20091118 - Accounting & Business Direct

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ACCOUNTING ANDBUSINESS DIRECT

ACCA'S BULLETINFOR FINANCEPROFESSIONALS

18 November 2009

IN THIS ISSUE

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NEWS

Obama creates task force to fight financial crime Reuters

EU delays adoption of accounting rule changes FT.com

Warren Buffett: the financial panic is over Reuters

HMRC launches new Charter HMRC

Pensions reform is a 'burden' FT.com

Thin Cap GLO rule goes against HMRC Accountancy

Divided and overruled? The Economist

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http://www.accaglobal.com/economy

One third of global businesses actively seeking M&A targets in next 12 months Ernst & Young

Rise in auditor reports of irregularities Business Day (South Africa)

Asda loses 18-month flapjack VAT dispute with the taxman Accountancy Age

FRC urges caution on KPMG audit mix Accountancy Age

Deloitte hits back after Woolworths' former board blames firm for failing CityAM

TECHNICAL

IASB completes first phase of financial instruments accounting reform IASB

AcSB on track for adding IFRS to handbook CA Magazine

National Insurance and PAYE Service (NPS) - tax agents and advisers’ issues HMRC

Corporation Tax Online - prepare your software HMRC

ASB proposes Amendment to FRS 25 - Classification of Rights Issues FRC

FRC highlights current challenges for audit committees and users of actuarialinformation FRC

Progress Report on FRC review of matters raised in Inspectors' Report onPhoenix Venture Holdings/MG Rover

FRC responds to Treasury Select Committee Report on Banking Crisis FRC

Corporate insolvency market faces fair trade probe Accountancy Age

CPD

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Accounting and Business CPD: Companies Act 2006

Accounting and Business CPD: Revenue recognition

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Direct Debit: the most efficient way to pay your annual subscription

ACCA roundtable considers climate change agenda

ACCA speaks up on the lack of public trust in private and public sectors

Excellence in enterprise support ACCA/SFEDI CONSULTATION EVENT, 30 November, LondonInfluence future standards and recognition for professional development

Centernet Supervisory Board appoints ACCA member as president Telecom.paper

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UPDATE 3-Obama creates task force to fightfinancial crime | Reuters* Mortgage fraud, Wall Street crimes targeted

* Attorney general to chair task force

* Task force replaces Bush-era one set up in 2002 (Adds details from news conference, reaction)

By James Vicini and Jeremy Pelofsky

WASHINGTON, Nov 17 (Reuters) - The Obama administration created a new task force on Tuesday tocrack down on financial fraud, an increasingly important political issue after a spike in mortgage scams and bigWall Street trading scandals.

President Barack Obama signed an executive order directing the task force, led by the Justice Department, toinvestigate and prosecute financial crimes connected to the past year's financial crisis and to try to deter futurefraud.

The stakes are high for the administration, particularly with a weak economy, anger about huge Wall Streetbonuses and outrage that securities regulators missed one of the biggest frauds in U.S. history involvingBernard Madoff, who bilked investors of as much as $65 billion in a decades-long scheme.

"We will be relentless in our investigation of corporate and financial wrongdoing and we will not hesitate tobring charges, where appropriate, for criminal misconduct on the part of businesses and business executives,"U.S. Attorney General Eric Holder told a news conference.

The administration has long pledged to be more aggressive in fighting financial crime, but has faced a fewsetbacks like Madoff and losing a high-profile case against two hedge fund managers accused of fraud in theearly days of the crisis.

The task force replaced a similar one established by the Bush administration in 2002 after corporate scandalslike the collapse of Enron Corp, the giant energy trader.

Asked how this one would be different, Holder said the "breadth" of the task force, with a wide range offederal government agencies coordinating action among themselves and with state and local law enforcementauthorities.

The task force also includes the Treasury and Housing and Urban Development departments and theSecurities and Exchange Commission, among other government agencies. It will hold its first meeting in thenext 30 days.

TIME TO PUT PIECES TOGETHER

Asked why the administration which took office in January had not created the task force earlier as thefinancial crisis has ebbed, Holder said, "It took a great deal of time to put all the pieces together."

Robert Mintz, a former U.S. prosecutor who now does white-collar criminal defense work, said, "The

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formation of this new task force is likely more than mere symbolism, but it may take some time before we seeany tangible results."

