Accounting and Auditing News Today (ANT) Issue No 46 - 1 December 2006

1. AUASB meeting highlights - 27-28 November 2006

The latest meeting of the Australian Auditing and Assurance Standards Board (AUASB) was held in Melbourne on 27-28 November 2006. Highlights of the meeting which the Institute attended included discussion and consideration of:

1. The structure for AUASB pronouncements. Further consideration is being given to the status of guidance contained in the standards as compared to any guidance contained in Auditing and Assurance Guidance Statements.
2. Concise reports. The Board noted the proposed International standard ISA 805 "Special Considerations when Reporting on Summary Financial Statements" and will seek to incorporate those requirements into an Australian standard, or guidance statement, that addresses Concise Reports.
3. The proposed revision of AUS 108 "Framework for Assurance Engagements". Minor changes are to be made out of session.
4. Proposed ASAE 3000 "Assurance Engagements Other Than Audits or Reviews of Historical Financial Information". Minor changes are to be made out of session.
5. Proposed ASRE 2400 "Engagements to Review Historical Financial Information". This will replace the current AUS 902 "Review of Financial Reports" and is expected to be finalised at the Board's February 2007 meeting.
6. The revised AGS 1050 "Audit Issues Relating to the Electronic Presentation of Financial Reports", which is expected to be finalised in the first quarter of 2007.
7. The possible impact of any changes to the reporting framework on the audit requirements for small entities.
8. International developments and the possible implications for Australia.
9. Other projects currently underway:

• Performance auditing
• Internal controls
• Audit implications of organisations using a service entity
• Compliance engagements

2. ED 151 now up on AASB website

ED 151, "Australian Additions to and Deletions from IFRSs" is now up on the AASB website at http://www.aasb.com.au. Comments are due to the AASB by 31 January 2007.

The ED is the result of the AASB's examination of Australian variations from the text of the original IFRS. In the process of adopting IFRSs in Australia, the AASB made a number of additions to, and deletions from, the Standards. The AASB considered this to be necessary in order to provide a sound basis for the transition to Australian equivalents to IFRSs and to maintain a high level of consistency in Australian financial reporting.

The purpose of this ED is to invite comments from Australian constituents on proposed amendments to Australian equivalents to IFRSs relating to the additions and deletions made by the AASB. The AASB deleted optional treatments from the IFRSs when an existing Australian Standard (pre-2005) allowed only one of those treatments. The AASB also added disclosures to the IFRSs that existed in (pre-2005) Australian Standards.

Based on recent experience in implementing Australian equivalents to IFRSs, the AASB has decided to make the Australian requirements the same as IFRSs in respect of for-profit entities. In order to achieve this objective, the AASB is proposing to remove most of the remaining differences from IFRSs, other than those dealt with in specific not-for-profit entity paragraphs. The not-for-profit paragraphs are expected to be reviewed in conjunction with the Financial Reporting Standards Board of New Zealand.
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3. Update on the IASB's IFRS Lite/Light SME standard

Paul Pacter who is the IASB's staff member responsible for the IASB's SME Project met with key constituents including the Institute this week in Melbourne and Sydney at a Seminar and Roundtables. Paul appreciated the input that Australian Constituents provided and whilst the draft Exposure Draft has been effectively finalised, the input will be used through the ED and later Standard development process.

The ED is expected to be approved at the IASB's January 2007 Meeting for release in late January 2007, but a near final draft is available on the IASB's Website here.

The ED will be open for a 6 month Comment period, and a Standard is expected by June 2008 with perhaps immediate or delayed application.

A major issue for Australia is the expected applicability of IFRS Lite (or "Light") with the AASB yet to make a decision on how it intends to deal with the forthcoming ED. A plea was made that the AASB should immediately issue the ED as a badged Australian ED and also explain what it proposes to do with a final Standard in Australia. A concern was the AASB might either:

• not apply the final Standard at all, in which case the Non-Listed Reporting Entities would not be able to make use of reduced 'recognition, measurement, and disclosures compared to full IFRS, or
• the AASB might remove the non-reporting scope limitation on the AIFRS Standards and force non-reporting entities to adopt IFRS Lite, which contains considerably more requirements than the present AASB 101, 107 and 108 applied by non-reporting entities that prepare accounts under Chapter 2M, as IFRS Lite has not sufficient simplified measurement, recognition and disclosure requirements.

