Accounting and Auditing News Today (ANT) Issue No 36 - 14 September 2007

1. AUASB meeting highlights - 10 September 2007

The Auditing and Assurance Standards Board (AUASB) met in Melbourne on Monday. Matters covered included:

• Proposed ASRE 2400 - "Review of Financial Reports and Other Historical Financial Information" (which is a revision of AUS 902 "Review of Financial Reports"). The Board approved the draft standard for exposure, subject to some minor changes. The suggested operative date is for financial reporting periods or engagements commencing on or after 1 January 2008, although feedback is to be requested on this matter.

• A first read of a proposed standard on assurance engagements - ASAE "Compliance Engagements". It is to provide practitioners with an overarching ASAE which can be applied when undertaking any compliance engagements.

• A first draft of a proposed ASAE "Performance Engagements" - which is a proposed revision of AUS 806 "Performance Auditing" and AUS 808 "Planning Performance Audits". A revised draft is expected to be considered at the October meeting of the Board.

• Guidance Statement GS 004 "Audit Implications of Prudential Reporting Requirements for General Insurers", was approved, subject to legislation (Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007) being passed in the current session of Federal Parliament.

• Proposed Guidance Statement GS 005 "Using the Work of an Actuary". The Board requested some changes, the revised version to be presented at the October 2007 Board meeting. When issued, this Guidance Statement will lead to the withdrawal of AUS 524 "The Auditor's use of the Work of the Actuary and the Actuary's use of the Work of the Auditor in Connection with the Preparation and Audit of a Financial Report".

• Other projects currently underway:
  • A proposed Guidance Statement to address the audit requirements of self managed superannuation funds
  • The audit implications of Australian Accounting Standard AASB 1049 "Financial Reporting of General Government Sectors by Government"
  • A proposed Guidance Statement - "Audit Implications of the Use of Service Organisations for Investment Management Services". Comments are to be sought from key stakeholders.
  • A proposed Guidance Statement - "Special Considerations in the Audit of Investor Directed Portfolio Services and Investor Directed Portfolio-Like Services"
  • Revision of AGS 1056 "Electronic commerce - Effect on the Audit of a Financial Report"
  • A proposed guidance statement on Electronic Publication of the Auditor's Report

2. AASB Action Alert - 5-6 September 2007

The Action Alert summarising the outcomes of the Australian Accounting Standard Board's (AASB) September meeting held late last week is now available on its website. Interim highlights of the meeting were included in last weeks ANT.

Other items discussed at the meeting not mentioned last week included:

• ED 155 Financial Reporting by Whole of Governments

It will adopt all of the changes proposed in ED 155 with the exception of those in relation to deferred tax and transition requirements which are still under consideration. The standard will not require early adoption of the requirements in the revised AASB 1023 Borrowing Costs and will not include the changes that will be necessitated by the recent reissue by the International Accounting Standards Board (IASB) of IAS 1 "Presentation of Financial Statements" which will considered at a later date.

The Board also noted that the outcomes of its consideration of the revisions to AAS's 27, 29 and 31 proposed in ED 156 will be issued shortly after the new GAAP/GFS standard with the same application date.

• Definition of not for profits

• Revised AASB 1048 'Interpretation and Application of Standards'

3. Institute White paper on standards for SMEs

The Institute has now published the white paper 'Financial Reporting Standards for Small and Medium Entities: Stakeholder insights', which summarises the key issues relating to the IASB International Financial Reporting Standards (IFRS) for SMEs, discussed at a forum hosted by the Institute in June this year.

The forum was attended by 24 leading figures from the accounting and business profession, regulators, standard setters and academics.

Key areas of agreement outlined in the discussion paper include:

• Definition of a SME - the use of the term IFRS for SMEs is a misnomer and contributes to confusion about what the introduction of this standard in Australia would achieve;
• Definition of publicly accountable - it is unclear from the SME ED just how far the notion of public accountability is expected to stretch in practice
• Appropriateness of a stand-alone document - participants supported the IASB's choice to issue the IFRS for SMEs ED as a stand-alone document
• What should be excluded or included in the SME exposure draft - participants expressed the view that the IFRS for SMEs is still too complicated, but time did not permit the group to delve into the detail
• Treatment of subsidiaries - some concessions should be available for wholly owned subsidiary companies; and
• Appropriateness of a third-tier alternative framework - there seems to be a need for a third tier of best practice guidance for entities that are outside the regulated financial reporting framework and further research needs to be done in this area.

