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Welcome to the fifteenth edition of Accounting & Assurance News Today for 2008. What follows is a brief update on changes and proposed changes in the financial reporting and assurance sphere.
1. ANT arrives earlier this week
Due to the Anzac Day public holiday, this week’s ANT has been delivered to you on Thursday. Our avid readers can now sit back and enjoy ANT over the long weekend.
2. Corporate Reporting Discussion Group highlights – 21 April 2008
The Institute of Chartered Accountants’ (the Institute’s) Sydney Corporate Reporting discussion group met on Monday 21 April 2008 to discuss impairment in today’s market. The discussion was broken into three segments:
- the first was led by Tanya Branwhite, an analyst, Divisional Director - Strategy, Macquarie Bank
- the second segment was led by Ishwar Madhyastha, a valuation practitioner, Partner, Ernst & Young
- the third segment was led by Vik Bhandari, an accounting and audit practitioner, Executive Director, Assurance & Advisory Business Services, Ernst & Young
The common message from all presenters was that impairment was an issue in the current economic climate and that they could not see that changing in the short term. The economic statistics presented by Tanya as to the current state of the economy and the trends over a number of years showed a different perspective to what most CAs encounter in their day to day work.
The determination of appropriate discount rates was discussed and it was noted that the weighted average cost of capital can be the starting point in determining a discount rate but other factors must also be considered. These factors include the size of the business and the risk of the cash-generating unit or business being valued as compared with other industry players.
It was pointed out that annual impairment testing on goodwill and indefinite life intangibles did not have to be completed at year end. However, it should be done at the same time each year. This led to discussion on whether in a declining market you would be obliged to address the issue of impairment again at reporting date and what auditors will be requiring for entities to demonstrate that their assumptions are still valid.
There is an expectation that the 30 June 2008 annual reports will contain significantly more disclosure on impairment, including the assumptions used and sensitivities, and further disclosures when impairment loss exists than had previously been the case.
Chartered Accountants in Business who are interested in attending future meetings can register their interest by emailing jane.ma@charteredaccountants.com.au. Members of the group are encouraged to email suggestions for discussion topics to that address.
3. Joint accounting bodies lodge submission on AUASB ED 1/08
The Institute, CPA Australia and National Institute of Accountants have jointly lodged a submission on the Auditing and Assurance Standards Board’s (AUASB) exposure draft on proposed standard ASAE 3500 Performance Engagements.
Generally, the submission commends the AUASB’s proposed introduction of this standard for assurance engagements. It was reiterated that a clear explanation of applicability, perhaps through diagrams or tables would greatly enhance understanding.
The submission is available for download from the Institute’s website.
4. Institute lodges comments on proposed emissions trading scheme
The Institute has lodged its comments on the proposed structure of the Australian Emissions Trading Scheme (AETS) issued by the Garnaut Review (Review). The Institute supports the introduction of the AETS as part of the Review’s approach to mitigating emissions. However, we consider there to be three key areas that have not been addressed in the discussion paper which are detailed in our submission.
The submission is available for download from the Institute’s website.
5. AASB meeting update – 17 April 2008
The most recent meeting of the Australian Accounting Standards Board (AASB) was held on 17 April 2008 in Melbourne. Highlights of the meeting included:
Key Management Personnel Disclosures
The Board decided to issue an ED proposing to exempt disclosing entities that are companies from complying with key management personnel (KMP) disclosures in AASB 124 Related Party Disclosures. The existing ASIC relief from making duplicate disclosures expires before the end of June 2008.
The Board expects to issue the ED by the end of April with comments required by 19 May 2008 and expects the new relief to apply before the end of June 2008.
Superannuation Plans and ADFs
The Board agreed that accrued benefits of members of superannuation plans or approved deposit funds (ADF) should be recognised as liabilities in the financial statements of the plan or ADF.
It was also agreed that the amendments to AASB 101 Presentation of Financial Statements and AASB 132 Financial Instruments: Presentation from AASB 2008-2 Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations Arising on Liquidation should not apply to superannuation plans or ADFs as it would produce different presentations for similar entities.
