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TECHNICAL: ACCOUNTING

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URGENT AMENDMENTS ISSUED ON THE RECLASSIFICATION OF FINANCIAL ASSETS APB APPROVAL

The Trustees of the International Accounting Standards Committee Foundation, the oversight body of the International Accounting Standards Board (IASB), recently agreed that the IASB accelerate its response to the credit crisis. Under this approach, the IASB sought to reduce the difference between International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP) in respect of the issue of reclassification of financial instruments. Accordingly, the IASB issued amendments to IAS 39 – Financial Instruments: Recognition and Measurement and IFRS 7 – Financial Instruments: Disclosure, whereby limited reclassification of certain financial instruments will be allowed subject to adherence to certain requirements. Due to the urgency of the matter, the IASB suspended process and did not issue an exposure draft to obtain comment on the changes. The Accounting Practices Board (APB), the official financial reporting standards-setter in South Africa, approved the Amendments to IAS 39(AC 133) and IFRS 7(AC 144) as amendments to the Statements of Generally Accepted Accounting Practice (GAAP) on 24 October 2008.

Effective date
The decision to reclassify a financial asset on or after 1 July 2008, but on or before 31 October 2008, had to be completed before 1 November 2008. Reclassifications may not be applied retrospectively before 1 July 2008. All reclassifications made on or after 1 November 2008 shall be effective from the date of reclassification.

Amendments – IAS 39(AC 133)
Permitted reclassifications – an entity may reclassify a financial asset in the following instances if the financial asset is no longer held for the purpose of selling or repurchasing in the near term (notwithstanding that the financial asset may have been acquired or incurred principally for the purpose of selling or repurchasing it in the near term):

a. Financial assets (other than those that would have met the definition of loans and receivables)
A financial asset may be reclassified from held-for-trading (measured at fair value through profit or loss) to another financial asset category only in ‘rare circumstances’. The APB is of the view that it is highly unlikely that there are such ‘rare circumstances’ currently in South Africa. However, there may well be ‘rare circumstances’ affecting South African companies that have operations or financial assets in other countries that have such ‘rare circumstances’. The International Accounting Standards Board (IASB), which issued the amendments to the standards that the APB has endorsed for issue in South Africa as Statements of GAAP, indicated that ‘rare circumstances’ arise from a single event that is unusual and highly unlikely to recur in the near term.

b. Loans and Receivables
Assets that were classified as held-for-trading or as available-for-sale (measured at fair value through other comprehensive income) that would have met the definition of loans and receivables on initial recognition, had they not been classified differently, can be reclassified to the loans and receivables category (measured at amortised cost through profit or loss), if the entity has both the intention and ability to hold the assets for the foreseeable future or until maturity. It is essential to ensure that, at the date the reclassification of the financial assets takes place, the assets meet the definition of loans and receivables as set out in IAS 39(AC 133).

c. Restrictions on reclassifications
An entity may not reclassify derivatives and financial assets that were designated at fair value through profit or loss upon initial recognition. In addition, financial instruments may not be reclassified to either held-for-trading or be designated to be carried at fair value through profit and loss after initial recognition or reclassification.

d. Measurement
All reclassified financial assets are measured at their fair value on the date of reclassification. The fair value of those financial assets becomes the starting fair value or amortised cost for the instruments new financial instruments category on the date of reclassification. Gains or losses that were already recognised in profit or loss in respect of held-for-trading financial assets may not be reversed. The accounting for cumulative gains and losses for financial assets that were previously classified as available-for-sale remains unchanged under IAS 39(AC 133).

e. Subsequent increases in recoverability of cash receipts
The amendment also provides that where a financial asset is reclassified as a loan and receivable in accordance with the criteria specified above, and the entity subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase shall be recognised as an adjustment to the effective interest rate from the date of the change in estimate rather than as an adjustment to the carrying amount of the asset at the date of the change in estimate.

Amendment to IFRS 7(AC 144)
The amendment to IFRS 7(AC 144) imposes additional disclosure requirements when a financial asset is reclassified in terms of the amendment to IAS 39(AC 133). The entity is required to disclose:

• the amount reclassified into and out of each category;
• for each reporting date until the asset is removed from the balance sheet, the carrying amounts and fair values of all reclassified financial assets in the current and previous reporting periods;
• if the reclassification of the financial assets arose as result of ‘rare circumstances’, the facts and circumstances indicating that the situation was rare;
• in the period of reclassification, the fair value gains and losses recognised in profit or loss or other comprehensive income in the current and previous reporting periods;
• for each reporting period following the reclassification (including the reporting period in which the financial assets were reclassified) until the financial assets are removed from the balance sheet, the fair value gain or loss that would have been recognised if the financial assets had not been reclassified as well as the gain, loss, income and expense that was recognised in profit or loss; and
• the effective interest rate, and the estimated cash flows that the entity expects to recover, as at the date of reclassification of the financial assets.

