stated.
Revised Ethical Standard on Compilations
The APESB has released APES 315 Compilation of Financial Information, which redefines the fundamental responsibilities of professional accountants who collect, classify and summarise financial information. APES 315 will be effective from 1 January 2009, with early adoption permitted.
New requirements have been introduced to the standard, including how to communicate significant matters to those charged with governance and the procedure to follow when subsequent discovery of facts occurs. The revised standard also reinforces the need for accountants to clearly document and communicate with the client the agreed scope of work to be conducted, as well as their professional obligations in performing such work.
APES 315 replaces the miscellaneous professional statement APS 9 and has been updated to reflect the requirements in APES 110 ‘Code of Ethics for Professional Accountants’ and APES 305 ‘Terms of Engagement’.
APESB Chairperson Kate Spargo said: “The previous standard was limited because it only applied to the compilation of traditional financial statements. Given the breadth of financial information accountants manage today, we needed to broaden the scope of the standard so that is adequately covers all financial information compiled by an accountant.”
David Sauer, Member, GAAP Consulting Network, notes that the standard is clearer in respect of scoping out internal reporting, such as bookkeeping reports. He welcomes the expansion beyond historical financial information, but cautions preparers of, for example, forecast financial data, to consider carefully their obligations in respect of communications of significant matters to those charged with governance.
Compiled Code of Ethics Released by APESB
The APESB has released a compiled APES 110 ‘Code of Ethics for Professional Accountants’ incorporating relevant amendments issued up to 15 February 2008. The compiled APES 110 incorporates the revised definition of network firms and changes to auditor independence requirements in line with the Corporations Act 2001 amendments enacted in June 2007 by the Simpler Regulatory System legislation.
Except for paragraphs 290.14 to 290.26 compiled APES 110 is effective from 15 February 2008. Paragraphs 290.14 to 290.26 are effective for assurance engagements for periods commencing on or after 1 July 2008.
For members of the three professional accounting bodies compliance with APES 110 is mandatory. Members who conduct audits in accordance with Chapter 7 of the Corporations Act 2001 are reminded that, in relation to such audits, APES 110 has the force of law.
“The impact of changes to the network firm definition within APES 110 will have wide reaching impacts for a number of accounting firms. Those meeting the definition for the first time are having to look at their network-wide policies on quality control and independence, the procedures within each firm, and other issues such as the need for robust conflict checking systems between network firms”, stated Justin Reid, Associate, GAAP Consulting.
New Auditing Standard on Compliance Engagements
The AUASB released of ASAE 3100 ‘Compliance Engagements’ provides new and complex rules on the audit or review of an entity’s compliance with requirements under legislation, regulation, company policies, statutory requirements, and enforceable contractual obligations. The AUASB has previously provided subject-matter specific guidance to auditors on areas of compliance. Practitioners will need to use this standard for reporting periods or engagements commencing on or after 1 October 2008. Early adoption is permitted.
“ASAE 3100 is the second of the new Assurance Standards (the first being ASAE 3000) to be released. Members should understand the ‘Explanatory Guide to Review Engagements’ (April 2008) for a background on the Assurance Standards that will be released by the AUASB. Some of the upcoming standards will replace former AUS, so members should ensure that they continue to perform Assurance Engagements using the most up to date standards”, stated Justin Reid, Associate, GAAP Consulting
“ASAE 3100 is the new benchmark for the conduct of an audit or review on an entity’s compliance with requirements under criteria, such as legislation, regulation, corporate policies, and enforceable contractual engagements. Audit firms will have to revise their audit programs and reports, and train their staff to meet these new requirements”, Justin said. “Auditor’s should not forget to communicate with management and governance on these new requirements”, he concluded.