"While this is clearly a reaction to the public's continued frustration with Wall Street, in the past we have seena real impact from these types of task forces when they are targeted at specific types of crime," he said. Continued...

Follow us on Twitter »Readability version 0.4

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Warren Buffett: The financial panic is over |U.S. | ReutersBy Jonathan Stempel and Clare Baldwin

NEW YORK (Reuters) - Warren Buffett, perhaps the world's most admired investor, said on Thursday thefinancial panic that gripped the globe last year is a thing of the past, even as the U.S. economy's strugglespersist.

"The financial panic is behind us," the world's second-richest person said at Columbia University's businessschool. "Our economy was sputtering, still is sputtering some."

Buffett, 79, nevertheless said there is greater opportunity for investments inside the United States than outside,noting that the U.S. economy is far larger than any other.

He appeared at Columbia with Microsoft Corp founder Bill Gates, the world's richest person and a Buffettfriend and bridge partner.

Last month, preliminary government data showed the U.S. economy expanded in the third quarter, the firstthree-month period of growth since the second quarter of 2008.

Nonetheless, the U.S. unemployment rate last month reached 10.2 percent, the first double-digit reading in 26years.

Buffett last week made a big bet on the U.S. economy when his Berkshire Hathaway Inc agreed to pay about$26.4 billion for the 77 percent of railroad company Burlington Northern Santa Fe Corp that it did notalready own.

"There will be more people in this country, 10, 20, 30 years from now," Buffett said. "They'll be moving moreand more goods back and forth to each other and the most environmentally friendly and cost-efficient way ofdoing that is railroads."

Buffett said rail transport uses one-third less fuel and pollutes the air less than trucks, and that one train cansupplant about 280 trucks.

Gates, who is also a Berkshire director, said other sectors might also boost the economy over the long term,including information technology, energy and medicine.

Separately, Buffett advised the U.S. government not to coddle companies that need bailouts to survive orpreserve capital.

"More sticks are called for," he said.

Buffett gave Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner "highmarks" for how they managed the financial crisis.

The billionaire has praised Bernanke in the past, while mocking Geithner's stress tests for banks.

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CNBC television was a host for the Columbia event.

(Reporting by Clare Baldwin and Jonathan Stempel; Editing by Tim Dobbyn and Bernard Orr)


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News : NDSUnder the Charter, HMRC gives a commitment to: respect you; help and support you to get things right; treatyou as honest; treat you even-handedly; be professional and act with integrity; tackle people who deliberatelybreak the rules and challenge those who bend the rules; protect your information and respect your privacy;accept that someone else can represent you; and do all it can to keep the cost of dealing with HMRC as lowas possible.

In return, HMRC expects you to be honest, respect its staff, and take care to get things right.

The Charter also provides pointers to further information on your rights, where you can get help and support,and HMRC’s role.

Welcoming the Charter, Financial Secretary to the Treasury Stephen Timms said:

“The Government is committed to making the tax system as useable and accessible as possible, forindividuals, businesses and all the other organisations who interact with HMRC. The new Charter will go along way to helping achieve that goal.”

In a podcast launched today to help publicise the Charter, HMRC Permanent Secretary for Tax DaveHartnett says:

“The Charter’s key aim is to improve the relationship between HMRC and our customers, and we obviouslyhave a crucial role in making that possible. But we can’t do it all on our own. Both parties have a part to play,and that’s why the Charter sets out people’s rights and their responsibilities.”


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Accountancy MagazineHM Revenue & Customs is unlikely to be happy with the judgment delivered by Mr Justice Henderson in whathas been dubbed the class action Thin Cap GLO case.

The case concerned five multinationals that had lent money to their UK subsidiaries, which HMRC deemed to beexcessive.

In his judgment today, one of the longest in a tax case in the High Court, he held that UK law should not applywhere lending was for overriding commercial reasons, and that it should be for HMRC to demonstrate that thelending was not commercial. In this case he held that Lafarge, Volvo and Siemens succeeded in principle in theirclaims.

The European Court of Justice had previously decided that the UK’s law prior to the Finance Act 2004, whichrestricted interest deduction where these exceeded arms-length amounts, went further than needed to protect theUK tax base. As a result, the case was remitted to the UK for the national court to consider the UK provisionsin detail.

Bill Dodwell, head of tax policy at Deloitte, said: ‘HMRC will not be happy with this result. The judge has heldthat there were commercial reasons for lending in all cases, even though several companies had previously agreedto disallow part of their interest claims. Inevitably the case will go to the Court of Appeal and possibly theSupreme Court.’