Whilst the IASB has yet to issue the 'Basis for Conclusions' for the draft IFRS Lite ED, it seems clear that the draft ED is still heavily influenced by IFRS and the measurement basis still relies heavily on fair market value rather than a simplified cost/recoverable amount basis that is used in the Business Practice Guide (BPG). However, it should be noted that whereas full IFRS contain about 3000 disclosure requirements, IFRS Lite only contains around 400.

The Institute commends the project but sees it as being of limited use in the Australian environment because of the reporting entity concept. It is envisaged that eventually there will be a 4 tier system consisting of:

• full IFRS
• IFRS Lite
• Something akin to the Institute's BPG
• Simple financial statements generated by a book-keeping system such as MYOB and designed for internal reporting and preparing the tax return

4. Auditor independence gets international tick

The Parliamentary Secretary to the Treasurer, Chris Pearce, recently released a comparative review of the Australian Auditor Independence Requirements.

"The overall conclusion of the comparative review, which was prepared by Treasury, is that, despite differences in terminology, institutional arrangements and legal frameworks, there is a substantial underlying equivalence between the Australian requirements and international best practice standards," Mr Pearce said.

The Institute welcomes Mr Pearce's comments and anticipates that this review will aid in simplifying the regulatory system and provide scope to refine the existing auditor independence requirements to reduce the compliance burden.

To download the comparative review, visit here.

Comments on the key findings of the comparative review are welcomed. Members are encouraged to provide their comments and submit them to the Institute no later than one week before the closing date of 15 December 2006. Forward all comments by email to ps_submission@icaa.org.au.
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5. IASB and IFRIC meeting updates

The reports from the November meetings of the IFRIC and IASB are now available on the IASB website http://www.iasb.org/Updates/Updates.htm.

The IASB has approved the new IFRIC on Service Concession Arrangements which is expected to be released shortly and should apply from I January 2008.

However it has deferred a decision on finalising amendments to IAS 23 on borrowing costs following significant disagreement by respondents to the Board's proposal to remove the option to expense borrowing costs as incurred. Staff has been asked to review the feedback in more detail prior to the next IASB meeting.

The Board made some tentative decisions on the content of the draft discussion papers on financial instruments and post employment benefits. The Board also discussed the conceptual framework including a new draft definition for an asset. Finally it discussed the short-term convergence project on joint ventures and its annual improvements project work on reporting compliance with IFRS, finance costs and classification of the liability component of a convertible instrument.

The IFRIC meeting discussed feedback on the draft "Due process" handbook which sets out policies and procedures for including items on the IFRIC agenda and how to communicate agenda decisions.

It also discussed issues in relation to the following standards:

• IAS 18 real estate sales and upfront fees
• IAS 19 review of all outstanding issues including special wages tax
• IAS 21 hedging a net investment
• IAS 38 treatment of catalogues and other advertising costs
• IAS 39 contracts linked to an entity's earnings
• IAS 41 obligations to replant biological assets

6. December Charter articles

The "Technical focus" section of this month's Charter includes:

• our regular update of changes in the financial reporting sphere "The Panel".
• an article on the complex issues that have arisen in applying AIFRS to retirement villages by Roseanne Blumberg and Annette Kimmitt from Ernst and Young
• a review of the planned overhaul of AAS 25 for Superannuation Funds by Richard Rassi (the Institute's Superannuation Committee chair from Deloittes) and;
• a warning to those planning mergers and acquisitions to ensure they carefully consider the requirements of the Business combination standard by Chris Dodd, Cameron Perret and Orn Tirabanchaaak from PWC

7. DVD of AIFRS Implementation Conference now available

Knowing the standards is important. Being aware of what happens when they are applied is critical. Fine-tune your understanding of AIFRS by purchasing the highly acclaimed AIFRS Conference 2006 on DVD or Webcast.