Guidance on New Section in Auditor’s Report on Remuneration Disclosures Issued by AUASB
The AUASB issued Guidance Statement GS 008 ‘The Auditor’s Report on a Remuneration Report Pursuant to Section 300A of the Corporations Act 2001’ that provides guidance to auditors when expressing an opinion on whether the remuneration report, contained within the directors’ report, complies with the Corporations Act 2001 (S.300A). The auditor’s report will now have two distinct sections: the conventional section that includes the auditor’s opinion on the financial report; and a new section, which contains the auditor’s opinion on the remuneration disclosures in the directors’ report.
ASIC Proposals to Improve Disclosure by Unlisted Mortgage and Property Schemes
ASIC released Consultation Paper 99 ‘Mortgage Schemes – Improving Disclosure for Retail Investors’ and Consultation Paper 100 ‘Unlisted Property Schemes – Improving Disclosure for Retail Investors’ and draft regulatory guides. ASIC’s objective is to ensure that retail investors were better informed about the nature of these investment and risks associated with unlisted mortgage schemes and unlisted property schemes. Comments on the consultation papers and draft regulatory guides are due by 5 August 2008.
When ASIC released its report on the new disclosure measures by unlisted and unrated debentures in April this year, it foreshadowed extending the concept of an ‘if not, why not’ approach to disclosure against key benchmarks to other areas of unlisted investments. The current proposals are the start of a process to assess in more detail with the market what scope there is to improve disclosure in these areas of unlisted investments. As with ASIC’s work in the unlisted and unrated debentures, it will be producing companion investor guides for both sectors to assist investors in understanding the enhanced disclosure and make better informed investment decisions.
ASIC encourages responsible entities to communicate the enhanced disclosure information to investors in the most effective way possible and using existing effective investor communication channels (e.g., by the scheme’s website and regular reports). ASIC has also included draft guidance for advertising of these products and expectations of compliance plans, compliance committees and compliance plan auditors.
ASIC’s draft regulatory guide proposes a benchmark-based disclosure model for unlisted mortgage schemes. The eight benchmarks differ from the ones introduced for debentures to reflect the different risk profile of unlisted mortgage schemes and the different legal structures and rights associated with this type of investment It is proposed that issuers disclose against the benchmarks on the ‘if not, why not’ approach. ASIC is proposing that responsible entities for existing mortgage schemes report against benchmarks to existing investors by 31 October 2008. From this date, new fundraising documents for new and existing mortgage schemes need to comply with the ‘if not, why not’ benchmarks.
The new proposals regarding unlisted property schemes centre on eight disclosure principles that are designed to give issuers guidance on key areas that need to be prominently disclosed to existing and potential retail investors. Clear and prominent disclosure of information referred to in the disclosure principles will allow retail investors to compare the relative risk and return of unlisted property scheme investments. ASIC does not currently propose to extend the ‘if not, why not’ approach to unlisted property schemes.
ASIC will be reviewing the unlisted property schemes sector to see whether our guidance has improved investor disclosures. It will also analyse the impact on the sector of any changes in market conditions. Based on these factors, ASIC may consider whether there is a need to establish benchmarks for property schemes to disclose against on an ‘if not, why not’ basis.
ASIC is proposing that responsible entities for existing unlisted retail property schemes provide updated disclosure to existing investors applying the new disclosure principle by 31 October 2008. From this date, responsible entities of all unlisted retail property schemes will need to apply the disclosure principles to PDSs and ongoing disclosures.
GAAP Network member David Sauer notes that some issuers will provide these details for the first time and should take care that there is no inconsistency between the product disclosure statement, where ASIC is seeking the disclosure, and information provided in financial statements.
