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TECHNICAL: ACCOUNTING: CLASSIFICATION OF RIGHTS ISSUES

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The International Accounting Standards Board (IASB) has issued proposals to amend IAS 32(AC 125) – Financial Instruments: Presentation. The purpose of the amendment is to clarify the classification of instruments that give the holders the right to acquire an entity’s own equity instruments at a fixed price (rights issue) when that price is stated in a currency other than the entity’s functional currency. The proposals further specify that a rights issue that is offered pro-rata to all existing shareholders, where the entity receives a fixed amount of cash for a fixed amount of the entity’s own equity instruments, is classified as an equity instrument, regardless of the currency in which the exercise price is denominated. This exposure draft has been issued in South Africa as ED 269.

The deadline for comment to SAICA was 24 August 2009. A copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee (APC) sub-committee can be found on the SAICA website under submissions.

ED 269 – Classification of Rights Issues: Proposed amendments to IAS 32(AC 125) – Financial Instruments: Presentation can be downloaded from the SAICA website.

EXTINGUISHING FINANCIAL LIABILITIES WITH EQUITY INSTRUMENTS

The International Financial Reporting Interpretations Committee (IFRIC) has issued proposals to assist entities who have, as result of the current economic environment, renegotiated the terms of contracts with their creditors. This exposure draft provides guidance where an entity settles its financial liability by issuing equity instruments to the creditor. This exposure draft has been issued in South Africa as ED 270.

The exposure draft proposes that:

• the entity considers the issue of the equity instruments to be part of the consideration paid to extinguish the financial liability;
• the equity instruments should be measured at either fair value or the fair value of the financial liability extinguished, whichever is more reliably determinable;
• any difference between the carrying amount of the financial liability extinguished and the initial measurement amount of these equity instruments is included in the entity’s profit or loss for the period. The profit or loss is recognised as a separate line item in the statement of comprehensive income and the separate income statement (if one is presented) or in the notes;
• where only part of the financial liability has been extinguished and the terms of the outstanding liability are substantially different from those of the original financial liability, the entity should account for the modification as an extinguishment and a new financial liability is recognised.

The deadline for comment to SAICA was 11 September 2009. A copy of the SAICA comment letter resulting from the deliberations of the APC sub-committee can be found on the SAICA website under submissions.

ED 270 – IFRIC D25 – Extinguishing Financial Liabilities with Equity Instruments can be downloaded from the SAICA website.

DISCOUNT RATE FOR EMPLOYEE BENEFITS

The global financial crisis has brought a significant spread between the yields on corporate bonds and yields on government bonds. As a result, entities with similar employee benefit obligations could be reported at different discount rates. The exposure draft issued by the IASB proposes that entities would be required to estimate the yield on high quality corporate bonds using the guidance in IAS 39 – Financial Instruments: Recognition and Measurement. In order to address this urgent matter, the IASB has issued the exposure draft for a 40-day comment period and the objective is to issue the final amendments for December 2009 financial statements. This exposure draft has been issued in South Africa as ED 271.

In countries where there is no deep market in high quality corporate bonds, entities would estimate the yield on such bonds. As a result of these amendments, entities operating in these countries will no longer report liabilities that are higher than equivalent employee obligations of entities operating in other jurisdictions.

ED 271 – Discount Rate for Employee Benefits: Proposed amendments to IAS 19 – Employee Benefits can be downloaded from the SAICA Website.

ELEVEN IMPROVEMENTS TO IFRSs ISSUED

The IASB has issued eleven improvements to International Financial Reporting Standards (IFRSs) as part of its annual improvements project. This exposure draft has been issued in South Africa as ED 272.
The table opposite lists the IFRSs and the related areas that will be affected by the proposals.

The proposed improvements will be applicable to annual periods beginning on or after 1 January 2010 with the exception of IFRS 3(AC 140), which will be applicable for annual periods beginning on or after 1 July 2010.

The deadline for comment to SAICA was 23 October 2009. A copy of the SAICA comment letter resulting from the deliberations of the APC sub-committee can be found on the SAICA website under submissions.

ED 272 – Improvements to IFRSs: Proposed amendments to International Financial Reporting Standards can be downloaded from the SAICA website.

APB HAS APPROVED TWO AMENDMENTS TO STATEMENTS OF GAAP

The Accounting Practices Board (APB) has approved Additional Exemptions for First-time Adopters – Amendments to IFRS 1(AC 138): First-time Adoption of International Financial Reporting Standards (IFRSs) and Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2(AC 139) – Share-based Payments, as amendments to Statements of Generally Accepted Accounting Practice (GAAP), at its meeting held on 13 August 2009.

Group Cash-settled Share-based Payment Transactions
The amendments issued broaden the scope of IFRS 2(AC 139) to include guidance on how to account for share-based payment transactions within a group (as defined in IAS 27(AC 132) – Consolidated and Separate Financial Statements). The amendments further provide that the amount recognised for goods or services by the entity receiving the goods or services and the entity settling the share-based payment transaction may differ. For an entity receiving the goods or services under a share-based payment transaction, the goods or services can be measured as either equity-settled or cash settled by assessing:

• the nature of the awards granted; and
• its own rights and obligations.

