Accounting and Auditing News Today (ANT) Issue No 26 - 6 July 2007

Welcome to the twenty-sixth 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. AASB releases Supplement to ED 155 for comment

Following on from their June meeting, the Australian Accounting Standards Board (AASB) has released a Supplement to ED 155 'Financial Reporting by Whole of Governments'. It contains an illustrative example left out of the initial exposure draft release. This Supplement to ED 155 should be considered in conjunction with ED 155 itself.

As reported in ANT23 (15 June 2007), ED 155 was issued in May, and is based on the GAAP/GFS (Government Finance Statistics) harmonisation requirements in AASB 1049 'Financial Reporting of General Government Sectors by Governments'.

The Supplement is broadly based on Illustrative Example A in AASB 1049. However in the Supplement, the AASB has assumed the general government sector holds no investments in controlled entities whose shares are publicly traded.

In common with ED 155, comments on this Supplement to ED 155 are sought by 17 August 2007.
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Other highlights of the 28 June meeting of the AASB included the following:

Key Management Personnel Disclosures
AASB will consider at a future meeting an exposure draft to remove certain requirements re non-corporate disclosing entities. The exposure draft would propose to remove Paragraphs Aus 25.1 to Aus 25.9.3 in AASB 124 and include a Basis for Conclusions.

Amending Standard AASB 2007-7
Minor amendments to Australian Accounting Standards AASB 1, AASB 2, AASB 4, AASB 5, AASB 7 and AASB 128 were approved, as well as the removal of encouragement to adopt a particular format for the cash flow statement and the removal of guidance accompanying AASB 4, announced in ANT25/2007 last week.

Other issues discussed included:

• Insurance Contracts - An education session was held for the AASB on the Discussion Paper 'Preliminary View on Insurance Contracts'. No decisions were reached.
• Superannuation Entities - a draft consultation paper 'Fair Value Accounting and the Consolidation of Subsidiaries by Superannuation Entities' was discussed, and will be finalised at the August meeting.

As noted in ANT24/07 (29 June 2007) the AASB has commenced compiling revised versions of the 35 standards affected as a result of the changes approved in the issue of Omnibus 2007-4.

Omnibus 2007-4 applies to financial reporting periods ending on or after 1 July 2007 but may be applied to earlier periods. This means that entities can choose to early adopt this standard and thereby potentially benefit from some of the policy changes that were introduced by it to promote greater convergence of the AIFRS and IFRS standards.

These include the option to use the indirect cash flow method in AASB 107, the option to record non-monetary grants at nominal amounts and to present assets and expenses net of related grants in AASB 120, the option to use proportional consolidation in AASB 131 and the removal of specific Australian disclosure in AASB's 130, 131 and 134.

However it is important to note that where accounting policies are changed, regard must be given to the requirements of paragraph 14(b) of AASB 108 which requires new policies to provide reliable and more relevant results.

In considering this requirement it should be remembered that some of these options were not the preferred AASB option (hence they were omitted when the original suite of AASB standards was issued) and so it may be difficult to argue 'relevant and reliable' in order to adopt. In addition the new policy option concerning proportional consolidation to be included in AASB 131 may only have a short useful life as a result of the current IASB/ FASB convergence work in this area.

It is also important to note that AASB 2007-4 has no transitional provisions and so the requirements of AASB 108 concerning retrospective application would also need to be applied.

A copy of AASB 2007-4 is available on the AASB website. Ernst & Young have also produced a helpful paper discussing the changes introduced by this standard and appropriate responses.
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1. A number of changes have been announced to the Corporations Regulations. The more significant ones are summarised below and full details can be found on the Commonwealth Attorney-General's website under 29 June 2007.

