Accounting and Auditing News Today (ANT) Issue No 27 - 13 July 2007

1. Institute's Technical Enquiries Helpline closing temporarily for Institute move

The Institute's Head Office is moving to 33 Erskine Street, Sydney on 23 July 2007.

As a result, the Institute's Technical Enquiry Service (phone and email) will be closed from 12pm Thursday 19 July 2007 until 9am Tuesday 24 July 2007.

For more information on the move visit http://www.charteredaccountants.com.au/33_erskine_street.
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2. Financial reporting by unlisted public companies - we need your feedback

A Discussion Paper has just been released by the Federal Treasury canvassing the possibility of exempting smaller unlisted public companies from the financial reporting and auditing requirements of the Corporations Act in the same way as small proprietary companies.

This paper raises the possibility of allowing companies limited by guarantee that fall below the size thresholds in operation for small proprietary companies not to lodge audited financial reports with ASIC. We would welcome your feedback on the proposals and have prepared a short online survey to capture your views at http://charteredaccountants.com.au/A119400121.

The Institute's submission will be finalised on Thursday, 26 July 2007 in time for The Treasury's deadline of 3 August 2007, so please respond by Monday, 23 July 2007.
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3. Highlights of the ASIC Accounting Liaison Committee meeting

Representatives of the Institute, other professional accounting bodies and accounting firms attended a regular briefing in Sydney on 10 July 2007. Matters discussed included:

ASIC financial reporting surveillance program

The current program, now in its fourth year, has seen ASIC focus on the accounts of listed entities. More attention will be paid to the accounts of unlisted disclosing entities for this reporting period.

Some matters noted are:

• Presentation of, and emphasis on 'alternate profits' in the financial reports or in accompanying information
• Problems in reverse acquisition accounting
• Inappropriate revaluations of intangibles - an active market is being inferred when in ASIC's view one does not exist
• Grossing up of revenue and expenditure where the entity is entitled only to a commission on the underlying transaction
• Valuations of investment properties which are not in accordance with the accounting standards

ASIC audit inspection program

ASIC are currently completing the third year of reviews, which have continued to focus on systems of quality control, independence and audit quality.

For the next round of reviews ASIC plans to follow up on certain reviews to date, and extend the reviews to firms that have not yet been visited. In addition to matters mentioned in the preceding paragraph, ASIC plans to pay close attention to:

• Auditor rotation requirements
• Documentation of decisions made to provide non audit services to audit clients
• How firms are preparing for the upcoming likely change to the definition of 'network firms' (refer Accounting Professional and Ethical Standards Board exposure draft )
• The requirements of the revised auditing standards applicable from 1 July 2006, specifically those addressing audit documentation, the auditor's responsibility to consider fraud in an audit, consideration of laws and regulations, audit sampling and the 'Risk' standards

Other common issues

• Transactions recorded that do not reflect 'substance over form'
• Attention to directors' report disclosure requirements introduced by CLERP 9 for listed companies and ensuring that the Auditor's Independence Declarations are included with the financial reports of all companies, registered schemes and disclosing entities.

4. Rearrangement of ASIC releases

ASIC has launched new regulatory documents and a road map as part of its Better Regulation initiative to increase the ease of locating and understanding ASIC decisions, policies and approaches. The road map will be "a subject matter index that links to regulatory documents and class orders on both general and specific topics".

Four regulatory guides will replace 14 existing types of documents:

• From 5 July 2007, there will only be four types of ASIC regulatory documents;
• Regulatory guides will replace approximately 14 types of documents including policy statements, practice notes, guides, kits, information releases and frequently asked questions;
• The other three types of documents will be: consultation papers, reports and information sheets;
• Legal documents such as class orders, instruments and forms are unchanged.

• * A short summary and details of the intended audience on the front cover;*
• A summary of key points at the beginning of each new section; and*
• An executive overview for larger documents.

5. ASIC updates licencing requirements for AFS licencees

ASIC has released updated versions of Policy Statement 166 "Licensing" Financial requirements" and Pro Forma 209 "Australian financial services licence conditions" and withdrawn three guides for Australian financial services licensees The changes include a number of clarifications and additional illustrations designed to help practitioners apply the policies to their clients.

The changes are effective immediately. For more information, visit the ASIC website .
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6. IFRIC issues Interpretation on IAS 19

The International Financial Reporting Interpretations Committee (IFRIC) has this week issued an Interpretation, IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

IFRIC 14 provides general guidance on how to assess the limit in IAS 19 Employee Benefits on the amount of the surplus that can be recognised as an asset. It also explains how the pensions asset or liability may be affected when there is a statutory or contractual minimum funding requirement. The Interpretation will standardise practice and ensure that entities recognise an asset in relation to a surplus on a consistent basis.

No additional liability need be recognised by the employer under IFRIC 14 unless the contributions that are payable under the minimum funding requirement cannot be returned to the company. IFRIC 14 is likely to have the most impact in countries that have a minimum funding requirement and where there are restrictions on a company's ability to get refunds or reduce contributions.

When adopted by the AASB, the Interpretation will be mandatory for annual periods beginning on or after 1 January 2008. Earlier application will be permitted.