IASB June Meeting Highlights
The highlights of IASB 16–20 June meeting included:
Amendments to IFRS 5: Discussed whether to amend the definition of discontinued operations in IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. This will be further considered at future meeting. Decided if exemptions were to be provided from the discontinued operations disclosures for subsidiaries that qualify as held for sale on acquisition, similar exemptions should also be provided from the business combinations requirements
Annual Improvements: Decided to amend: IAS 7 ‘Statement of Cash Flows’ to clarify whether expenditure that does not result in a recognised asset should be classified as a cash flow from investing activity or operating activity; IAS 36 ‘Impairment of Assets’ (paragraph 80(b)) of IAS 36 to clarify that the largest unit permitted for the goodwill impairment test is the lowest level of operating segment as defined in paragraph 5 of IFRS 8, before the aggregation permitted by paragraph 12 of IFRS 8; and IFRS 2 ‘Share-based Payment’ to clarify that the formation of a joint venture and common control transactions are excluded from the scope of IFRS 2
Conceptual Framework – Elements, Definition of a Liability: Considered how to determine when statutes, laws and regulations give rise to a liability and how to deal with uncertainty when ascertaining the existence of a liability
Financial Statement Presentation: Discussed the preliminary views that would be expressed in the discussion paper that is expected to be available in September 2008
Extractive Activities Research Project: An education session with discussion paper expected to be ready for publication by the end of 2008
Hedge Accounting – Qualifying Exposures: Confirmed the decision that the amendments should be applied retrospectively and that they should come into effect for annual periods beginning on or after 1 July 2009
Valuing Financial Instruments in Markets that are No Longer Active: Received a report on the first meeting of the valuation’s panel
IFRS for Private Entities: The following decisions were made:
Presentation of financial statements: The statement of financial position should be based on liquidity where this provides information that is reliable and more relevant than a current/noncurrent presentation. A private entity would be permitted to present a combined statement of comprehensive income and retained earnings in place of the statement of comprehensive income and the statement of changes in equity if the only changes to its equity during the period arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy. If an entity has other equity transactions with owners, a statement of changes in equity would be required. A statement of cash flows must be presented, but with a choice of the direct or indirect method for reporting operating cash flows Consolidated financial statements: Such statements should be required for all private entities that are parent entities Separate financial statements: Separate company financial statements should not be required. When an investor prepares separate statements, it should choose between cost or fair value through profit or loss for each different category of investment (e.g., different policies could be adopted for associates and for subsidiaries), and Accounting policy hierarchy: Decided to clarify that management may consider the requirements and guidance in full IFRSs. The hierarchy should not include reference to recent pronouncements of other standard-setting bodies, other accounting literature or accepted industry practice.
IASB July Meeting Agenda
The agenda for the 22-25 July meeting of the IASB includes:
Income Taxes: Discuss issues arising from the pre-ballot draft of the ED of amendments to IAS 12 Income Taxes Annual Improvements Process: Discuss final sweep issues Amendments to IFRS 5: Discuss outstanding issues that need to be addressed before issuing an exposure draft to amend IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ Fair Value Measurement: Discuss the results of the standard-by-standard review of where fair value represents a current entry price or a current exit price in IFRSs IFRS for Private Entities (formerly IFRS for SMEs): Continue consideration of recommendations for changes to the recognition, measurement, and presentation requirements in the proposed IFRS for SMEs Consolidations: Consider proposal’s for a comprehensive overview of the consolidation principles and disclosure requirements that will be used, when drafting the exposure draft of a revised consolidation standard Leases: Discuss the following issues: deferral of lessor accounting; initial and subsequent measurement of the right of use asset and the obligation to pay rentals; treatment of options to extend or terminate a lease; treatment of contingent rentals; and classification of leases Management Commentary: Begin deliberations on the Management Commentary project that includes a summary of the decisions reached in the discussion paper, and an analysis of related conclusions in the context Phase A of the ‘Conceptual Framework project ’ Revenue Recognition: Discuss the next steps in the project, and whether and when performance obligations should be remeasured other than when deemed onerous Liabilities and Equity: Representatives from the Proactive Accounting Activities in Europe working group will lead an education session on the loss absorption approach (based on their discussion paper ‘Distinguishing between Liabilities and Equity’) Expert Advisory Panel on Valuing Financial Instruments in Markets that have become Inactive: An update will be provided on the activities of the Panel, and Project proposals: Derecognition/Liabilities and Equity: Discuss proposals to add the Liabilities and Equity project and the Derecognition project to the active agenda.