In short, these disclosures provide the same information that would have been provided had reclassification not taken place.

IMPROVEMENTS TO FINANCIAL INSTRUMENT DISCLOSURES

The International Accounting Standards Board (IASB) has published for public comment proposals to improve the information available to investors and others about fair value measurement of financial instruments and liquidity risk. This exposure draft has been issued in South Africa as ED 248. These proposed amendments are made in addition to the urgent amendments to IAS 39(AC 133) – Financial Instruments: Recognition and Measurement and IFRS 7(AC 144) – Financial Instruments: Disclosures, issued by the IASB on 13 October 2008.

This exposure draft proposes amendments to disclosure requirements that are based on a three-level fair value hierarchy. The proposed amendments would apply to financial instruments and require disclosures about:

a. the level of the fair value hierarchy into which fair value measurements are categorised in their entirety. This requirement would apply to both fair values included in the statement of financial position and other fair values that are disclosed, but not included in that statement;
b. the fair value measurements resulting from the use of significant unobservable inputs to valuation techniques. For these measurements, the disclosures include a reconciliation from the beginning balances to the ending balances; and
c. a reconciliation between the different levels of the fair value hierarchy and the reasons thereof.

The deadline for comment to SAICA on this exposure draft was 14 November 2008.

ED 248 – Improving Disclosures about Financial Instruments – Proposed amendments to IFRS 7(AC 144) can be downloaded from the exposure draft section of the SAICA website.

Exhiibit 1: working format for presenting information in the financial statements

Statement of Financial Position
Statement of
Comprehensive Income
Statement of Cash Flows

Business
• Operating assets and liabilities
• Investing assets and liabilities Business
• Operating income and expense
• Investing income and expense Business
• Operating cash flows
• Investing cash flows
Financing
• Financing assets
• Financing liabilities Financing
• Financing asset income
• Financing liability expense Financing
• Financing asset cash flows
• Financing liability cash flows
Income Taxes
Income Taxes (related to business and financing)
Income Taxes

Discontinued operations
Discontinued Operations,
Net of Tax
Discontinued operations

Equity
Other Comprehensive Income, Net of Tax
Equity

EDUCATIONAL GUIDANCE ON THE APPLICATION OF FAIR VALUE

The International Accounting Standards Board (IASB) has published educational guidance on the application of fair value measurement when markets become inactive. The educational guidance takes the form of a summary document prepared by IASB staff and the final report of the expert advisory panel established to consider the issue.

The summary document sets out the context of the expert advisory panel report and highlights important issues associated with measuring the fair value of financial instruments when markets become inactive. It takes into consideration and is consistent with recent documents issued by the US Financial Accounting Standards Board (FASB) on 10 October 2008 and by the Office of the Chief Accountant of the US Securities and Exchange Commission (SEC) and FASB staff on 30 September 2008.

The report of the expert advisory panel is a summary of the seven meetings of experts that are users, preparers and auditors of financial statements, as well as regulators and others. In the report, the panel identifies practices that experts use for measuring the fair value of financial instruments when markets become inactive, and practices for fair value disclosures in such situations. The report provides useful information and educational guidance about the processes used and judgements made when measuring and disclosing fair value.

The IASB has also used the work of the panel to address the issues of disclosure, an area identified by the Financial Stability Forum (FSF) along with fair value measurement and off balance sheet accounting. The feedback from the panel was incorporated in the preparation of the exposure draft proposing improvements to IFRS 7 – Financial Instruments: Disclosures published on 15 October 2008 and will be used in the development of the forthcoming standard on fair value measurement. The IASB expects to publish an exposure draft of that standard in 2009.

Both documents can be downloaded from the IASB website.

AUDITING

IAASB ISSUES SEVEN REVISED ISAS, INCLUDING UPDATED STANDARD ON SCOPE OF AUDIT AND AUDITOR’S ROLE

The International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC), has released seven International Standards on Auditing (ISAs) following the consideration and approval of due process by the Public Interest Oversight Board (PIOB). The ISAs are in the new style following the conventions developed in the IAASB’s project to improve the clarity, and therefore the application of its standards. Some of the standards released have been substantively revised, while others have been redrafted to apply the new conventions. The standards will provide further momentum towards achieving convergence and contribute to enhancing understanding of the purpose and scope of audits, and their effective conduct. The Independent Regulatory Board for Auditors (IRBA) has accordingly issued these revised standards in
South Africa.