4. AASB summary of SME roundtable discussion

The AASB has released on its website a summary of comments by participants that attended the ITC 12 Roundtables held in Melbourne and Sydney on 16 and 24 August 2007.

Key themes emerging from these discussions included:

• Support for retention of reporting entity concept
• Support for relief from disclosures for wholly-owned subsidiaries of publicly accountable entities and wholly-owned subsidiaries of foreign entities
• Support for SMEs IFRS as second tier with reduced disclosures
• Support for a third tier of simpler requirements for private sector NFPs and public sector entities
• Concern about introducing new recognition and measurement methods through an SMEs IFRS
• Need for transitional provisions to avoid switching between full IFRS and SMEs IFRS on fluctuation of revenue if thresholds are implemented
• Concern about whether filing on a public register automatically makes a report a GPFR
• Concern about differences in the hierarchies in the SMEs IFRS and full IFRS

5. IASB meeting agenda - 18-21 September 2007

The next International Accounting Standards Board (IASB) meeting will be held in London on 18-19 and 21 September 2007. Items to be discussed include:

• IFRS for SMEs - considering a proposal to defer the comment deadline to 30 November 2007 for companies undertaking the field tests
• Final decisions on amendment to IAS 32 "Financial instruments puttable at fair value"
• Post-employment benefits
• Conceptual framework - Reporting entity, Objectives and qualitative characteristics
• Annual improvements process
• Related party transactions

6. IASB World Standard Setters meeting agenda - 24-25 September 2007

The next meeting of the World Standard Setters (WSS) is to be held in London on 24-25 September 2007. Items for discussion include:

• Adoption and implementation of IFRS - experiences from various countries including Australia
• Implementation and enforcement of IFRS
• US GAAP/IFRS convergence update
• Roundtable discussions on IFRS for SMEs, IFRS Technical Update, Fair value measurements, Conceptual Framework and Presentation of Financial Statements

7. Can you develop a practice management guide?

The International Federation of Accountants (IFAC) is seeking proposals from interested parties who would be able to produce for its small and medium practices committee a "Practice Management Guide". This guide would be used by small and medium accounting practices (SMPs) to assist them to operate their practices in an efficient, professional and profitable manner.

The specifications for this project can be found here. Proposals are to be submitted by 19 October 2007.
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8. IPSASB proposes amendments to foreign exchange standard

International Public Sector Accounting Standards Board (IPSASB) has issued exposure draft ED 33 "Amendments to IPSAS 4, The Effects of Changes in Foreign Exchange Rates". The revisions implement in the public sector the amendments made by the IASB to IAS 21 concerning exchange differences arising on a monetary item that forms part of the reporting entity's net investment in a foreign operation.

Comments on this ED are requested by 31 December 2007.
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9. APRA Discussion Paper on Refinements to the General Insurance Prudential Framework

On 31 July 2007, The Australian Prudential Regulation Authority (APRA) released a Discussion Paper on Refinements to the General Insurance Prudential Framework. Previously, submissions to this Paper were requested by 11 September 2007. The closing date has now been extended to 28 September 2007. This extension will allow time for respondents to consider APRA's proposals while considering an options paper on exemptions for Direct Offshore Foreign Insurers (DOFIs) that the Treasury is expected to release during September.

Clarification of proposal on capital recognition of reinsurance recoverables older than 12 months

The background to this proposal is concern over the operation of insolvency laws in foreign jurisdictions and the assets in Australia requirement being diluted by offshore reinsurance recoveries replacing assets in Australia.

Please note that 'reinsurance recoverables' in this proposal relate to all liabilities for outstanding claims, including case estimates, Incurred But Not Reported (IBNR) and Incurred But Not Enough Reported (IBNER) claims as well as reinsurance recoverables against payments already made by an insurer. Recoverables on premium liabilities are not included. The 12-month period referred to in this proposal is from the date of occurrence of the claim (whether reported or not).

In addition, although the Discussion Paper made no reference to transitional provisions for this proposal, APRA is nevertheless inviting submissions on transitional provisions relating to pre-existing reinsurance arrangements, including indications of the likely impact of the proposal on pre-existing reinsurance arrangements.