IFRIC Interpretation on Agreements for Construction of Real Estate
The International Financial Reporting Interpretations Committee (IFRIC) released Interpretation IFRIC 15 ‘Agreements for the Construction of Real Estate’ that clarifies the accounting for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, ‘off plan’, i.e., before construction is complete. The main expected change in practice is a shift for some entities from recognising revenue using the percentage of completion method (i.e., as construction progresses, by reference to the stage of completion of the development) to recognising revenue at a single time (i.e., at completion upon or after delivery).
The Interpretation provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’ and when revenue from the construction should be recognised. Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11 that do not meet the definition of a construction contract, and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses.
IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation is effective for annual periods beginning on or after 1 January 2009 and is to be applied retrospectively.
IFRIC Interpretation on Hedges of a Net Investment in a Foreign Operation
The IFRIC issued Interpretation IFRIC 16 Hedges of a Net Investment in a Foreign Operation that provides clarity on accounting for the hedge of a net investment in a foreign operation in an entity’s consolidated financial statements. The main expected change in practice is to eliminate the possibility of an entity applying hedge accounting for a hedge of the foreign exchange differences between the functional currency of a foreign operation and the presentation currency of the parent’s consolidated financial statements.
IFRIC 16 states: the presentation currency does not create an exposure to which an entity may apply hedge accounting, consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation; and the hedging instrument(s) may be held by any entity or entities within the group. While IAS 39 ‘Financial Instruments: Recognition and Measurement’ must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’ must be applied in respect of the hedged item.
IFRIC 16 applies to an entity that hedges the foreign currency risk arising from its net investments in foreign operations and wishes to qualify for hedge accounting in accordance with IAS 39. It does not apply to other types of hedge accounting.
Recognising the difficulty that entities would face in preparing adequate documentation from the inception of the hedge relationship, prospective application is required. IFRIC 16 is effective for annual periods beginning on or after 1 October 2008.
IFRIC July Meeting Agenda
The agenda for the 10-11 July meeting of International Financial Interpretations Committee included:
IFRS 2 ‘Share-Based Payment’ and IFRIC 11 ‘IFRS 2-Group Treasury Share Transactions’: Redeliberation of ED of proposed amendments D23 ‘Distributions of non-cash assets to owners’: First redeliberations on the exposure draft D24 ‘Customer Contributions’: First redeliberations on the exposure draft Review of Tentative Agenda Decision published in March IFRIC Update: Application of the Effective Interest Rate Method, and Tentative Agenda Decisions: Consider staff recommendations regarding: Recognition of Lease Expense under an Operating Lease; Accounting for Trailing Commissions; Transaction Costs Deducted from Equity; and Compliance Costs for REACH.
Good Practice Guide for Audit Committees
The Australian Institute of Company Directors, the Auditing and Assurance Standards Board and the Institute of Internal Auditors - Australia (IIA - Australia) have released ‘Audit Committees: A Guide to Good Practice’. It is a user-friendly reference that sets out the responsibilities of audit committees and outlines practical strategies for overseeing company functions, and includes committee charters, the right memberships balance and reporting protocols, and committee assessments. The guide incorporates all relevant regulatory developments from 2001 affecting audit committees.
“All audit committee members and auditors should familiarise themselves with the updated publication, particularly as audit committee responsibilities are onerous”, stated Jim Dixon, Associate, GAAP Consulting. “Audit committee members should be regularly briefed on contemporary issues such as new accounting standards, the governance implication of new auditing standards, and corporate governance developments by independent experts”, he concluded.
