TECHNICAL

ACCOUNTING

INTERPRETATIONS

AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE

The IFRIC has issued IFRIC 15 – Agreements for the Construction of Real Estate. The Interpretation will standardise accounting practice across jurisdictions for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, ‘off-plan’, i.e. before construction is complete.

The Interpretation provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11(AC 109) – Construction Contracts, or IAS 18(AC 111) – Revenue, and when revenue from the construction should be recognised. The main expected change in practice is a shift for some entities from recognising revenue using the percentage of completion method (i.e. as construction progresses, by reference to the stage of completion of the development) to recognising revenue at a single time (i.e. at completion upon or after delivery). Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11(AC 109) – Construction Contracts, that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses.

IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly, or through subcontractors.  The interpretation is effective for annual periods beginning on or after 1 January 2009 and is to be applied retrospectively.

This interpretation was approved by the APB in August 2008 and issued as an Interpretation of Statements of GAAP. The Interpretation is available online in the SAICA Handbook.

HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION

The IFRIC has issued IFRIC 16 – Hedges of a Net Investment in a Foreign Operation. The IFRIC was asked for guidance on accounting for the hedge of a net investment in a foreign operation in an entity’s consolidated financial statements. Practice has diverged as a result of differing views on which risks are eligible for hedge accounting according to International Financial Reporting Standards (IFRSs).

IFRIC 16 clarifies the following three main issues:

1. Whether risk arises from the foreign currency exposure to the functional currencies of the foreign operation and the parent entity, or from the foreign currency exposure to the functional currency of the foreign operation and the presentation currency of the parent entity’s consolidated financial statements.

IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation.

2. Which entity within a group can hold a hedging instrument in a hedge of a net investment in a foreign operation and, in particular, whether the parent entity holding the net investment in a foreign operation must also hold the hedging instrument.

IFRIC 16 concludes that the hedging instrument(s) may be held by any entity or entities within the group.

3. How an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item when the entity disposes of the investment.

IFRIC 16 concludes that while IAS 39(AC 133) – Financial Instruments: Recognition and Measurement, must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21(AC 112) – The Effects of Changes in Foreign Exchange Rates, must be applied in respect of the hedged item.

This interpretation was approved by the APB in August 2008 and issued as an Interpretation of Statements of GAAP, and is available on the SAICA Handbook-on-line.

REVIEW OF THE CONSTUTITION

The Trustees of the International Accounting Standards Committee (IASC) Foundation have published a discussion document, Review of the Constitution: Public Accountability and the Composition of the IASB – Proposals for Change. The Accounting Practices Committee has issued this as Exposure Draft 242.

The document contains proposals that are dealt with in the first phase of the organisation’s five-yearly Constitution Review. The public comment deadline on the document is 20 September 2008.

The proposals would:

• establish a formal link between the organisation and a Monitoring Group comprising representatives of public authorities and international organisations that have requirements for accountability to public authorities; and
• expand the membership of the International Accounting Standards Board (IASB) to 16 members and add new guidelines regarding the geographical diversity of the members of the IASB.

The establishment of the link to a Monitoring Group, a group established by public authorities outside the IASC Foundation’s organisational framework, is aimed at enhancing the transparency and public accountability of the IASC Foundation, while not impairing the independence of the standard-setting process. The document is available on the SAICA Website.

AUDITING

FURTHER PROGRESS ON CLARITY STANDARDS

The International Auditing and Assurance Standards Board (IAASB) has released International Standard on Auditing (ISAs) 550 (Revised and Redrafted) – Related Parties and three clarity redrafted ISAs.

The involvement of related parties in major corporate scandals encouraged the IAASB to revise its current auditing standard on the subject. The revised Related Parties standard clarifies the meaning of ‘related party’ for purposes of an audit. It also makes clear the auditor’s responsibility to obtain sufficient evidence about the required accounting and disclosure of related party relationships and transactions and to understand how such relationships and transactions affect the view given by the financial statements.

The standard will strengthen current auditing practice in this area by emphasising the need for the auditor to understand related party relationships and transactions in order to identify the risks of material misstatement to which these may give rise and directing the auditor to focus work effort on the assessed risks of material misstatement, including those due to fraud.

The revised standard clarifies the auditor’s responsibilities in those cases where the financial reporting framework establishes minimal or no related party requirements. In addition, it provides enhanced guidance to assist the auditor in understanding and responding to the risks of material misstatement that may arise in relation to related parties with dominant influence.