For further information on IFRIC 14, please visit the project webpage on http://www.iasb.org .
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7. IFRIC issues draft interpretation on real estate sales

The IFRIC has this week released for public comment a draft Interpretation, IFRIC D21 Real Estate Sales. The proposal is open for public comment until 5 October 2007.

The proposed Interpretation aims to standardise accounting practice among real estate developers for sales of units, such as apartments or houses, 'off plan', ie before construction is complete.

At present, real estate developers interpret International Financial Reporting Standards (IFRSs) differently and record revenue for the sale of the units at different times. Some record revenue only when they have handed over the completed unit to the buyer, while others record revenue earlier, as construction progresses, by reference to the stage of completion of the development.

IFRIC D21 proposes that revenue should be recorded as construction progresses only if the developer is providing construction services, rather than selling goods (completed real estate units). It proposes features that indicate that the seller is providing construction services.

In many countries, these features tend currently not to be present in typical off plan sale agreements.

IFRIC D21 Real Estate Sales will be available on the IASB website shortly.
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8. IASB meeting agenda - 17-20 July 2007

The International Accounting Standards Board (IASB) will hold their next meeting on 17-20 July 2007 at its London offices. The agenda includes the following topics for discussion:

• Annual improvements process
• Conceptual framework
• Earnings per share
• Financial instruments puttable at fair value and obligations arising on liquidation
• IAS 27 - Formation of a new parent entity
• Income taxes
• Liabilities - amendments to IAS 37
• Post-employment benefits
• Share-based payment - Vesting conditions and cancellations (IFRS 2)

9. IFRIC meeting agenda - 12-13 July 2007

The IFRIC is currently meeting at the IASB's London offices. The agenda includes the following topics for discussion:

• IAS 18 "Revenue" - Customer contributions
• IAS 27 "Consolidated and Separate Financial Statements" - De-mergers and other in-specie distributions
• IFRS 2 "Share-based Payment" - Group cash-settled share-based payment transactions
• Staff recommendations for Tentative Agenda Decisions
  • IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations"
  • IAS 19 "Employee Benefits"

10. Financial services licensees' compensation arrangements

The Parliamentary Secretary to the Treasurer Chris Pearce has announced that the new regulations that complement section 912B of the Corporations Act 2001 will operate from 1 July 2007. The regulations provide that section 912B is satisfied if licensees have adequate professional indemnity insurance in place. Certain bodies that are regulated by the Australian Prudential Regulation Authority are exempt from this requirement.

ASIC will release the draft ASIC guidance which supplement the regulations shortly for public consultation. For more information go to the Parliamentary Secretary to the Treasurer website http://parlsec.treasurer.gov.au/cjp/content/pressreleases/2007/028.asp.
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11. Summary of mandatory requirements of auditing standards

As a service to its members, the Institute has gathered together in one document all the mandatory (black letter) requirements of the Auditing Standards at 30 June 2007. Practitioners may find this document to be helpful in comparing their current audit procedures to the minimum requirements of the standards. Visit the Institute's website for the Mandatory Requirements of Auditing Standards Checklist .
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12. Query of the week - Client no longer requires an audit because of changes to the size thresholds

Q: My audit client was a large proprietary company but became small at 30 June 2007 due to the threshold changes in the Simpler Regulatory System Bill that was given royal assent on 28 June 2007. Do I need to resign as auditor?

A: The Simpler Regulatory Bill changed the thresholds for proprietary companies to $25 million in consolidated revenue and $12.5 million in consolidated assets. The threshold regarding the number of employees remains at 50 employees. The test remains passing 2 out of 3 to be classified as large and thus require an audit under the provisions of the Corporations Act. pp Action you should consider:

1. If you have not already done so, advise your client of the changes immediately, including the fact that they will no longer be required to undergo a statutory audit for the 30 June 2007 financial year.

2. Discuss with your client whether they still wish to avail themselves of your audit services. Audits provide many benefits to clients over and above the statutory obligations fulfilled. You and your client should discuss these benefits and make an appropriate decision in the circumstances. It is possible that shareholders and / or providers of finance may nevertheless require an audit to be performed.

3. If the client chooses not to have an audit you should resign as promptly as possible. You should do so in writing to the directors. However because the audit is of a proprietary company that no longer requires an audit under the provisions of the Corporations Act, you do not have to notify ASIC. The question of an audit engagement at 30 June 2007 thus becomes a matter between you and your client.

4. The company will need to notify ASIC within 14 days of receiving your notice of resignation.

5. Be aware of your section 311 responsibilities up until the date of your resignation and your obligations under the auditing standards especially ASA 300" Planning an audit of a financial report". You may also need to remind the client of their obligations under section 331 to pay your reasonable fees and expenses for any work necessarily performed up until such time as your resignation takes effect. This may include year end physical inventory counts or other asset verification procedures, audit planning work or other interim audit procedures you may have performed.

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 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.

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'

3 August 2007
Treasury discussion paper - Financial reporting by unlisted companies
(see survey)

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'

5 October 2007
IFRIC D21 'Real Estate Sales'

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/ANT27_07_07_13.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.