The other group entity settling the share-based payment transaction recognises the transaction as an equity-settled share-based payment transaction only when it settles the transaction in its own equity instruments. Other transactions are recognised as cash-settled share-based payment transactions.

The amendments are effective for annual periods beginning on or after 1 January 2010. Earlier application is permitted.

Technical information on the amendment and the IASB Press Release can be found on the SAICA website.
Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2(AC 139): Share-based Payment can be downloaded from the SAICA on-line handbook.

Additional Exemptions for First-time Adopters
Amendments to IFRS 1(AC 138) address the retrospective application of IFRSs to particular situations ensuring that entities applying IFRSs will not encounter undue cost or effort in the transition process.

The amendments exempt entities from:

• using the full cost method from retrospective application of IFRSs for oil and gas assets; and
• reassessing the classification of lease arrangements in accordance with IFRIC 4(AC 437) – Determining whether an Arrangement contains a Lease, where the previous GAAP had produced the same result.

The amendments are effective for annual periods beginning on or after 1 January 2010. Earlier application is permitted.

The technical information on this amendment and the IASB press release can be found on the SAICA website.

Additional Exemptions for First-time Adopters – Amendments to IFRS 1(AC 138): First-time Adoption of International Financial Reporting Standards (IFRSs) can be downloaded from the SAICA on-line handbook.

As a result of these amendments the following exposure drafts have been removed:

• ED 232 – Amendments to IFRS 2 – Share Based Payment and IFRIC 11 – IFRS 2 – Group and Treasury Share Transactions: Group Cash-settled Share-based payment Transactions.
• ED 246 – Additional Exemptions for First-time Adopters, Proposed amendments to IFRS 1.

REVISED CIRCULAR ON HEADLINE EARNINGS ISSUED

Circular 3/2009 – Headline Earnings
Listed companies are required, in terms of JSE Listing Requirements, to publish a headline earnings figure, which is currently determined in accordance with Circular 8/2007 – Headline Earnings. Circular 8/2007 contains various rules on IFRSs that were issued before June 2007. Circular 3/2009 amended the rules table of Circular 8/2007 to take into account all amendments to IFRSs issued from June 2007 to April 2009, and is effective for interim and/or annual financial periods ending on after 31 August 2009.

Circular 3/2009 – Headline Earnings can be downloaded from the SAICA website.

IFRS
Subject of the amendment

IFRS 1 – First-time Adoption of International Financial Reporting Standards
Accounting policy changes in the year of adoption
Revaluation basis as deemed cost
IFRS 3 – Business Combinations
Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS
Measurement of non-controlling interests
Unreplaced and voluntarily replaced share-based payment awards
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations Application of IFRS 5 to loss of significant influence over an associate or a jointly controlled entity
IFRS 7 – Financial Instruments:
Disclosures Clarifications of disclosures

IAS 1 – Presentation of Financial Statements
Clarification of statement of changes in equity

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Change in terminology to the qualitative characteristics

IAS 27 – Consolidated and Separate Financial Statements
Impairment of investments in associates in the separate financial statements of the investor
Transition requirements for amendments made as a result of IAS 27 (as amended in 2008) to IAS 21, IAS 28 and IAS 31
IAS 28 – Investments in Associates Partial use of fair value for measurement of associates
IAS 34 – Interim Financial Reporting Significant events and transactions
IAS 40 – Investment Property Change from fair value model to cost model
IFRIC 13 – Customer Loyalty
Programmes Fair value of award credit

AUDITING

Q&A ON APPLYING ISAs PROPORTIONATELY WITH THE SIZE AND COMPLEXITY OF AN ENTITY

The staff of the International Auditing and Assurance Standards Board (IAASB) has developed a new question-and-answer publication entitled Applying ISAs Proportionately with the Size and Complexity of an Entity. The publication was developed to assist auditors worldwide in implementing the clarified International Standards on Auditing (ISAs).

While the publication is relevant in the context of any audit, it will be of particular assistance to those who audit, or oversee the audits of, small and medium-sized entities.

The publication highlights how the design of the ISAs issued under the Clarity Project enables them to be applied in a manner proportionate with the size and complexity of an entity.

The publication can be downloaded free of charge from the IAASB Clarity Center at http://web.ifac.org/clarity-center/support-and-guidance.

NEW AUDITING STANDARD ON ENGAGEMENT QUALITY

On 28 July 2009, The Public Company Accounting Oversight Board (PCAOB) voted to adopt Auditing Standard No. 7 – Engagement Quality Review (EQR) as well as to issue a Concept Release on requiring the engagement partner to sign the audit report.

The EQR standard focuses the engagement quality reviewer’s attention on areas that are most likely to contain significant engagement deficiencies and increases the likelihood of identifying and correcting those deficiencies prior to the issuing of the audit report. It also provides a framework for the engagement quality reviewer to evaluate significant judgements made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.