In addition to ISA 550 (Revised and Redrafted), the IAASB has also released the following clarity redrafted ISAs:

• ISA 250 (Redrafted) – Consideration of Laws and Regulations in an Audit of Financial Statements
• ISA 510 (Redrafted) – Initial Audit Engagements – Opening Balances
• ISA 570 (Redrafted) – Going Concern

To date, 15 final clarity redrafted ISAs have been released by the IAASB, which form part of its 18 month program to redraft existing standards following the clarity drafting conventions.

The will be effective for audits of financial statements for periods beginning on or after 15 December 2009 and can be downloaded from the IFAC online bookstore.

IAASB STRATEGY AND WORK PROGRAM (2009-2011)

The IAASB has released its Strategy and Work Program, 2009-2011. The three-year strategy includes an emphasis on the development of standards that contribute to the effective operation of the world’s capital markets that address the needs of small and medium-sized entities and small and medium practices.

The Strategy and Work Program builds on the strong base of standards developed by the IAASB to date and focuses on the following three areas:

• The development of standards.
• The facilitation and monitoring of adoption of those standards.
• Responding to concerns about the implementation of the standards by activities designed to improve the consistency with which they are applied in practice.

The IAASB’s vision is that the high quality standards on assurance, related services and, in particular, ISAs are developed in the public interest and are adopted and applied internationally. The strategy and work programme is consistent with this longer term vision.

It responds to significant developments in the environment in which audit and other assurance services are performed, and in which standards for such services are set. It also highlights the IAASB’s role in working towards global acceptance of and convergence with its standards, and in establishing and maintaining relevant partnerships. It is underpinned by the IAASB’s communication initiatives to keep stakeholders informed of its activities and to promote adoption and implementation of its standards.

It also reflects the outcome of an extensive consultation programme to obtain the widest possible input into determining the IAASB’s priorities over the next three years. A summary of the IAASB’s conclusions with regard to significant matters raised during these consultations is presented in the Basis for Conclusions: IAASB Strategy and Work Program, 2009-2011. The Strategy and Work Program, 2009-2011 can be obtained from the IFAC online bookstore. To access the related Basis for Conclusions and other information on the IAASB’s work, visit the IAASB website on www.iaasb.org.

The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing. Albert Einstein

IRBA & ITS FUNCTIONS

Much reference is made to the IRBA and its functions. The IRBA was established to act as an oversight and regulatory body over the attest function in the public interest.

The IRBA accredits professional bodies against defined criteria. This accreditation allows individuals that have gone through the qualification process of the professional body to act as Registered Auditors (RAs). The attest function performed by an RA is then regulated by the IRBA. It is not the intention of the Board to regulate tax practices in the same manner. It is the intention of the Board to prescribe minimum education standards, a code of conduct and sound investigative and disciplinary processes. These functions are accredited as being adequately managed by various professional bodies. The IRBA places reliance on a professional body delivering competent, qualified practitioners as a proactive measure in ensuring the continued quality of the audit profession.

A number of specific comments were made on the Bill. The most significant being changes that will ensure that SAICA members, who are practitioners, are treated the same as those registered with the IRBA or the provincial law societies. A copy of SAICA’s submission is available and can be accessed on the SAICA website, www.saica.co.za.

PUBLIC SECTOR

2007/8 AUDITING OF PERFORMANCE INFORMATION APPROACH

Are you aware of the 2007/8 auditing of performance information approach? It is contained in the 2008 Auditor-General directive published in General Notice 616 of 2008, issued in Government Gazette No. 31057 of 15 May 2008.

THE APPROACH

To be applied in all public sector entities, by audits done by Auditor-General or Registered firms, which require the following steps:

Step 1 Internal controls and systems

Understanding of the internal controls and systems relevant to collect, monitor and report performance information and documenting system descriptions. The controls and systems should be verified by means of walkthrough tests.

Step 2 Evaluate

Evaluate quality of performance information reported in annual report for:

1. Existence and quality of:

• measurable objectives;
• indicators;
• targets;
• actual performance; and
• reasons for deviations.

1. Consistency of predetermined objectives between strategic plan, annual performance plan, budget, quarterly reports and annual report.
2. Format and presentation in annual report.

Step 3 Comparison

Compare reported performance information to relevant source documentation and conducting limited substantive procedures to ensure valid, accurate and complete reporting on performance information.

Step 4 Reporting

The results of audit work done on performance information should not have an impact on the audit opinion. However, the following aspects, if they exist, should be reported under “other reporting responsibilities” heading in the audit report:

• Non-compliance with Public Finance Management Act (PFMA) reporting requirements.
• Material difference between measurable objectives in annual report and strategic plans.
• No measurable objectives in strategic plans, while measurable objectives included in annual report.
• Reported information is materially inconsistent when compared to the evidence provided.
• Performance information was not received in time to be evaluated at year-end.