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FT.com / Entrepreneurship - Pensions reform isa ‘burden’By Jonathan Moules

Published: November 13 2009 18:01 | Last updated: November 13 2009 18:01

Small businesses will be saddled with extra costs and red tape because of new workplace pension rules, theUK’s main accountancy body has warned.

Major pension reforms are due to be introduced in 2012, under the Pensions Act 2008. The Department ofWork and Pensions this month completed its third consultation on the changes.

The Association of Chartered Certified Accountants (Acca) is concerned that small businesses in particular willface substantial extra burdens from the proposals.

John Davies, head of business law at Acca, said there was a danger that employers would downgrade the qualityof pension schemes because the proposals would allow them to change their practices to the minimum allowedby the law.

The government estimates that 5m-9m people will join or save more in workplace pension schemes as a result ofthe reforms.

Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articlesfrom FT.com and redistribute by email or post to the web.


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FT.com / Companies / Banks - EU delaysadoption of accounting rule changesBrussels has delayed the introduction in the European Union of a radical overhaul of accounting rules for banksand insurers which on Thursday came into force across most of the rest of the world outside the US.

The move follows a deep split between European financial institutions over the new rules on the way they valueassets in their accounts.

Analysts say some French, German and Italian banks with large investment banking activities would be hitdisproportionately by the changes, forcing them to book losses on large holdings of derivatives.

But the decision by the European Commission to delay the changes within Europe has angered other banks in theregion who fear they will be put at a disadvantage to international peers.

The International Accounting Standards Board earlier published its overhaul of rules on “fair value” accounting,where assets are marked to market prices. Supporters say this makes accounts more transparent, but criticsbelieve it exacerbated the financial crisis by forcing banks to take losses on assets when markets fell.

IASB said it had fast-tracked the changes in response to calls by the Group of 20 nations to introduce them bythe end of the year. However, the European Commission said it would not adopt the changes until it had carriedout an in-depth analysis. It would consider adoption in the new year. The decision means that European banksand insurers will not be able to use the new rules for their 2009 accounts while companies in more than 80countries outside the EU will be able to do so.

The postponement comes at a time when the commission itself is in caretaker mode. Diplomats in Brussels sayFrance is interested in the internal market commissioner’s job in the next commission, which is set to startoperating early next year.

Charlie McCreevy, current commissioner for the internal market, has been overseeing talks over the rulechanges.

Douglas Flint, HSBC’s chief financial officer, had told the commission a delay could place European companies“at a competitive disadvantage”. In a letter to Mr McCreevy dated November 10, he said the changes wererequired to address an urgent need to improve the accounting of financial instruments in response to the financialcrisis.

Accountants said the reforms would provide greater clarity in determining which bank assets must be marked tomarket and which can be valued according to so-called amortised cost accounting, which smooths out marketvolatility.

The IASB proposed that if an asset earned predictable cash flow such as a loan, then it could be valued byamortised cost accounting. If it delivered an unpredictable return, such as a share portfolio or derivative, then ithad to be marked to market. However, commission officials believe the overhaul did not limit the use of fair value

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accounting enough. A decision by the German financial industry to back postponement of the standard until nextyear was decisive in the Brussels decision, people familiar with the situation said.


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BODY:

Accountants grapple with the fallout over "marking to market"

ACCOUNTING has become political. Fair-value rules, which require assets to be marked to market prices, areblamed by some for exaggerating banks' losses. Although it will take years to establish whether banks' accountshave painted too bleak a picture, the rows are already in full swing. Confidence in "efficient" market prices hasbeen hammered, as has the principle that accounts are designed mainly for investors. The public has a big interestin banks' books now, too. "There are competing paradigms about what financial statements are for," says JohnHepp of Grant Thornton, an accountancy firm.

The International Accounting Standards Board (IASB), which sets rules for most countries apart from America,has made tactical concessions to avoid the nightmare scenario of banks and politicians writing the rulesthemselves. On November 12th it issued new rules for financial assets that will be optional from this year andmandatory from 2013.

Loans, or securities similar to loans, will be held at the price banks paid for them, provided the bit of the firm thatowns them is not engaged in trading. Everything else will be held at fair value. Most observers, including theIASB, reckon this will cut the proportion of assets held at fair value, which is about 50% for big European firms.Critically, for those who believe most firms try to warm up, if not fully cook, their books, the notes to theaccounts will disclose all assets at fair value.