The New Standards
The clarified ISAs include ISA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. This fundamental ISA contains an overview of an audit to aid in understanding its purpose and scope; defines the respective authority of the requirements and guidance in ISAs; and contains the most fundamental requirements for auditors. It emphasises the importance of sound and consistent professional judgement by the auditor, and the necessity for sufficient audit evidence to support the auditor’s opinion.
“The issuance of ISA 200 (Revised and Redrafted) is a milestone for the IAASB in that it codifies the principles underpinning the interpretation of standards drafted using the clarity conventions. As the overarching standard to all other ISAs, ISA 200 (Revised and Redrafted) establishes the basic objective and obligations of the auditor, and sets out how the objectives, requirements and guidance in all ISAs are to be understood.”

In addition to ISA 200 (Revised and Redrafted), the IAASB has also released:

1. ISA 320 (Revised and Redrafted), Materiality in Planning and Performing an Audit;
2. ISA 450 (Revised and Redrafted), Evaluation of Misstatements Identified during the Audit;
3. ISA 530 (Redrafted), Audit Sampling;
4. ISA 610 (Redrafted), Using the Work of Internal Auditors;
5. ISA 705 (Revised and Redrafted), Modifications to the Opinion in the Independent Auditor’s Report; and
6. ISA 706 (Revised and Redrafted), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

These ISAs form part of the IAASB’s programme to redraft existing standards following the clarity drafting conventions. To date, the IAASB has released 22 final clarity-redrafted ISAs.

All clarified ISAs will be effective from a single date, for audits of financial statements for periods beginning on or after December 15, 2009.

The ISAs can be downloaded free-of-charge from the IFAC online bookstore at www.ifac.org/store.

PUBLIC SECTOR

PUBLIC SECTOR ACCOUNTING STANDARDS

To keep up-to-date with the development of public sector accounting standards, visit South Africa Accounting Standards Board (ASB) website www.asb.co.za.

ASB continues to develop accounting standards that are applicable to public sector entities in South Africa. ASB calls for participation of stakeholders in providing comment on the exposure drafts of the standards. The issued standards and exposure drafts are available on the ASB website.

The updates and guidance on the implementation of the standards and other applicable accounting frameworks in the public sector can be obtained from The Office of Accountant-General website www.oag.treasury.gov.za.

REGULATED INDUSTRIES

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

No. 19/2008 – Foreign portfolio investments by institutional investors
Sections B.2 (B)(iii)(c) of the Exchange Control Rulings has been amended to incorporate guidelines when processing requests for investment abroad or investing into inward listed securities.
Whilst Authorised Dealers are not required to scrutinise the quarterly asset allocation reports of institutional investors wishing to obtain foreign exposure, Authorised Dealers are obliged to ensure that they are dealing with a legitimate institutional investor.

No. 20/2008 – Authorised Dealers in Foreign Exchange
The attention of Authorised Dealers is drawn to Government Notice No. R.302; in terms of which Albaraka Bank Limited was appointed an Authorised Dealer in foreign exchange with limited authority to operate Bureaux de Change in South Africa with immediate effect.
The name of Albaraka Bank Limited should be added to Section A.2(B) of the Exchange Control Rulings.
Please direct any specific queries regarding the Exchange Control Circulars or Rulings to the FAQs on the SAICA Website.

WITHDRAWAL OF CIRCULAR 6/2004 – GUIDANCE FOR CHARTERED ACCOUNTANTS IN RESPECT OF THE FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT.

Circular 6/2004 – Guidance for Chartered Accountant in respect of the Financial Advisory and Intermediary Services (FAIS) Act has been withdrawn. The new Financial Advisory and Intermediary Services Act Guide has been issued by IRBA and gazetted by the Financial Services Board (FSB) in terms of Board Notice 85 of 2008.

It should be noted that the FSB now requires an ISAE 3000 limited assurance report for Section 19 (3) of the FAIS Act.

Please refer to IRBA’s website for a copy of the limited assurance report, sample engagement letter and management representation letter (www.irba.co.za) and to the FSB’s website for Board Notice 85 of 2008 (www.fsb.co.za).