SUBMISSION

External auditors should have received the performance information on or before 31 May 2008, as communicated in the engagement letter.

REFERENCE DOCUMENTS

The audit approach, audit programmes, procedures and related working papers to be used for the auditing of performance information for the 2007/08 PFMA cycle can be found on SAICA’s website, www.saica.co.za. Chapter 2 of the National Treasury’s annual report preparation guide 2007-08 details the reporting requirements for performance information. This guide can be accessed on the website for the Office of the Accountant-General, www.oag.gov.za.

THE WAY FORWARD

In the absence of an auditing standard, the Auditor-General initiated a phased approach in 2005/6 to comply with Public Audit Act – section 20(2)(c). The requirement of this audit report is to reflect at least an opinion or conclusion on the reported information relating to the performance of the auditee against predetermined objectives.

The intention of this phased approach will be completed by 2009/10, at a time when appropriate standards would have been developed, with a view to issuing an audit opinion/conclusion in 2009/10.

Have you informed the Auditor-General (AG) if appointed directly by auditee to perform an audit?

The AG has initiated a process to collate information of all registered firms engaged to audit entities, which they opt not to audit in reference to the Public Audit Act (PAA). PAA Section 25(1) requires an auditee (an entity) where the AG has opted not to perform the audit, to notify the AG of the registered firm the auditee intends to appoint. Similarly, Section 26 requires the auditee to inform the AG in the event that it intends to discharge an auditor appointed in terms of section 25(1).

A document highlighting the information that the auditee must submit has been issued by the AG. The document can be obtained from AG directive published in General Notice 616 of 2008, issued in Government Gazette No. 31057 of 15 May 2008.

The AG may opt, in terms of Section 4 (3) of PAA, not to audit:

any public entity listed in the Public Finance Management Act (PFMA); or

any other institution not listed in PFMA, which is funded from the National Revenue Fund or a Provincial Revenue Fund or by a municipality authorised in terms of any legislation to receive money for a public purpose.

There are many entities that receive funding from government or for a public purpose that are not being audited by the AG. If you are an auditor of such an entity, or a member of management of such an entity, we encourage you to check that you are complying with the requirement

REGULATED INDUSTRIES

EXCHANGE CONTROL CIRCULARS

The Exchange Control Department of the South African Reserve Bank (EXCON) has issued the following Exchange Control Circular:

No. 13/2008 – Authorised Dealers in Foreign Exchange.

Section A.2 (A) of the Exchange Control Rulings has been amended to delete the name of Rennies Bank Limited and replace it with the name of Bidvest Bank Limited.

Please direct any specific queries regarding the Exchange Control Circulars or Rulings to standards@saica.co.za.

FAIS FIT AND PROPER QUALIFICATION LIST APPLICATION

The Financial Services Board has issued the following notice:

Fit and Proper Qualifications Application Form

Accredited providers/institutions/professional bodies and/or industry associations are invited to apply for qualifications to be recorded on the Fit and Proper Qualification List Application.

Key individuals and representatives will, in future, be required to complete and obtain an ‘appropriate’ qualification. The notice is issued in order to simplify the identification of which qualifications are deemed to be ‘appropriate’. The list of qualifications will be updated/amended regularly.

Please visit the Financial Services Board website for more information: www.fsb.co.za.

REMOVAL OF CIRCULAR

Circular 1/2007 – Medical Schemes Summarised Financial Statements has been removed from the SAICA website.

The circular was replaced by Circular 38/2007 – Summarised Financial Statements issued by the Council for Medical Schemes. Please direct any specific queries regarding the replacement Circular to standards@saica.co.za.

TAX

WHAT’S NEW AT SARS?

The latest updates can be viewed on the SARS website (www.sars.gov.za).

REVISED DRAFT REGULATION OF TAX PRACTITIONERS BILL

SARS issued the revised draft Regulation of Tax Practitioners Bill on 3 June 2008 for public comment. This process was accompanied by a consultation between SARS and the professional associations that commented on the initial draft. SAICA/SAIPA attended a meeting with representatives from SARS in July 2008 in this regard.

SAICA submitted written comment, which was sourced from chartered accountants around the country, the SAICA leadership team and members of the National Tax Committee.