The IASB also proposes a rejig of how bad debts are recognised. Instead of booking losses as things go sour,they will be spread over the life of a loan, although the draft rules do not go as far as Spain's system of "genericprovisions" which leads to more reserves being built up in good times than in bad, smoothing profits even more.The IASB also wants to end the practice of banks marking the price of their own debt to market, though detailsare not agreed.

The IASB has made big concessions. Yet it is the European Commission which decides if the European Unionadopts the standard-setter's new rules. The G20 has called for independent, global standards, that "reaffirm?theframework of fair value", but a few countries, notably France, are hostile. In a letter to Sir David Tweedie, theIASB's chairman, the commission said the rules "may not yet have struck the right balance". The IASB willprobably plough on and hope the commission backs down.

The IASB's position has been weakened by differences with the Financial Accounting Standards Board(FASB), which sets rules in America and which wants to merge eventually with the IASB (although a recentsurvey found only 24% of American finance executives supported this goal). The FASB has yet to produceproposals on financial assets and is more wedded to a fair-value regime. It also faces a proposal in Congress thatcould allow America's new systemic-risk regulator to suspend the rules. Strength comes from unity—without it,accounting risks becoming just another tool for governments to attempt to manage the economic cycle.


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http://www6.lexisnexis.com/publisher/En

One third of global businesses actively seekingM&A targets in next 12 months - Ernst & Young- United KingdomMajority believe tough financing challenges will remain for at least three years

LONDON, 12 NOVEMBER 2009 – There is a growing sense of anticipation about the global M&Aenvironment with 33% of businesses likely or highly likely to acquire other companies in the next 12 months,according to a new study of almost 500 senior executives around the world by Ernst & Young’s TransactionAdvisory Services. In fact, 25% expect to do so in the next six months.

The study, entitled Why capital matters – building competitive advantage in uncertain times, is underpinned by thefirst in a regular series of surveys called the Capital confidence barometer, which was conducted in October. Thesurvey finds that despite recognizing the opportunity for transactions, 62% of businesses feel their ability to act isrestricted by various factors, including the lack of available financing.

Jon Hughes, UK&I Managing Partner of Ernst & Young’s Transaction Advisory Services group, says: “In thecoming months, there is likely to be an increase in M&A activity as companies dispose non-core,underperforming or distressed assets. Those in a position to buy will have the opportunity to capture marketshare and grow revenues in ways that were impossible two years ago.

“Buying will not be an option for all. Capital is no longer cheap nor is it readily available. The tough new realitieswill force some executives to seriously consider a strategic review. Many companies have responded to therecession with short-term measures around cash and costs. Sensible though these were, they are largelytemporary, buying breathing space. To thrive, companies need to be resilient and they also need to adaptquickly. That means being able to compete strongly for new funding options in a time of scarce capital,strengthening their core operations and having the ability to make opportunistic decisions.”

The survey found strengthening core operations is the primary transaction driver, with 64% consideringacquisitions for this reason and 50% of executives are looking to acquire to enter new geographic markets —nearly half list the US as the most attractive developed market destination, while emerging markets weredominated by India (30%) and China (27%).

Sixty-three per cent of respondents are expecting to see acceleration of industry consolidation in the next 12months, while 61% expect the downturn to reveal the emergence of a few industry winners best able to exploitacquisition opportunities.

Adapting to uncertaintyWhile M&A confidence is up, a strong note of caution is also reflected in the survey with 70% of companiesexpecting the downturn in the broader economy to persist beyond the next 12 months. Of those, 40% believe itwill continue for more than two years.

Furthermore, 53% of respondents believe that financing conditions will not return to mid-2007 levels for at least

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another three years with 19% believing it will be over five years or it may never return to this level.

Dougald Middleton, partner and Head of Capital & Debt Advisory at Ernst & Young comments: “In 2010finance will continue to be very difficult to secure. New options will need to be explored – from joint ventures toIPOs. In this complex and uncertain environment a strong capital agenda will be central to boardroom planningand strategy. Boards need new capabilities around performance reporting, forecasting and strategic decisionmodeling around capital that will, over time, become normal business practice. Leading businesses recognize thatamid the new risks there is also opportunity – resilience must be enhanced alongside the ability to respondquickly as the market changes.”