Revised Supplementary Guidance to Principle 7 ‘Recognise and Manage Risk’
The ASX Corporate Governance Council has released Revised Supplementary Guidance to Principle 7 (Revised Guidance). The key changes include a reminder that when entities consider the issue of material business risks, they need to be aware of their obligations under ASX Listing Rule 3.1 to make an announcement to the market in relation to some or all their material business risks and/or changes to those risks, where the risk or change is likely to have a material impact on the price or value of a company's securities. Boards will need to exercise their judgement when considering whether disclosure is required. Entities should also be aware of their obligations under S.299A of the Corporations Act to include in the directors’ report, information required to make an informed assessment of companies' operations, financial position, business strategies and prospects for future financial years. The Revised Guidance includes additional discussion about the reports Boards may receive from the CEO/CFO under Recommendation 7.3 and the issues to consider.
Former Company Secretary Charged
Ms. Claire Horsman appeared in the Melbourne Magistrates’ Court following an investigation by ASIC in relation to her conduct while the company secretary of Bustan Australia Holdings Pty Ltd and Bustan International Pty Ltd (the companies). She is charged with 26 counts of falsification of records made for an accounting purpose, two counts of furnishing misleading, false or deceptive information, 23 counts of obtaining a financial advantage by deception and two counts of making available false or misleading information to the companies’ auditors. The charges allege that Ms. Horsman used her position to falsely represent the companies’ financial position to its financiers to ensure the continuation of a syndicated banking facility. Ms. Horsman was bailed to appear in the Melbourne Magistrates’ Court on 3 October 2008.
In November 2006, the former director of the companies, Mr. Mark Timleris was sentenced to three years imprisonment with a minimum of 12 months to be served for falsifying accounting records of the companies, obtaining a financial advantage by deception from the companies’ financiers and providing false, misleading or deceptive information to the companies’ financiers.
Governance and Costing EDs Released by IFAC
The Professional Accountants in Business (PAIB) Committee of International Federation of Accountants (IFAC) has released two new proposed International Good Practice Guidance on evaluating and improving governance structures and use of costing to support effective decision making for public comment.
The exposure draft ‘Evaluating and Improving Governance in Organizations’, sets out a framework, a series of fundamental principles, practical guidance, and references on how to evaluate and improve governance in organisations. The purpose of this guidance is to assist professional accountants and their organisations in creating a balance between conformance with rules and regulations and organisational performance.
The second proposed International Good Practice Guidance ‘Costing to Drive Organizational Performance’ is designed to assist professional accountants in business in delivering useful cost information to support effective decision making and organisational performance. The proposed guidance sets out eight fundamental principles of costing that encourage a performance-based view of costing to help professional accountants in business to ensure that costing information supports forward-looking strategic and operational decisions.
Comments on the two proposed guidance documents are requested by 23 September. They may be viewed by going to IFAC’s website. Comments may be submitted by email.
Your Needs = Our Independent Expert Advice
The 30 June reporting season will give rise to the need for independent, authoritative and timely advice on GAAP and GAAS. Our experts are available to meet your needs:
Colin Parker, member of the AASB, advice on complex financial reporting issues, particularly for listed entities Jim Dixon, a public sector specialist Justin Reid, auditing and ethical standards, as well as assistance with modified opinions, and David Sauer, advice for SMEs, accounting firms and not-for-profit entities.
These are names you know and people you trust. For more information please contact us.
Outstanding Exposure Drafts
Accounting
15 July ED 34 ‘Social Benefits: Disclosure of Cash Transfers to Individuals or Households’ – IPSASB 15 July Consultation Paper ‘Social Benefits: Issues in Recognition and Measurement’ – IPSASB 1 August Discussion Paper ‘Financial Instruments with Characteristics of Equity’ – AASB 1 August Consultation Paper ‘Accounting and Financial Reporting for Service Concession Arrangements’ – PSASB 22 August Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – AASB 25 August ED 164 ‘An Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information’ – AASB 25 August ITC 17 ‘Request for Comment on IASB Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity’ – AASB 5 September Discussion Paper ‘Financial Instruments with Characteristics of Equity’ – IASB 19 September Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – IASB 19 September Discussion paper ‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ – IASB 29 September ‘An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information)’ – IASB and FASB 29 September ‘Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity’ – IASB and FASB
Ethics
Other
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