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TECHNICAL: AUDITING

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IAASB STAFF ISSUES Q&As TO GUIDE AUDITORS’ EFFECTIVE IMPLEMENTATION OF CLARIFIED ISAs; AND ADDRESSES SME ISSUES

To assist auditors worldwide in implementing the clarified International Standards on Auditing (ISAs), 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 is relevant in the context of any audit, but will be of particular help to those that audit, or oversee the audits of, small- and medium-sized entities (SMEs).

“SMEs are an important sector of national economies and one that is sensitive to significant changes in standards,” emphasises James Gunn, IAASB Technical Director. “This staff publication highlights provisions within the ISAs that guide auditors in applying the requirements to audits of SMEs in an efficient and effective manner.”

The questions and answers explain how the design of ISAs enables them to be applied in a manner that is proportionate to the specific characteristics of the entity subject to audit. Furthermore, answers are given to questions relating to audit procedures, work effort, documentation and professional judgment.

Many of those with responsibility for financial statement audits are progressing their consideration of implementation issues of the clarified ISAs. The publication is available for download free of charge from the IFAC website (http://web.ifac.org/clarity-center/support-and-guidance).

ACCOUNTING

AMENDMENTS TO SHARE-BASED PAYMENT STANDARD

The International Accounting Standards Board (IASB) has issued amendments to IFRS 2(AC 139) – Share-based Payment, to clarify the accounting for group-cash settled share-based payment transactions. The amendments 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). As a result of the amendments, the IASB has withdrawn IFRIC 8(AC 441) – Scope of IFRS 2(AC 139) and IFRIC 11(AC 444) – IFRS 2(AC 139) – Group and Treasury Share Transactions.

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 an equity-settled or a cash-settled payment by assessing:
• the nature of the awards granted; and
• its own rights and obligations.

The other group entity settling the share-based payment transactions 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.

The amendments to IFRS 2(AC 139) have been issued as amendments to Statements of Generally Accepted Accounting Practice (GAAP) as approved by the Accounting Practices Board (APB). Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2(AC 139) can be downloaded from the SAICA on-line handbook.

PROPOSED GUIDANCE ON MANAGEMENT COMMENTARY

The IASB has issued for public comment proposed guidance to help entities prepare and present a narrative report, referred to as management commentary. The management commentary contextualises the financial position, financial performance and cash flows of an entity, and provides users of financial statements with the opportunity to understand management’s objectives and its strategies for achieving those objectives. This exposure draft has been issued in South Africa as ED 264.

The guidance requires that an entity clearly identifies and distinguishes information disclosed as a management commentary in its financial statements. Further, this guidance can only be applied to financial statements that have been prepared in accordance with IFRSs and will be issued as a non-mandatory guidance. The disclosures made should be governed by the qualitative characteristics and enhancing qualitative characteristics of relevance, faithful presentation, comparability, verifiability, timeliness and understandability.

The deadline for comment to SAICA is 1 February 2010. ED 264 -Management Commentary can be downloaded from the SAICA website.

FURTHER SIMPLIFICATIONS TO ACCOUNTING FOR FINANCIAL INSTRUMENTS

Proposals to improve the manner in which financial instruments are currently classified and measured have been published for comment by the IASB. The exposure draft has been issued in South Africa as ED 267.

The IASB’s decision to address classification and measurement of financial instruments was based on the premise that this formed a foundation of a future standard on financial instruments. Further, many of the concerns that were raised during the financial crisis related to the classification and measurement requirements. The IASB plans to finalise the classification and measurement proposals in time for non-mandatory application in 2009 year-end financial statements, hence the proposals are open only for a 60-day comment period.

The exposure draft proposes the following:
• On initial recognition, entities can classify its financial assets or financial liabilities as subsequently measured at either amortised cost or fair value. Subsequent reclassification from amortised cost to fair value and vice versa is prohibited. Moreover, on initial recognition the financial assets or financial liabilities will be measured at fair value plus transaction costs (provided that they are not held
for trading).
• To measure a financial asset or financial liability at amortised cost, the financial asset or financial liability must contain only basic loan features, and the financial instrument must be managed on a contractual yield basis. All other financial instruments that do not meet both criteria are measured at fair value. The proposals also allow an entity to classify and measure financial instruments that meet the two criteria to be carried at fair value, if such a designation would significantly reduce any accounting mismatch.
• In respect of investment in equity instruments not held for trading, an entity can make an irrevocable election at initial recognition to account for changes in fair value in other comprehensive income. If this decision is taken, the related dividends received must also be recognised in other comprehensive income.

Existing IAS 39(AC 133) – Financial Instruments: Recognition and Measurement classifications of ‘held for trading’ and ‘available for sale’ will be eliminated.

The deadline for comment to SAICA was 14 August 2009. The opportunity to submit comment has passed, however, a copy of the SAICA comment letter resulting from the deliberations of the Accounting Practices Committee sub-committee can be found on the SAICA website under submissions.

