Accounting and Auditing News Today (ANT) Issue No 32 - 17 August 2007

Welcome to the thirty-second edition of Accounting & Auditing News Today for 2007. What follows is a brief update on changes and proposed changes in the financial reporting sphere.

1. Draft Institute SME submissions

The Institute is seeking member input on its draft submissions on the International Accounting Standards Board (IASB's) IFRS for SMEs exposure draft and the Australian Accounting Standards Board (AASB's) Preface to ITC 12, which is now available on our website.

The Institute supports the overall objective of the draft IFRS for SMEs, to produce a simpler form of general purpose financial reporting for entities that are not publicly accountable. However, the Institute has significant reservations about the AASB's proposals for differential reporting in Australia and consequently how the IFRS for SMEs might be used here.

In particular the Institute does not support the AASB's proposals in ITC 12 to do away with the reporting entity concept altogether as it considers that this would remove the flexibility entities currently have to prepare financial reports that suit the needs of users. The AASB proposals would have the effect of imposing a much more rigid financial reporting framework on Australian entities which will be expensive for the community to implement and which will require the production of financial information for which there are no identified users.

The Institute encourages members to review its submissions on both ITC 12 and the IASB's IFRS for SME's exposure draft and provide feedback via our submissions email box techsubmissions@charteredaccountants.com.au prior to Wednesday August 29 to enable our submission to be finalised and lodged with the AASB before the ITC comment close date of 1 September 2007. Read the draft Institute's submission to the AASB ITC 12.

The draft Institute submission for the IASB IFRS for SMEs is also available for download.

Members are encouraged to prepare their own submissions on these documents to ensure their contribution to this important debate about the future of differential reporting in Australia.
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As foreshadowed in ANT30 (3 August 2007), the AASB has now issued Interpretation 13 and Interpretation 14.

Interpretation 13 "Customer Loyalty Programmes"
Interpretation 13 offers guidance on accounting for customer loyalty award credits granted to an entity's customers as part of a sales transaction with which, subject to meeting any further qualifying conditions, customers can redeem free or discounted goods or services in the future.

This Interpretation is applicable to annual reporting periods beginning on or after 1 July 2008 with early adoption permitted.

Interpretation 14 "AASB 119 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction"
Interpretation 14 provides guidance on how to assess the limit in AASB 119 paragraph 58 on the amount of the surplus that can be recognised as an asset by an employer sponsor. It also explains how the defined benefit surplus or deficiency recognised by the employer sponsor may be affected where there is a statutory or contractual minimum funding requirement.

Interpretation 14 is applicable to annual reporting periods beginning on or after 1 January 2008 with early adoption permitted.
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The AASB has now included on its website IFRIC D21 "Real Estate Sales" and IFRIC D22 "Hedges of a Net Investment in Foreign Operation" for comment by 17 September 2007.

IFRIC D21 aims to standardise accounting practices among real estate developers for the sale of units "off the plan" before their completion.

IFRIC D22 aims to clarify two issues arising from IAS 21 (AASB 121) "The Effects of Changes in Foreign Exchange Rates" and IAS 39 (AASB 139) "Financial Instruments: Recognition and Measurement" regarding accounting for hedging foreign currency risks arising from a net investment in a foreign operation.

The AASB will discuss its draft submissions to the IFRIC at its 3-4 October meeting.

The draft interpretation can be downloaded from the AASB website.
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Following are some brief notes from the recent meeting of the Accounting Professional & Ethical Standards Board (APESB) held on August 14 2007. An expanded document listing the highlights from the meeting will be published by the APESB in due course.

• Taxation Services: APESB considered responses to the exposure draft ED 01/07 and agreed to consider some further redrafting of this standard before its finalisation and release. It is expected that the standard will be issued in the next few weeks.
• Contingent Fee Arrangements: APESB considered responses to the exposure draft ED 02/07 and determined to defer issuing this standard pending developments at the international level concerning contingent fee arrangements.
• Conformity with Accounting Standards (formerly APS 1): APESB considered a revised exposure draft and agreed to consider some further redrafting before finalising this for exposure. Compilation of Financial Reports (formerly APS 9): APESB considered a draft of a revision of the standard on compilation of financial reports (APS 9) and determined to consider a further draft based directly on the corresponding international standard ISRS 4410 "Engagements to Compile Financial Statements" with Australian amendments/additions.

The following is a reminder by the Auditing and Assurance Standards Board (AUASB) regarding the application of the ASA Auditing Standards to all audits conducted in Australia, particularly with regard to 30 June 2007 financial year ends. Members are also encouraged to review the results of the survey referred to.