QUERIES

The email query system has been replaced by a web-based system. Please make use of the Frequently Asked Questions section or the Search facility on the SAICA website to seek resolution to your query. Should your question not be addressed there, please pose your question via the appropriate “Ask a question” facility.

The web-based queries system and database went live on Friday 15 August 2008. Integrated workflow will enable SAICA Standards and other divisions to monitor replies, turnaround time, issues unsatisfactorily resolved (i.e. returned by member) and repetitive issues for broader communication (e.g. FAQs), clarification and possible training interventions.

Regular, random quality checks will be performed by each Project Director and Senior Executive: Standards. Examples of instances where members are not satisfied with responses should be forwarded to these parties directly.

TAX

WHAT’S NEW AT SARS?

SAICA’s National Tax Committee submissions
SAICA made the following submissions to SARS/National Treasury during September/October 2008. (See Table 1).

Table 1

SAICA submission to SARS s24 Instalment credit agreements
12-Sep-08

SAICA submission to SARS on DRLAB 2008: Removal of the basic amount
26-Sep-08

Draft Interpretation Note: Income Tax: Section 11(e) Follow-up submission
30-Sep-08

SAICA Submission on Section 12E of the Income Tax Act
01-Oct-08

Follow-up submission on section 23(m) to National Treasury
01-Oct-08

Section 18(3) of the Administration of Estates Act – R125 000 limit
01-Oct-08

Draft Interpretation Note: Brummeria Judgement
23-Oct-08

SA Tonnage Tax Proposal
31-Oct-08

SAICA submission to SARS on Alternative Dispute Resolution Process
31-Oct-08

SAICA submission to SARS on the Provisional Tax System
31-Oct-08

SAICA submission to SARS on the Tax Clearance Certificates process
31-Oct-08

S12E Small Business Corporations and the use of shelf CCs
06-Nov-08

Copies of these and previous submissions are available on the SAICA website at www.saica.co.za

Dr Beric Croome
Beric Croome, a Tax Executive at Edward Nathan Sonnenburgs Inc, was conferred his Doctorate degree at the University of Cape Town at a graduation ceremony held on 13 June 2008.

Beric is actively involved within the SAICA tax structure. He is presently a member of the Integritax Editorial Panel and previously served as the chairman of the SAICA National Tax Committee (1999 – 2002). Prior to this he had served as a member of the SAICA National Tax Committee (1996 – 1998).

Thesis Title:
Taxpayers’ Rights in South Africa: An analysis and evaluation of the extent to which the powers of the South African Revenue Service comply with the Constitutional rights to property, privacy, administrative justice, access to information and access to courts.

In his thesis, Beric evaluates certain powers conferred on the Commissioner: SARS under the fiscal statutes against five rights available to taxpayers. This analysis establishes whether a taxpayer is likely to succeed in challenging the constitutional validity of the powers available to the Commissioner. Further, he considers the remedies available to taxpayers in South Africa by reviewing current statutory provisions to establish whether the remedies are equitable.

In his research, he reviewed South African texts, articles and cases in the context of constitutional law and tax law. He also drew on his experience of dealing with the Commissioner on behalf of clients that consulted with him on tax matters. The websites of international revenue authorities yielded useful material, as did several other countries’ texts, articles and cases on constitutional and tax law.

He concludes that taxpayers in South Africa do not have a cost-effective remedy in seeking redress from the Commissioner where his officials breach their rights. In addition, taxpayers’ rights are meaningless unless there is an appropriate remedy for breaches of those rights. The relief available from the Service Monitoring Office is currently deficient because the office is not independent of the Commissioner and does not have the legal authority to direct the Commissioner’s officials to rectify matters. Thus, he suggests that the legislature creates a specialised and independent ombudsman’s office to deal with taxpayer’s complaints, drawing on the principles followed in other democratic societies. Further, current legislation requires amendment to allow taxpayers to recover damages and wasted costs from the Commissioner in specific areas.

He also concludes that taxpayers and the Commissioner are not fully aware of the impact of the procedural rights contained in the Constitution, Act 108 of 1996. The Commissioner may achieve this by means of correspondence and other documents. The performance of the Commissioner’s officials should be evaluated by, inter alia, referring to their knowledge of taxpayers’ rights and to their compliance with the levels of service set out in the SARS Service Charter.

SAICA congratulates him on this significant achievement.

All queries: www.saica.co.za
Telephone: 011 621 6641
Telefax: 011 621 6819
Website: http://www.saica.co.za

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