Driving the capital agendaWhile valuation uncertainty, insufficient financing, investor caution and board scrutiny are cited as currentobstacles to doing deals, raising capital is recognized as a critical factor, with 46% prepared to consideralternative deal structures that depend less on debt.

Middleton adds: “We are already seeing leading boards drive a more focused, disciplined and rigorousmanagement of their capital. Different options will suit different needs — whether it’s operational restructuring,divesting or acquiring opportunistically, but doing nothing and trying to ride out the storm is not a strategy forsuccess.”

Survival of the quickestIn an environment where further distress will drive short notice accelerated timetables – readiness to act is criticalfor success. Forty-five per cent of executives expect an increase in distressed assets coming to market yet twothirds are not confident in their ability to act quickly. Only 36% say they are ready to act quickly should the rightopportunity present itself.

“Boards will now need to juggle new demands in this environment. They will have to maintain investorconfidence, win the competition for scarce capital, adapt to changing market conditions and exploit opportunitiesfor growth. The winners will avoid the temptation of inertia and have the confidence to use their capital at a timewhen rapid decision-making could make the crucial difference between success and failure elsewhere,” saysHughes.

“The market will divide into those who quickly adapt and thrive and those who play by the old rules for thesevery new market conditions. A nimble response is needed, no matter the size of the organization – much like timeand tide, market share waits for no-one.”


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BODY:

Rise in auditor reports of irregularities

SANCHIA TEMKIN

Professional Services Editor

THE Independent Regulatory Board for Auditors (Irba) has received 857 reports of alleged irregularities andcontraventions of accounting regulations by South African companies since April 1, with four months still to goin this financial year.

This is fast approaching the number notified in the previous financial year of April last year to March this year.

Bernard Agulhas, CEO of Irba, said yesterday: "We believe the rise in reportable irregularities is indicative of thefact that auditors have become increasingly aware of the consequences of not reporting, but could also be theresult of an increase in white-collar crime."

Agulhas said this was good news as far as reporting was concerned, because reportable irregularities were partof larger initiatives to eradicate commercial crime. "Hopefully it's bad news for white-collar criminals," he said.

Auditors who fail to report an irregularity run the risk of a 10-year jail sentence.

Unlike in the past, firing the auditor to make the problem go away is not an option, and directors must respond toauditors' information properly.

Agulhas said: "One of our recurring queries from auditors is whether or not they may notify clients if they find areportable irregularity."

He said the guidance issued by Irba was clear. Firstly, the auditor needed to consider whether it was a potentialreportable irregularity. If so, they had to discuss it with the client's management before sending a report to Irba.

The auditor then has 30 days in which to confirm to Irba whether it was, in fact, a reportable irregularity.

If not, Agulhas said, Irba closed the file. However, if it did turn out to be an irregularity, the matter was reportedto the relevant regulator.

"It would be useful if the other regulators provided regular feedback to Irba on the actions they had taken whenwe report a reportable irregularity to them," he said, "and Irba continues to encourage regulators to monitor andreport progress with any investigations they may institute as a result of reportable irregularities reported to them."

Irba issued a guide to assist auditors to get more clarity on important matters such as who has the responsibilityto report, when an irregularity is reportable, the process to be followed, interpretations of what constitutesmanagement, and the effect on the audit report.

[email protected]



mailto:[email protected]


Asda loses 18-month flapjack VAT dispute withthe taxman - Accountancy AgeThe issue of whether products can be zero-rated for VAT purposes has always been fought tooth and nail bybusinesses and the taxman. There have been battles over smoothies, teacakes (M&S’ victory was worth £3.5m)Jaffa Cakes and now flapjacks have hit the courts.

Gill called for a level playing field to be established: “It’s difficult to see in some of the other products [that havegained VAT exemptions] how it is so different, but the judges were very fair nonetheless.”

The flapjacks case arose after former professional wrestler turned entrepreneur Chris Thompson developedCrohn’s disease, which saw him suffer rapid weight loss.He devised the idea of high energy seed-stacked flapjacks and made a successful pitch to business tycoon PeterJones in an Asda “Dragons’ Den”-style competition. This led to the flapjacks hitting the shelves of thesupermarket giant but the taxman took issue with the product’s exemption from VAT, HMRC claiming it was“confectionary” not a “cake”.