The Sarbanes-Oxley Act of 2002 directs the PCAOB to include in its standards a requirement that each registered public accounting firm provide a concurring or second partner review and approval of the audit report and related information as well as a concurring approval in its issuance by a qualified person – other than the person in charge of the audit.

For more information please visit the standards page of the PCAOB at www.pcaobus.org.

EXCHANGE CONTROL

EXCHANGE CONTROL CIRCULARS

Amendments to the Exchange Control Rulings

The Exchange Control Department of the South African Reserve Bank (EXCON) has issued Exchange Control Circular No. 09/2009 – Amendments to the Exchange Control Rulings.

Following representations made, Authorised Dealers are advised of the following amendments to the Exchange Control Rulings:

Section A.3(E)(ii) – The entire subsection has been deleted and substituted with the following: The arrangement set out in the Rulings should in no manner be construed as absolving Authorised Dealers from their duties and obligations in terms of the Prevention of Organised Crime and the Financial Intelligence and the Protection of Constitutional Democracy against Terrorist and Related Activities Acts.

Section B.14(D) – The entire subsection has been deleted and substituted with the following:

“(D) CHARGES IN CONNECTION WITH LEGAL DISPUTES
Legal fees, court costs as well as upfront deposits for legal work incurred outside the CMA.”

Replacement pages of the amended Exchange Control Rulings, can be requested from SAICA through our query system on www.saica.co.za.

PUBLIC SECTOR

SAICA has made the following submissions to the Accounting Standards Board (ASB) during June/July 2009

Submission name
Comment Deadline
Comment Submission

SAICA submission on the ASB’s ED 59 on the proposed International Public Sector Accounting Standard (IPSAS) on Agriculture – ED 36
15 June 2009
12 June 2009

SAICA submission on the ASB’s ED 60 on the proposed IPSAS on Financial Instruments: Presentation – ED 37
15 July 2009
15 July 2009

SAICA submission on the ASB’s ED 60 on the proposed IPSAS on Financial Instruments: Recognition and Measurement – ED 38
15 July 2009
20 July 2009

SAICA submission on the ASB’s ED 60 on the proposed IPSAS on Financial Instruments: Disclosures – ED 39
15 July 2009
17 July 2009

SAICA submission on the ASB’s ED 61 on the proposed IPSAS on Intangible Assets – ED 40
31 July 2009
31 July 2009

SAICA submission on the ASB’s ED 62 on the proposed IPSAS on Entity Combinations – ED 41
31 July 2009
31 July 2009

TAXATION

SAICA’S NATIONAL TAX COMMITTEE SUBMISSIONS

SAICA made the following submissions to SARS/National Treasury during August 2009.

Submission name
Date submitted
Deadline

SAICA submission to SARS on VAT and the sale of an enterprise as a going concern
4 August 2009
4 August 2009

SAICA submission to SARS on PAYE Reform 2010
10 August 2009
13 August 2009

Copies of these and previous submissions are available on our website on www.saica.co.za.

SAICA influences changes in provisional tax legislation

The provisional tax legislation is due to be amended to include proposals that SAICA made to the Standing Committee on Finance (SCOF) during public hearings held in June 2009.
SAICA, with the support of other professional bodies, had lobbied for the retention of the basic amount (being the taxable income reflected in the most recent assessment received from SARS) when making the second provisional tax payment. Our proposals were outlined in a joint submission dated 10 July 2009.

In the submission, we also proposed the introduction of a two-tier system with different rules for smaller and larger taxpayers. National Treasury and SARS on 5 August 2009 reported back to the SCOF on proposed provisional tax changes contained in the Draft Taxation Laws Amendment Bills 2009. We are pleased to announce that the majority of SAICA’s proposals have been implemented. According to the revised proposals, a two-tier approach is envisaged for second provisional tax estimates:

Tier 1: Smaller taxpayers:
A return to the old ‘basic amount’ safe-harbour system, which includes the 20% penalty for estimating below the lesser of ‘basic amount’ and 90% of actual taxable income. However, the ‘basic’ amount will now include an automatic annual 8% increase.

Tier 2: Larger taxpayers:
The current requirement of 80%-of-actual taxable income will be retained, but the 20% penalty will be made discretionary rather than automatic. This means that SARS will no longer be able to apply an automatic penalty and would have to give due consideration to whether the taxpayer had intended to delay the payment of provisional taxes. This is a welcome relief for corporate taxpayers that would otherwise have to disclose such penalties in their financial statements pending an appeal to SARS.

Differentiation:
Smaller taxpayers will mean taxpayers with a taxable income up to R1million.

According to National Treasury’s response document to Parliament, the R1million threshold will place 90% or more of provisional taxpayers by volume in Tier 1. The change is likely to save taxpayers time in calculating their provisional tax obligations.

The effective date of this legislation is likely to be years of assessment commencing on or after 1 January 2010.

All queries: http://www.saica.co.za/TechnicalInformation/OnlineTechnicalQueries/AskaQuestion/tabid/1250/language/en-ZA/Default.aspx
Telephone: 011 621 6641
Telefax: 011 621 6819
Website: http://www.saica.co.za