• SLI 2007 No. 193 - These Regulations amend the Corporations Regulations 2001 to move the disclosure requirements for director and executive remuneration in the accounting standards into regulation 2M.3.03 of the Corporations Regulations 2001.
• SLI 2007 No. 194 - These Regulations amend the Corporations Regulations 2001 to repeal regulation 2M.6.03 and Schedule 5A thereby requiring bank and life insurance companies to comply with the accounting standards under Chapter 2M of the Corporations Act 2001 rather than the financial reporting requirements in the Banking Act 1959 and the Life Insurance Act 1995.
• SLI 2007 No. 195 - These Regulations amend the Corporations Regulations 2001 to remove certain prescribed paper forms from the Regulations and, instead, list certain provisions of the Corporations Act 2001 relating to company charges under which forms are prescribed for the purposes of the Corporations Act, to allow the Australian Securities and Investments Commission (ASIC) to create approved forms for the registration company charges that may be lodged electronically.
• SLI 2007 No. 196 - These Regulations amend the Corporations Regulations 2001 to remove the requirement for public companies and registered schemes to notify ASIC of their top 20 shareholders or interest holders.
• SLI 2007 No. 200 - These Regulations amend the Corporations (Review Fees) Regulations 2003 to prescribe amounts to be payable in respect of review dates for public companies, proprietary companies, special purpose companies and registered schemes. The purpose of the Regulations is to reduce transactions costs for businesses that are required to pay review fees for entities registered with the Australian Securities and Investments Commission.

ASIC has clarified its auditor report requirements under its relief for investor directed portfolio services (IDPS), IDPS-like registered schemes (IDPS-like services) and managed discretionary accounts (MDAs).

The amendments to ASIC's relief clarify the nature of the auditor report required of electronic transaction facilities made accessible to clients of these services. Where electronic access to account information is given to clients of IDPS, IDPS-like and MDA services, auditors will only need to review the information that is displayed at the end of each quarter. The auditor's review is limited in this way provided that:

• the information at the end of each quarter remains accessible to clients through the same electronic facility until the end of the following financial year; and
• the electronic facility through which the information is accessible includes a statement to the effect that only information displayed at the end of the quarter will be audited.

A copy of Class Order [CO 07/480] "Investor directed portfolio services, investor directed portfolio-like services and managed discretionary accounts - amendments" can be downloaded from ASIC.
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The International Accounting Standards Board (IASB) met on 19-22 June 2007. The IASB update summarising decisions made is available for downloaded.

Business combinations
The Board affirmed the tentative decision it made in February 2007, that any terms of an operating lease would be recognised in the fair value of the asset subject to the lease. Thus consequential amendments to IAS 16 "Property, Plant and Equipment" have been directed for inclusion by the staff to emphasise this.

Technical Plan
The Board made its quarterly review of its Technical Plan, a timetable outlining the projects the IASB intends to cover over the next 18-24 months. This is available on their website.

Leases
In relation to simple leases, the Board discussed the initial recognition and subsequent measurement of the lessee's contractual right to use the leased item and contractual obligation to make payments to the lessor.

Financial statement presentation
The Board continued discussions on how financial statements could present information about what causes a change in reported amounts of assets and liabilities. This includes the presentation of disaggregating amounts recognised as income or expense and any alternative formats of presentation.

Post-employment benefits
The IASB considered issues relating to defined return promises.

Conceptual framework
The Board redeliberated issues relating to the Discussion Paper on Conceptual Framework. They tentatively decided that the exposure draft should describe what is meant by financial reporting, and that specific decisions regarding its scope should be considered later in the Conceptual Framework project.

Annual improvements process
The Board considered 12 issues for inclusion in the annual improvements process, which is aimed at eliminating inconsistencies between standards and clarifying wording. All proposed amendments to standards would be published in one single exposure draft each year, with the first to be published in October 2007.

Short-term convergence: joint ventures
The Board discussed the disclosure requirements to be included in the exposure draft of proposed amendments to IAS 31 "Interests in Joint Ventures".

IFRS 1 amendments
The Board tentatively decided to consider amending IAS 27 "Consolidated and Separate Financial Statements" together with the revised amendment of IFRS 1.

IFRIC - approval of interpretations
The Board approved two IFRIC Interpretations for issue: IAS 19 (IFRIC 14) and Customer Loyalty Programmes (IFRIC 13). More details follow.
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IFRIC 13 "Customer Loyalty Programmes"
The International Financial Reporting Interpretations Committee (IFRIC) has issued IFRIC 13. This Interpretation address the recognition and measurement obligations of entities that provide customers with free or discounted goods if and when they choose to redeem loyalty award credits.

IFRIC 13 now requires entities that grant loyalty award credits allocate some of the proceeds of the initial sale to award credits. These proceeds will be recognised as revenue only when themselves or a third party has fulfilled their obligations.

IFRIC 14 "IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction"
IFRIC 14 provides guidance on assessing the limit in IAS 19 "Employee Benefits" on the amount of surplus that can be recognised as an asset. It also explains how the pensions asset or liability may be affected where there is a statutory or contractual minimum funding requirement.