Australian Auditing Standards now have force of law, reminds AUASB
The AUASB reminds all auditors that audits of organisations with reporting periods starting 1 July 2006 or later are required to comply with the new Australian Auditing Standards. The Auditing Standards also have the force of law for statutory audits and reviews conducted under the Corporations Act 2001. Additionally, the Auditing Standards are to be applied to all financial report audits in accordance with APES 410 "Conformity with Auditing and Assurance Standards" by auditors who are members of the professional accounting bodies in Australia.

A research report, released by the AUASB in April 2007, indicated most auditors from small accounting practices were aware that the new Auditing Standards are legally enforceable. The survey conducted of small accounting practices also highlighted that while many auditors were aware that new Auditing Standards were being introduced:

• 62 per cent were aware but did not understand all the detail, and
• 54 per cent were unaware of the new Auditing Standards or only had partial understanding.

It is essential that auditors of small organisations, such as not-for-profits, incorporated associations, proprietary companies, and the fast-growing SMSF sector, understand the requirements of the new Auditing Standards and apply them appropriately to ensure they meet the obligations under the Corporations Act and other relevant legislation, as well as the quality assurance requirements of the professional accounting bodies.

For further details about the new Australian Auditing Standards, visit http://www.auasb.gov.au/standards.htm. To view the research report, visit http://www.auasb.gov.au.

The Institute of Chartered Accountants is hosting the next Sydney AIFRS Corporate Discussion Group Meeting on Monday 3 September 2007 at its Sydney offices at 33 Erskine Street, Sydney NSW 2000.

The meeting will be chaired by David Southwell, senior manager for Group Reporting at Insurance Australia Group. Regina Fikkers, partner at PwC will be the guest speaker for this forum. She will be leading discussion on the practical issues arising out of and concerning AASB 7 'Financial Instruments: Disclosures'.

The lunchtime meeting will begin at 12.30pm at the Level 1 Conference Centre and conclude at 2:00pm. If you wish to attend this forum, please send your name, member number, position and organisation to jane.ma@charteredaccountants.com.au by Wednesday 29 August 2007.
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The AASB has uploaded onto its website a copy of its presentation to AASB members at its most recent meeting regarding the IASB's proposed changes to IAS 3 and IAS 27 arising from Phase 2 of its business combinations project.

The paper explains the main differences between the new and existing standards and also provides some worked examples.

The IASB is expected to issue revised versions of the IAS 3 and IAS 27 standards in the near future. The AASB is then expected to prepare, revise, approve and reissue the Australian equivalents.
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With financial statement preparation in full swing it is timely to remind members of the need to ensure they are applying the versions of the accounting standards that are currently in force for their relevant year end.

The AASB's approach of issuing omnibus standards can make this difficult as there is often a delay before the relevant omnibus amendments are compiled by the AASB into the text of affected standards. In addition while omnibus standards have operative dates, they can also be adopted early, although under these circumstances the entire omnibus must be adopted. It is not permitted to simply adopt changes to a particular standard and ignore changes made by the same omnibus to another standard.

This makes it important for members to be aware of all the changes and ensure that the particular versions of the standards they are using actually meet their financial reporting needs. This is further emphasised by the requirements in AASB 108 to make disclosures about the effects of "not yet operative" standards on an entity (see AASB 108 paragraph 30). The responsibility to maintain standards belongs to the AASB whose website is regularly updated with omnibus standards as they are issued, and compiled versions of the standards (including omnibus amendments) as they are completed. This is subject to the AASB's work priorities. Table 1 in the standards section contains all compiled standards and any uncompiled omnibuses.

To assist members, changes being made by each omnibus are publicised in ANT and Charter as they are released by the AASB. August 2007's Charter also includes an article entitled "What's new in financial reports" which provides a summary of all relevant new material applicable for 30 June 2007 financial year ends. In particular this includes amendments made by omnibuses up to 2006-4 which are now fully operative (as opposed to optional) and the withdrawal of the implementation guidance and differences sections contained in the standards issued in 2005. The article also includes references to a comprehensive table of all omnibus amendments which is on the financial resources section of the Institute's website.

As noted in ANT31 (10 August 2007), the Institute has also recently issued its August update to the Members Handbook in both web and CD Rom forms which includes access to all issued omnibuses up to 2007-7 and all compiled standards issued by the AASB as of 9 July 2007, making it the most complete current handbook product.