Interpretations:
Distributions of Non-cash Assets to Owners
The Board considered a draft AASB submission on International Financial Reporting Interpretations Committee (IFRIC) Draft Interpretation D23 Distributions of Non-cash Assets to Owners. After noting that the majority of distributions of non-cash assets to owners are common control transactions, the Board acknowledged the need for accounting guidance in this area. The Board expressed its preference that these type of transactions should be dealt with as part of the International Accounting Standard Board’s (IASB) project on common control transactions or as an amendment to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Customer Contributions
The Board made a few comments in its submission to the IFRIC on D24 Customers Contributions:
- The scope of the Draft Interpretation should be narrower and more clearly defined, or the IFRIC should not issue an interpretation on this topic
- It disagrees with the proposal that revenue in all cases should be recognised in respect of customer contributions only as ongoing access to a supply of goods or services that is provided
- The appropriate accounting treatment of a customer contribution should depend on the circumstances.
The AASB Action Alert (pdf) is now available on the AASB website.
6. IPSASB consults on Service Concession Arrangements
In response to a critical issue within the public sector, the International Public Sector Accounting Standards Board (IPSASB) has released a consultation paper entitled Accounting and Financial Reporting for Service Concession Arrangements (pdf).
The paper identifies issues and provides proposals to be considered in the development of international guidance for grantors (typically public sector entities) of service concession arrangements.
Comments are requested by 1 August 2008 and may be submitted to EDComments@ifac.org.
7. AUASB meeting update – 14 April 2008
The Auditing and Assurance Standards Board (AUASB) met in Sydney on Monday 14 April. Matters covered included:
- The Board approved two exposure drafts on proposed standards on review engagements (ASRE 2400 and ASRE 2405). The Board also approved an exposure draft on proposed amendments to ASRE 2410 as well as an Explanatory Guide to Review Engagements (see next item).
- The Board approved the withdrawal of AUS 522 Audit Evidence Implications of Externally Managed Assets of Superannuation, Provident or Similar Funds, as well as AGS 1026 Superannuation Funds – Auditor Reports on Externally Managed Assets. This was done further to the issuance in March 2008 of GS 007 “Audit Implications of the use of Service Organisations for Investment Management Services”.
The Board is to withdraw the following Guidance Statements because they have been superseded by other pronouncements
- AGS 1048 Special Considerations in the Audit of Small Entities
- AGS 1056 Electronic Commerce – Effect on the Audit of a Financial Report
- AGS 1066 Reporting by Auditors on Compliance with International Financial Reporting Standards
- AGS 1046 Reporting on Control Procedures at Outsourcing Entities will have limited application for periods commencing on or after 1 July 2008
- Other matters:
- Feedback from the exposure draft on proposed Standard on Assurance Engagements ASAE 3100 Compliance Engagements. Some further changes are to be made, and a revised draft standard is expected to be considered and approved by the Board out of session.
- Three proposed standards which have been redrafted in accordance with the ASA re-drafting project (“clarity”) structure were presented to the Board for preliminary consideration. These were –
- ASA 240 (redrafted) The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report
- ASA 315 (revised and redrafted) Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment
- ASA 260 (revised and redrafted) Communication with Those Charged with Governance
The Board requested certain changes, after which the proposed standards are to be considered and approved for release as exposure drafts at the June 2008 meeting of the Board
- Other projects currently underway:
- A proposed Guidance Statement addressing financial and compliance audits of self- managed superannuation funds
- Reporting pursuant to APRA prudential reporting requirements for Authorised Deposit-taking Institutions
- Audit implications of AASB 1049 Whole of Government and General Government Sector Financial Reporting (GAAP/GFS)
- To update and re-issue the existing AGS 1038 Access to Audit Working Papers
- To amend the existing AGS 1042 Reporting on Control Procedures at Outsourcing Entities
- To revise and re-issue the existing AGS 1054 Auditing Revenue of Charitable Entities
8. AUASB releases three EDs
The AUASB has released three documents for comment:
ED 2/08 Proposed Standard on Review Engagements ASRE 2400 Reviews of Financial Reports Performed by an Assurance Practitioner Who is not the Auditor of the Entity (Replacement of AUS 902)
Proposed ASRE 2400 will replace AUS 902 Review of Financial Reports.
ED 3/08 Proposed Standard on Review Engagements ASRE 2405 Review of Historical Financial Information Other than a Financial Report (Replacement of AUS 902)
Proposed ASRE 2400 will replace AUS 902 Review of Financial Reports.
ED 4/08 Proposed Amendments to ASRE 2410 Review of an Interim Financial Report Performed by the Independent Auditor of the Entity
This exposure draft proposes to amend ASRE 2410 by:
- expanding the application of the standard to include the review of a financial report other than for an interim period
- providing explanatory guidance on the nature of financial reports
- amending the required contents of the Auditor’s Report
In particular, the AUASB is particularly keen to invite comment on the following two questions:
- What are the additional significant costs, if any, to assurance service providers and the business community for compliance with the main changes proposed, and, if so, do they outweigh the benefits to the users of the assurance service?