IFRIC 14 is mandatory for annual periods beginning on or after 1 January 2008 with early adoption permitted.
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The Australian Prudential Regulation Authority (APRA) has released a paper setting out its responses to submissions on its proposals to implement the advanced approaches under the Basel II capital adequacy regime. As well, APRA has also released three final draft prudential standards and their respective practice guides.

These draft prudential standards are:

• APS 113 "Capital Adequacy: Internal Ratings-based Approach to Credit Risk"
• APS 115 "Capital Adequacy: Advanced Measurement Approaches to Operational Rish"
• APS 117 "Capital Adequacy: Interest Rate Risk in the Banking Book"

Comments on the response paper and the final draft prudential standards are sought by 27 July 2007.
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The Institute's Technical Standards Audit team has produced a special edition audit ANT ready to be distributed next Tuesday 10 July 2007. It will contain essential information for all auditors regarding the application of the 'force of law' audit Standards.
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The Institute's Head Office is moving to 33 Erskine Street, Sydney on 23 July 2007. All telephone numbers for reception (02 9290 1344), the customer service centre (1300 137 322) and Institute personnel will remain the same.

The Institute's Customer Service Centre and reception will close at 12 noon on Friday 20 July and reopen at 11am on Monday 23 July.

The Knowledge Centre (the library) will close at 12 noon on Tuesday 17 July and will only be available for email and telephone enquiries until 12 noon on Friday 20 July before reopening in full capacity on Monday 23 July at 11am at Erskine Street.

More information on the move.
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The International Accounting Standards Committee (IASC) Foundation is hosting the International Financial Reporting Standards (IFRS) Conference on Wednesday 29 August and Thursday 30 August 2007, in Singapore.

Keynote speakers include Professor Sir David Tweedie - Chairman of the IASB, Lee White - Chief Accountant of ASIC and other spokespeople from the Australasia region.

The two-day conference is designed to assist members with:

• Element Definitions, Recognition and Measurement:
• The Reporting Entity and Consolidations;
• Presentation of Financial Statements;
• Business Combinations; and
• Fair Value measurements.

For further information please visit the IASCF Conference website.
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Q: Does an audit qualification for non-compliance with accounting standards require notification to ASIC under Section 311 of the Corporations Act?

A: Yes, a notification to ASIC would usually be required in these circumstances.

Under Section 311(1)(a) of the Corporations Act an auditor is required to notify ASIC if the auditor has reasonable grounds to suspect a contravention of the Act and they believe that the contravention is either significant or, if not significant, cannot be adequately dealt with by inclusion in the audit report or by bringing it to the attention of the directors.

ASIC's Practice Note 34 "Auditors Obligations: Reporting to ASIC "provides detailed guidance on the application of this section of the Act (note that from 5 July 2007, Practice Note 34 may also be referred to as "Regulatory Guide 34"). This Practice Note states at paragraph 20 that one example of a likely significant breach is "a breach of accounting standards or the true and fair view requirement". This is on the basis that compliance with accounting standards is required by the Corporations Act (section 296) and therefore a breach (or suspected non-compliance) of an accounting standard is a breach (or suspected breach) of the Corporations Act.

Non compliance with accounting standards is further discussed in paragraphs 33 to 35 of the Practice Note. This section states that an auditor's obligations to include breaches of accounting standards under section 308(2) and 309(2) do not relieve auditors from their reporting obligations under s 311. The practice note considers that departures from accounting standards would generally be either significant or, even if not significant, it might not be dealt with adequately in the audit report or by drawing it to the directors' attention and therefore should be reported under Section 311.

The Technical Standards team wrote an article in Charter in 2005 which summarised the reporting responsibilties under s311.
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Auditor Independence Checklist
As an Auditor are you interested in quickly validating the independence of each and every audit job? Updated with reference to the new components of the Corporations Act the Auditor Independence checklist is one again available, and would be of particular interest to small to medium sized public firms.
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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@icaa.org.au.

17 July 2007
AASB Proposed Rejection Statements

27 July 2007
APRA Implementation of Basel II report and draft prudential standards

31 July 2007
ISA 250 (redrafted) 'The Auditor's Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements'

17 August 2007
AASB ED 155 "Financial Reporting by Whole of Governments
Supplement to ED 155

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"

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'

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

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

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/ANT26_07_07_06.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.