The AASB endeavours to compile standards on a regular basis and has made good progress on compiling standards for the large volume of changes introduced by the 2007 series of omnibuses. The changes will be applicable for the most part for the 2008 financial reporting season, although they may be applied early. These are being released onto the AASB website as they are completed and will be included in future updates of the Institute's Members' Handbook.
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The International Public Sector Accounting Standards Board (IPSASB) most recently met on 3-6 July 2007 in Montreal, Canada, and discussed the following:

• Conceptual framework
• Employee benefits
• External assistance
• Impairment of cash-generating assets
• Financial instruments
• Service concession arrangements
• Social benefits
• Updating International Public Sector Accounting Standards (IPSASs)

The IPSASB website features project histories and briefs for current IPSASB projects. The project histories, which are updated shortly after each IPSASB meeting, provide a quick reference on the status of active projects.

To view histories and briefs for current IPSASB projects, click here.
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Q: What is the status of grandfathered companies that exceeded the previous size thresholds, but which are now below the revised size thresholds introduced by the recent Corporations Act changes?

Does the company lose its grandfathered status by virtue of no longer being required to have an audit, or can the company retain that status by continuing to have an audit, despite one no longer being required? Is that perhaps a cost of retaining grandfathering?

A: A grandfathered large proprietary company that has become small as a result of the recent corporations law changes and which still wishes to maintain its grandfathered status must continue to have its financial statements audited in order to do so. This is a requirement of the original conditions for grandfathering contained in the old s.319(4) of the Corporations Law, which is preserved through s.1408(6) of the Corporations Act.

The explanatory memorandum to the Company Law Review Bill 1997 which introduced grandfathering says:

"If the company was a large proprietary company at the end of the financial year that ended after 9 December 1995, but falls below that threshold in subsequent financial years, it may still take advantage of the exemption provided in subsection 319(4) of the Bill if it has continued to have its financial statements and reports audited before the deadline in each financial year from the financial year ending during 1993."

Thanks to Doug Niven at ASIC for helping us with this one
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Regional Roadshow
Running in 10 key regional centres throughout October 2007, the Regional Roadshow is a two-day event that provides the very latest changes and strategies for tax, accounting and auditing.

National Audit Conference 2007 DVD
If you didn't attend the National Audit Conference in June 2007 - don't miss out on this opportunity to view the conference at your convenience informing you and your colleagues.

Technical Conference
(October, Sydney & Melbourne)
All the latest practical information at your fingertips.
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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@charteredaccountants.com.au.

31 August 2007
APES ED 03/07 "Proposed Amendment to Network Firms in Section 290: Independence - Assurance Engagements of APES 110 Code of Ethics for Professional Accountants"

1 September 2007
AASB SME ITC "A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities"

3 September 2007
AASB ED 156 "Proposals Arising from the Short-term Review of the Requirements in AAS 27, 29 and 31"

12 September 2007
PAIB (IFAC) "Preface to IFAC's International Management Accounting Statements and International Good Practice Guidance"

14 September 2007
APES ED 04/07 "Terms of Engagement"

15 September 2007
ISA 200 (revised and redrafted) 'Overall Objective of the Independent Auditor, and the Conduct of an Audit in accordance with International Standards on auditing'
ISA 500 (redrafted) 'Considering the Relevance and Reliability of Audit Evidence'

1 October 2007
IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities

5 October 2007
IFRIC D21 'Real Estate Sales'

19 October 2007
IFRIC D22 'Hedges of a Net Investment in a Foreign Operation'

26 October 2007
AASB ITC 13 'Preliminary Views on Insurance Contracts'

31 October 2007
IASB proposed IFRS for SMEs field test questionnaires

16 November 2007
IASB Discussion Paper "Preliminary Views on Insurance Contracts"

30 November 2007
ISA 700 (Redrafted) 'The Independent Auditor's Report on General Purpose Financial Statements'
ISA 705 (Revised and Redrafted) 'Modifications to the Opinion in the Independent Auditor's Report'
ISA 706 (Revised and Redrafted) 'Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor's Report'
ISA 800 (Revised and Redrafted) 'Special Considerations-Audits of Special Purpose Financial Statements and Specific Elements, Accounts or Items of a Financial Statement'
ISA 805 (Revised and Redrafted) 'Engagements to Report on Summary Financial Statements'

31 December 2007
ISQC 1 (Redrafted) 'Quality Control for Firms that Perform Audits and Reviews of Financial Statement, and Other Assurance and Related Services Engagements'
ISA 220 (Redrafted) 'Quality Control for an Audit of Financial Statements'

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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TECHNICAL/XFILES/ARTICLES/ANT/ANT32_07_08_17.doc. The Technical Standards team comprises, Jeanette Dawes CA, Roslyn Hatton CA, Stephanie Kemp CA, Claire Locke CA, Andrew Stringer; Benjamin Lau and Jane Ma - Technical Standards Assistants.