- Are there any significant public interest matters that Respondents wish to raise?
It is proposed that all the proposed ASREs will be operative for periods commencing on or after 1 July 2008.
Submissions close on 30 May 2008 for all three exposure drafts.
9. APRA releases draft prudential framework for supervision of general insurance
The package consists of three draft prudential standards and a discussion paper that responds to submissions received following two previous consultation rounds in 2006 and 2007.
The foundation of APRA's approach to the supervision of general insurance groups is that the group as a whole should meet essentially the same minimum capital requirements as apply to individual general insurers.
The package of draft standards and discussion paper can be found on the APRA website.
APRA intends to issue these prudential standards in the third quarter of 2008, with an effective date of 1 January 2009.
Small not-for-profit audits: is there an alternative?
Q: I have a small not-for-profit client that requires an audit as a result of its own rules rather than legislation. My understanding is that once such a NFP specifies the requirement for an audit and I – as an Institute member – accept the appointment (whether honorary or otherwise), I am required to meet the Australian Auditing Standards (ASAs). The ASAs do not give specific consideration to the small NFP area.
If my understanding above is reasonably accurate, is there a practical option to offer the NFP entities referred to above an alternative form of assurance?
A: You are correct - if you are performing an audit of historical financial information, you have to use the auditing standards. The Accounting Professional and Ethical Standards Board (APESB) pronouncement APES 410 makes it mandatory for members of the professional accounting bodies in Australia to apply Australian Auditing Standards (i.e. those issued by the AUASB) to all Australian audit engagements, review engagements, other assurance engagements and related services (whether financial or non-financial information).
Currently, many small not-for-profits have an audit, even though the law does not require them to. If the entity's constitution and other legislative requirements permit, a good option could be for members to consider encouraging their clients to have review engagements performed in accordance with AUS 902 (soon to be replaced by ASRE 2400 and 2405). This lower level of assurance is likely to be less expensive for the organisation and may be something that meets their needs.
Note that if there is a requirement in the entity's constitution or rules to have an audit, the entity will have to change its constitution or rules before it can opt to have a review rather than an audit.
Listed below are the notable upcoming open domestic and international accounting and assurance exposure drafts. Members are encouraged to prepare their own submission on each document and submit them to the Institute (techsubmissions@charteredaccountants.com.au) no later than one week before the closing date shown.
30 May 2008
AUASB ED 2/08 Proposed Standard on Review Engagements ASRE 2400 Reviews of Financial Reports Performed by an Assurance Practitioner Who is not the Auditor of the Entity (Replacement of AUS 902)
AUASB ED 3/08 Proposed Standard on Review Engagements ASRE 2405 Review of Historical Financial Information Other than a Financial Report (Replacement of AUS 902)
AUASB ED 4/08 Proposed Amendments to ASRE 2410 Review of an Interim Financial Report Performed by the Independent Auditor of the Entity
16 June 2008
AASB ITC 15 Request for Comment on IPSASB Exposure Draft ED 34 Social Benefits: Disclosure of Cash Transfers to Individuals or Households and IPSASB Consultation Paper Social Benefits: Issues in Recognition and Measurement
For further exposure drafts, refer to our exposure drafts webpage.
Business Forum 2008
Throughout May and June in Melbourne, Sydney, Adelaide, Perth and Canberra. What’s your strategy for the year ahead? Join industry leaders and your peers as vital topics are addressed, key technical updates explored, and new ideas and options examined.
Accounting for Income Tax Workshop
Throughout May and June in Brisbane, Melbourne, Sydney, Adelaide and Perth. Prepared by Deloitte, this workshop will equip you with knowledge and tools to apply to your work place. Build on your understanding of accounting for income taxes (AASB 112) and identify your obligations in time for the June 2008 year-end.
Audit of Self Managed Superannuation Funds Workshop
Throughout May and June in Brisbane, Melbourne and Sydney. Now that there are competency requirements for auditors of self managed super funds, don’t miss out on ensuring your audits are compliant with the regulatory requirements.
Please continue to help us to improve the newsletter by sharing your comments on articles featured in this newsletter, or any financial reporting and auditing issues and experiences that might be of interest to other members. Responses should be emailed to "Your Input" (techsubmissions@charteredaccountants.com.au) and may be published in future editions of ANT.
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