The following are the most significant changes – as highlighted in the newsletter accompanying the revised Draft Bill:

• The requirement that tax practitioners (practitioners) that are under the statutory regulation of another relevant statutory body (e.g. the Independent Regulatory Board for Auditors (IRBA) or any Law Society etc.) will only be subject to the disciplinary or other procedures of that other statutory body. However, these tax practitioners will still be required to register with the Independent Regulatory Board for Tax Practitioners (the Board).
• The softening of the harsh penalties for errant practitioners. No criminal sanction will now be taken. Errant practitioners can be struck off the practitioners’ roll or be suspended for a period. Those practitioners that commit fraud are liable to prosecution under existing legislation.
• The removal of the requirement that practitioners keep “audit” files on their clients and report any irregularities in their clients’ tax affairs to the South African Revenue Service (SARS). Clients that are unhappy with the service they receive from practitioners, or in the event that SARS notice something suspicious in the tax affairs of a client of a tax practitioner, can report that to the Board.
• The Board will now comprise seven members of which at least three members must be practitioners and one a SARS representative. The SARS representative will have no voting rights nor sit on the investigative or disciplinary committees.

SAICA has welcomed these changes, but has noted a number of uncertainties or situations that have not been dealt with.

SAICA’s comment letter is structured into two distinct parts. The first presents an accreditation model as an alternative to the current proposal contained in the Bill. The second covers specific comment on the Bill as it is currently drafted.

FULL ACCREDITATION MODEL

SAICA continues to support a full accreditation model. This was previously referred to in our joint submission to SARS, dated 8 January 2008 (comment provided on the first Draft Regulation of Tax Practitioners Bill). We reproduce some of our earlier comment that is still applicable as follows:

The current Bill envisages a new body to govern tax practitioners, however, there are a number of bodies that currently govern the activities of their members, in a manner appropriate to support the principles which SARS wishes to achieve.

Professional bodies, such as SAICA, operate in a highly regulated environment. SAICA, for instance, is regulated in each of the following areas:

• Our education and training process is regulated as an Education and Training Quality Assurer (ETQA) through bodies such as South African Qualifications Authority (SAQA) and is relevant to the auditing profession by the Independent Regulatory Board for Auditors (IRBA).
• Our code of conduct, investigative and disciplinary processes are monitored and reviewed annually by the IRBA.
• Our requirement that members comply with Continuing Professional Development (CPD) is monitored and reviewed by, amongst others, the IRBA and International Federation of Accountants (IFAC).

Although not a statutory body as envisaged in the Bill, SAICA operates within the confines of various areas of legislation, is accredited by various statutory bodies and remains a member of various international organisations (IFAC, Global Accounting Alliance (GAA), etc).

This accreditation and global recognition ensure continued protection of public interest by ensuring the quality, competence and commitment to continuous learning of all professionals registered with the Institute. SAICA must comply with the accreditation requirements prescribed by each of these bodies, failing which it will be struck off as an accredited member. Practitioners that belong to such professional bodies already meet the minimum requirements as articulated by SARS in the current version of the Bill. In this manner, only tax practitioners that are not already a member of such a body need join the new body for tax practitioners (alternatively we recommend a transitional period be allowed for the market to create professional bodies to cater for these tax practitioners).

In this manner a double layer would not be created, as is the case with the current proposed draft Bill, which sees members (of professional bodies that meet the requirements) being members of a number of different bodies.

The Bill should then set out the minimum requirements (as articulated in the Bill) pertaining to:

• training and education requirements;
• continued professional education requirements;
• a code of conduct; and
• disciplinary procedures.

It is our opinion that the role of the Board is to set the minimum standards related to each of these areas. Where professional bodies can demonstrate that they meet or exceed these minimum criteria, as stipulated by the Board through the Bill, such professional bodies should then be granted full accreditation. The Board should, on a regular basis, review the activities of the professional body to ensure that it continues to meet the minimum requirements as stipulated. Where a professional body fails to demonstrate that it meets those requirements on a consistent basis, its accreditation should be removed.

This model has a number of advantages, including the following:

• Protecting the public interest. The designations held by members of professional bodies will proactively alert members of the public to the competence of the relevant practitioner.
• This model allows for proactive monitoring of the quality and competence of tax practitioners and sufficient reactive measures through continued accreditation of professional bodies coupled with consistent and reliable investigative and disciplinary procedures.
• Reducing the number of members the ‘Board’ directly regulates by accrediting professional bodies.
• Managing the potential added cost of establishing and running the Board by regulating a handful of professional bodies as compared to individuals.
• Reducing the ultimate added cost to business of doing business by effectively managing the cost of this regulatory structure.

Edited by: Ewald Muller

Technical queries: standards@saica.co.za

Ethics and Discipline queries:
standards@saica.co.za

Information Centre: pelmag@saica.co.za Telephone: 011 621 6641

Telefax: 011 621 6819 | Website:
http://www.saica.co.za