SUMMARY OF IASB’S RESPONSE TO THE FINANCIAL CRISIS

As part of its response to the financial crisis, the IASB is carrying out a comprehensive review of the financial instruments standards and other related areas. This review is taking place in piecemeal stages and the IASB does encourage constituents to contribute to the process of the review. A free email update service is available on the IASB website to enable interested parties to keep up-to-date with the progress of the projects. Below is a table that sets out changes currently proposed.

The table below outlines the expected publication dates of exposure drafts, discussion papers, final standards on the financial instruments aimed at replacing the current financial instruments standards and the consolidations project, in response to the financial crisis.

NEW ACCOUNTING STANDARD FOR RATE-REGULATED ACTIVITIES IN THE PIPELINE

The IASB has issued proposals on accounting for rate-regulated activities. The exposure draft has been issued in South Africa as ED 268.

The objectives in establishing the proposed standard for rate-regulated activities include:
• to establish criteria for the recognition of assets and liabilities arising from rate regulation;
• to clarify that rate regulated entities follow the requirements of all other IFRSs in addition to the requirements of the proposed standard; and
• to require disclosures that would enable the users of financial statements to understand the nature and the financial effect of rate regulation on an entity’s activities.
The proposed standard will apply to an entity’s operating activities that meet the following two criteria:
• An authorised body is empowered to establish rates that bind customers.
• The price established by regulation is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return.

When the above criteria have been met, the entity should recognise regulatory assets and liabilities in addition to those assets and liabilities recognised under other IFRSs. The impact of this requirement is that initially an asset or liability would be recognised at an amount that would have otherwise been recognised in the statement of comprehensive income.

On initial recognition and at the end of each of the subsequent reporting periods, the regulatory assets and regulatory liabilities are measured at their expected present value.

The deadline for comment to SAICA is 20 October 2009. ED 268 – Rate-regulated Activities, can be downloaded from the SAICA website.

ADDITIONAL EXEMPTIONS FOR FIRST-TIME ADOPTERS OF IFRSs

The IASB has issued amendments to IFRS 1(AC 138) – First-time Adoption of International Financial Reporting Standards, to address the retrospective application of IFRSs to particular situations and to ensure 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 statement had produced the same result.

The amendment to IFRS 1(AC 138): First-time Adoption of International Financial Reporting Standards has been issued as amendments to Statements of Generally Accepted Accounting Practice (GAAP) as approved by the Accounting Practices Board (APB). IFRS 1(AC 138): First-time Adoption of International Financial Reporting Standards can be downloaded from the SAICA on-line Handbook.

Financial
instrument area Document Expected publication date SAICA/IASB Comment deadline date
Fair value measurement guidance Exposure draft Issued May 2009 28 September 2009
Financial Instruments – Classification and measurement Exposure draft Issued July 2009 14 September 2009
Financial Instruments – Impairment Exposure draft October 2009 To be published
Financial Instruments – Hedging Exposure draft December 2009 To be published
Credit Risk in Liability Measurement Discussion paper Issued June 2009 1 September 2009
Derecognition Exposure draft/IFRS First Quarter – 2010 31 July 2009
Consolidation IFRS Fourth Quarter – 2009 Not applicable

INTERNATIONAL

IFAC CALLS FOR G20 TO ADOPT GLOBAL ACCOUNTING, AUDITING, AND INDEPENDENCE STANDARDS AND TO ENHANCE GOVERNMENT TRANSPARENCY

The International Federation of Accountants (IFAC) has called for broad action by the G20 leaders at their September meeting in Pittsburgh, PA to encourage adoption and implementation of global accounting, auditing, and auditor independence standards to improve the ability of capital markets to work globally. In addition, IFAC has called for the worldwide adoption and implementation of International Public Sector Accounting Standards as a means greatly to improve government transparency and accountability in light of the “unprecedented takeovers, lending, guarantees, and bailouts of major market institutions, banks, and companies”. It is also urging that further steps be taken to enhance the governance of the International Accounting Standards Board in order to ensure its legitimacy and its ability to act independently, and without inappropriate political interference, in its standard-setting role.

IFAC’s letter to the G20 also includes recommendations on enhancing corporate governance, supporting the long-term strengthening of the accountancy profession in developing countries, recognising the unique needs of small- and medium-sized enterprises, and developing new tools and metrics to achieve global sustainability. The submission also asks the G20 to facilitate debate to resolve issues between financial reporting – designed to communicate business performance to investors – and prudential reporting – used to monitor and maintain financial stability. The letter with the full list of recommendations is posted on the IFAC website (http://www.ifac.org/financial-crisis/).

The recommendations reflect the views of the 60 leaders of accountancy organisations that attended the IFAC G20 Accountancy Summit, which took place July 23-24 in London, UK. They build on IFAC’s previous submission to the G20, which was issued prior to its April 2009 meeting.