International Briefing: financial reporting

Compiled by David Cairns, a consultant on international financial reporting issues and author of the International Accounting Standards Survey 2000(
IASB: Employee benefits

The International Accounting Standards Board has issued an exposure draft of an amendment to

IAS 19, Employee Benefits, which deals with the interaction between the ceiling test for asset recognition on a defined benefit plan and the optional requirements for the deferral and amortisation of actuarial gains and losses and past service costs.

As currently drafted,

IAS 19 requires the recognition of income when the amount of unrecognised asset has declined and the resulting actuarial loss is deferred and amortised. Such accounting would result when, for example, the reduction in the market value of plan assets reduces any unrecognised surplus in a retirement benefit plan. The ED proposes that such income should not be recognised.

IAS 19 also currently requires an expense to be recognised when the amount of an unrecognised asset increases and the resulting actuarial gain is deferred and amortised. The ED proposes that such an expense should not be recognised.

Copies of Amendment to IAS 19, Employee Benefits: The Asset Ceiling, may be obtained from the IASB (

IFAC: IT monitoring

The International Federation of Accountants has issued an exposure draft, Managing Information Technology Monitoring, which defines the scope of IT monitoring, outlines the core principles that impact on IT monitoring processes and includes an appendix with information on IT monitoring control objectives. The proposed guideline is available from

Australia: Convergence with IAS

The Australian Accounting Standards Board has released The Australian Convergence Handbook, which identifies differences between Australian standards and IAS. It adopts a similar approach to the UK Convergence Handbook in classifying the differences into five broad categories: incompatibilities; Australian GAAP more detailed or restrictive than IASs; IAS more detailed or restrictive than Australian GAAP; Australian GAAP disclosure requirements more extensive than IASs; IAS disclosure requirements more extensive than Australian GAAP.

No comparison has been made when IASs or Australian GAAP contain a standard and the other has no corresponding standard.

The Handbook points out that differences between IAS and Australian GAAP may lead to 'cascading' differences. For example

IAS 21, The Effects of Changes in Foreign Exchange Rates, requires disclosure of exchange differences included in the carrying amount of assets, but Australian GAAP does not require a similar disclosure because it does not permit the IAS 21-allowed alternative treatment.

Incompatibilities are identified for almost all standards, but none was found for the following: presentation of financial statements; cash flow statements; construction contracts; segment reporting; and interim financial reporting.

The Australian Convergence Handbook is available at

Canada Implications of Enron

The Accounting Standards Oversight Council is planning to address issues facing accounting standard-setting in Canada as a result of the Enron failure in the US. It will consider which accounting standards might have been circumvented in the Enron case, and whether Canadian standards might be at similar risk in the future. It will also examine what changes, if any, should be made to the AcSB's priorities and programmes to ensure that any shortcomings or vulnerabilities in Canadian accounting standards highlighted by the Enron failure are addressed on a priority basis.

Business combinations

The CICA's Emerging Issues Committee has issued an Abstract, Definition of a Business, which deals with whether the acquisition of an enterprise's net assets or equity interests constitutes a business and, hence, gives rise to a business combination.

A business is defined as a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. For a transferred set of activities and assets to be a business, it must contain all the inputs and processes necessary for it to continue to conduct normal operations after it is separated from the transferor. This includes the ability to sustain a revenue stream by providing its outputs to customers.

The Abstract applies to all acquisitions of net assets and to all acquisitions of equity interest representing control of an enterprise that are initiated after 18 February 2002. It may also be applied to all business combinations initiated, or with an acquisition date, on or after 1 July 2001. Copies of the Abstract may be obtained from

China: Three new standards

The Ministry of Finance (MoF) has issued three new accounting standards:

  • Interim Financial Reporting (applicable to all listed enterprises).
  • Fixed Assets (applicable to listed enterprises and other joint stock limited enterprises).
  • Inventories (applicable to listed enterprises and other joint stock limited enterprises).

All three are effective from 1 January 2002. As a result, there are now 16 final standards issued (see Accountancy, December 2001, p 100).

Expanded applicability of comprehensive system. Additionally, in December 2001, the MoF announced that effective 1 January 2002, foreign investment enterprises will be required to adopt the new comprehensive Accounting System for Business Enterprises (the System) which, when it was initially released in January 2001, was only applicable to joint stock limited enterprises (listed companies plus some others). The System will replace the existing Accounting System for Foreign Investment Enterprises.

This substantially expands the applicability of the new System from just several thousand companies to several hundred thousand. Among other things, these companies are faced with a new requirement to recognise impairment losses on receivables, inventories, investments, fixed assets, intangibles, and other assets. The System also spells out the form and minimum content of financial reports (see Accountancy, May 2001, p 100, for a description of the System).

Financial institutions. In December 2001, the MoF adopted a new Accounting System for Financial Institutions that will apply to all listed financial institutions (including banks, insurance companies and brokerages) with effect from 1 January 2002. Unlisted financial institutions will continue to follow the old regulations.

Interim reporting. The new interim reporting standard requires complete financial statements in interim reports, as follows:

  • Balance sheet: end of the interim period and end of the prior financial year.
  • Income statement: current period, cumulative for the current year, and comparable periods of the prior year.
  • Cash flow statement: cumulative for the current year and the comparable period of the prior year.

Notes should reflect an update from the latest annual financial report. Recognition and measurement principles should be the same as those used in the annual financial statements. The China Securities Regulatory Commission requires all Chinese listed companies to publish quarterly reports starting in the first quarter of 2002. Quarterly reports must be released just one month after the quarter's end.

Inventories. Under the new standard on inventories, specific identification, FIFO, weighted average, moving average, and LIFO would all be allowed for determining closing inventories and cost of sales. Specific identification must be used for unique items. At the end of the period, inventories must be stated at the lower of cost and net realisable value. These provisions are similar to those in

IAS 2, Inventories, though the IASB has recently reached a tentative decision to propose to ban LIFO.

Fixed assets. The standard on fixed assets is similar to

IAS 16, Property, Plant and Equipment, except that it does not address asset revaluations. The principles in the Chinese standard for recognising and measuring impairment are similar to those in IAS 38, Intangible Assets. It permits major overhaul costs to be deferred and amortised, which is different from IAS 16.

Contributed by Paul Pacter Deloitte Touche Tohmatsu, Hong Kong

US Audit of fraud

The American Institute of Certified Public Accountants has issued an exposure draft of a proposed auditing standard, Consideration of Fraud in a Financial Statement Audit. It describes fraud and its characteristics and requires the auditor to: discuss among members of the audit team the risks of material misstatement due to fraud; identify the risks of material misstatement due to fraud by making inquiries of management and others within the entity; considering the results of the analytical procedures performed in planning the audit; carry out analytical review procedures on revenue; and evaluate the entity's programmes and controls.

The proposed standard also gives guidance on communications about fraud to management, the audit committee and others. It is available from and comments are due by 31 May 2002.

SEC disclosure

The Securities and Exchange Commission intends to propose changes in corporate disclosure rules in order to improve the financial reporting and disclosure system. Specifically, the Commission intends to propose rules that will: accelerate reporting of transactions by company insiders in company securities; accelerate filing of quarterly and annual reports; expand the list of significant events requiring disclosure on Form 8-K - such events could include changes in ratings, obligations that are not currently disclosed, and lock-out periods affecting employee stock-ownership plans; require publication of SEC filings on company websites; and require disclosure of critical accounting policies in management's discussion and analysis of financial condition and results of operations.

Lease accounting

The Financial Accounting Standards Board has issued a revised exposure draft that proposes an amendment to FAS 13, Accounting for Leases, which would eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. It is available at

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