The Discussion Paper is available on APRA's website at: http://www.apra.gov.au/media-releases/07_30.cfm .
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10. Query of the week - small foreign owned companies

Q. Where can I find guidance on the reporting and auditing requirements for small foreign owned companies?

A: The Corporations Act provides that most small proprietary companies are generally not required to prepare financial reports. Small is defined in section 45A(2) using several thresholds. The recent passage of the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 has increased the thresholds that distinguish small and large proprietary companies for financial reporting purposes, increasing them from $10 million in revenue to $25 million in revenue and from $5 million in assets to $12.5 million in assets. The threshold regarding the number of employees will remain at 50 employees. Entities must continue to satisfy 2 of the three tests and the new thresholds are applicable for 30 June 2007 year-ends.

However a significant exception to this general rule relates to small proprietary companies under foreign company control. These types of companies are generally treated by the Corporations Act as if they are large proprietary companies. The only exception to this is if the small proprietary company 's financial statements are consolidated by an Australian company, registered scheme, disclosing entity or registered foreign company that lodges with ASIC (see section 292(2)(b).

The effect of section 292(2)(b) is that small foreign owned companies must lodge audited financial reports with ASIC. However ASIC has provided class order relief to some of these entities exempting them from:

• the preparation and lodgement of financial reports (CO98/98)
• or auditing requirements (CO98/1417).

The relief from preparation and lodgement applies to small proprietary companies where the company, and any related entities (i.e. controlled by an overseas parent) formed or carrying on business in Australia, and their controlled entities fall under the large/small test criteria on an aggregated basis. A notice of a directors' resolution to apply the class order must be lodged in the 3 months immediately before commencement of the year.

Class order 98/98 has recently been updated for recent changes in the Corporations Act. These changes update the amounts in the large group test and provide a temporary extension of time for lodgment for companies immediately affected by the changes. Class order 7/505 which effects these changes is available on the ASIC website and was discussed in more detail in ANT 34.

If the small foreign owned proprietary company does not meet the lodgement exemption available under class order 98/98, it may still be eligible for audit relief.

Audit relief is available in the same way as it is to any large proprietary company under CO 98/1417. This class order requires the company to have unanimous agreement from directors and shareholders not to have an audit, have not previously had an audit and meet strict financial and other criteria. Again resolutions to this effect must be made annually and ASIC notified at the start of each financial year.

Companies that do not strictly meet the criteria for relief under either class order may apply for individual relief under ASIC Policy Statement 115.

Copies of the class orders referred to above are available from the ASIC website http://www.asic.gov.au.
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11. Training and development at the Institute

Audit of Self Managed Superannuation Funds Workshop
Throughout October in Adelaide, Sydney, Brisbane, Melbourne & Perth Now that the new auditing standards apply to SMSF audits, don't miss out on ensuring your audits of SMSFs are compliant with the regulatory requirements.

Technical Conference
Sydney 8 - 10 Oct, Melbourne 8 - 10 Oct. Day 2: Auditing. Examine force of law, AIFRS, APES 320 and the latest technical issues and developments. Take away timely and practical solutions for immediate implementation.

Regional Roadshow
Running in 12 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.

Audit Day
Highlighting key audit topics. Sessions include: Auditing update; Audit of Not for profit and Registered Clubs, Audit Quality Control and independence requirements.
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12. 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@charteredaccountants.com.au.

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'

28 September 2007
APRA Discussion Paper on Refinements to the General Insurance Prudential Framework

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

5 October 2007
IFRIC D21 'Real Estate Sales'

15 October 2007
IESBA ED "Proposed Revised Section 290 of the Code of Ethics for Professional Accountants, Independence - Audit and Review Engagements, and Proposed Section 291, Independence - Other Assurance Engagements"

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

19 October 2007
Exposure draft of APES 205 "Conformity with Accounting Standards"

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'

11 January 2008
IASB's proposed amendments to IAS 39 - 'Exposures Qualifying for Hedge Accounting'

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/ ANT36_07_09_14.doc. The Technical Standards team comprises, Jeanette Dawes CA, Roslyn Hatton CA, Kerry Hicks CA, Claire Locke CA, Stephanie Kemp CA, Andrew Stringer; Benjamin Lau and Jane Ma - Technical Standards Assistants.