With inconsistencies in interpretation and guidance it is essential to hear from the leaders in the field on the current state of play and the future direction of AIFRS implementation. For more information please go to the Institute's website here.
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8. IASB submission on Conceptual Framework

The Institute last week lodged its submission to the IASB on the on the IASB/FASB Conceptual Framework Discussion Paper (refer to ANT26 - 14/7/06)

Whilst the Institute is supportive of the need for an updated Conceptual Framework, the Institute believes that unless some fundamental amendments are made to the current Draft, there will be a need for the Australian Accounting Standards setter (AASB) to incorporate a number of significant changes to ensure that the Conceptual Framework caters not just for the Listed Private-for-Profit Sector, but also the Non-Listed Private-for-Profit, Not-for-Profit and Public Sectors. As the Draft Conceptual Framework is currently structured, the Institute is unable to support that Draft for Australian use, without significant amendments.

A copy of the institute submission can be downloaded from our website here.
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9. Query of the week - AASB 2 and vesting conditions

Q: I have a share based payment scheme where certain employees are granted options for shares that vest in 3 years' time subject to the employee still being employed at the end of the 3 year vesting date. Each year I estimate the number of employees that are still eligible for shares (i.e. still employed) but do I adjust each year's expense for those employees who have left and no longer have options that are excisable, which means that the cumulative expense is correct?

A: Yes. The question states the options vest provided the employees remain employed for the 3 years. For service conditions such as this, or other conditions NOT related to the entity's share price, paragraph 19 of AASB 2 applies and the number of options are adjusted each year so the number ultimately recognised is the number that eventually vest.

Paragraph 19 of AASB 2 'Share-based Payment' states that "vesting conditions shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest".

IG Example 1 - illustrates a 3 year expense calculation that is based on the cumulative remuneration expense adjusted each year for the change in the number of employees that are eligible to have the options vested as shares, The final year 3 amount represents the actual options that vest as shares.

However, if the conditions attached to the options are market conditions - ie conditions related to the entity's share price - they are treated quite differently. Paragraph 21 is relevant for these conditions - the market conditions must be taken into account when calculating the fair value of the options granted, but the number of options granted is NOT adjusted if the market conditions are not met.

IG Example 5 - illustrates a grant of options with a market condition, noting that the amounts are recognised irrespective of the outcome of the market condition.

The Basis for Conclusions issued by the IASB which is available to Australian residents on the AASB's website explains why the IASB adopted this approach.

Query amended 16 February 2007.

10. EDs: comment closing dates

Outlined below are the comment closing dates for all current exposure drafts. Members are encouraged to prepare their own submission on each document and submit them to the Institute no later than one week before the closing date shown.

For more information, refer to the Institute's Technical Standards' exposure drafts web page

Forward all ED submission/comment emails to techsubmissions@icaa.org.au.

15 December 2006
IAESB - 'Approaches to Developing and Maintaining Professional Values, Ethics and Attitudes' http://www.ifac.org/Eds
Treasury - Comparative review of the Australian Auditor Independence Requirements
http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1184

22 December 2006
Corporate & Financial Services Regulation Review Proposals Paper
http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=1189

31 January 2006
AASB ED 151 - 'Australian Additions to, and Deletions from, IFRSs'
http://www.aasb.com.au

15 February 2007
IAASB EDs
ISA 320 (Revised and Redrafted), Materiality in Planning and Performing an Audit;
ISA 450 (Redrafted), Evaluation of Misstatements Identified during the Audit;
ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance.
http://www.ifac.org/Guidance/EXD-Outstanding.php

28 February 2007
IPSASB ED 30 "Impairment of Cash-Generating Assets" IPSASB ED 31 "Employee Benefits" http://www.ifac.org/EDs

Technical Query Service
The Institute's Technical Standards Team responds to inquiries from members on auditing and financial reporting issues. This service provides general assistance and guidance only. Members have the responsibility to apply their own professional judgment. The service can be contacted on (02) 9290 5702.

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TECHNICA/XFILES/ARTICLES/ANT/ANT ANT46_06_12_01.doc. The Technical Standards team comprises, Jeanette Dawes CA, Roslyn Hatton CA, Stephanie Kemp CA, Claire Locke CA, Keith Reilly CA, Andrew Stringer; Benjamin Lau and Jane Ma - Technical Standards Assistants.