Asda argued the product was to be a “Seed Stacked flapjack”, a traditional “oat flapjack but with added seedsfor health and digestive benefits”.

HMRC argued that “the difference between flapjacks and cereal bars has narrowed due to the development ofcereal bars and their current proliferation on the market.”Tax judges ruled the flapjack was a cereal bar, which led to the standard rating, but CioT’s policy chief alsocalled for the kinks in law to be ironed out.

“36 years after the introduction of something that was supposed to simplify tax we’re still talking about thedifference between a cake and a biscuit,” Whiting added.

IN OUR VIEW

In the wider scheme of things, the decision shows businesses and entrepreneurs face a climate ofuncertainty because the rulings are arbitrary as every product has its own unique list of ingredients,which may or may not match the criteria needed to win an exemption.


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FRC urges caution on KPMG audit mix -Accountancy AgeLast week the FRC urged companies to use caution when considering the arrangement while it investigateswhether they are in line with ethical standards. A statement said: “Paul Boyle, chief executive of the FRC, saidcompanies should be ‘cautious’ not least because it could prove to be inconvenient and/or costly to change sucharrangements should [the FRC change] the Ethical Standards”.

The news came in a week when Kevin Chidwick, FD of FTSE 100 car insurer Admiral Group, toldAccountancy Age he would consider using the service. In the past KPMG itself said it was receiving interest inthe package.

Debate began on the issue in July when Rentokil, announced a switch from long-term auditorPricewaterhouseCoopers to KPMG, which promised to significantly reduce audit costs by extending the externalaudit work to areas commonly performed by internal auditors. The arrangement raised eyebrows among the BigFour, with some concerned it could be skirting ethical guidelines.

Audit standards warn against two threats when an external auditor undertakes internal audit work. The first,known as the self-review threat, warns against an auditor reviewing its own work. The second, known as themanagement threat, warns against internal auditors, performing a management role.


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Deloitte hits back after Woolworths’ formerboard blames firm for failing - City AMMonday, 16th November 2009RETAILCity accountancy firm Deloitte yesterday hit back at claims from Woolworths’ former directors holding itresponsible for the high street retailer’s demise.

Woolworths’ former chairman Richard North, and former chief executive Steve Johnson complained thatDeloitte’s dual role as both adviser to Woolworths and administrator to the business when it collapsed lastNovember constitutes a potential conflict of interest.

North and Jones have argued that Deloitte decided not to back an emergency rescue plan by Woolworths’management team, which would have saved the majority of the business, due to its interest in the higher fees itwould pocket as administrator.

Deloitte has made £3.8m in fees after the 99-year-old pick ‘n’ mix chain collapsed in what became the mosthigh-profile retail casualty of the downturn.

Close to 30,000 jobs were lost, and 800 stores shut – 70 per cent of which remain empty one year on.

But Deloitte has rejected any claim that any of its decisions were based on its fees.

It said: “Woolworths failed because it was losing money and had no cash. It was the directors themselves, notthe banks, who appointed Deloitte as administrators, based on the realisation that the company had run out ofmoney and could not continue trading on a solvent basis.

Deloitte added: “We are never driven by the fees available but simply by the pure economics of the options forthe creditors.”


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IASB completes first phase of financialinstruments accounting reform

The new standard enhances the ability of investors and other users of financial information to understand theaccounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20)and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset ismeasured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 isbased on how an entity manages its financial instruments (its business model) and the contractual cash flowcharacteristics of the financial assets. The new standard also requires a single impairment method to be used,replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makesfinancial statements easier to understand for investors and other users.

The IASB has received broad support for its approach. This became evident during the unprecedented globalscale of consultation and outreach activity it undertook in order to refine proposals contained within the exposuredraft published in July 2009. Round table discussions were held in Asia, Europe and the United States.Interactive webcasts, each attracting thousands of registered participants, have been held, often on a weeklybasis. In addition, more than a hundred meetings have been held with interested parties around the world duringthe past four months.

The views expressed to the IASB during its consultations resulted in the proposals being modified to addressconcerns raised and to improve the standard. For example, IFRS 9 requires the business model of an entity to beassessed first to avoid the need to consider the contractual cash flow characteristics of every individual asset. Itrequires reclassification of assets if the business model of an entity changes. The IASB changed the accountingthat was proposed for structured credit-linked investments and for purchases of distressed debt. The IASB alsoaddressed concerns expressed about the problems created by the mismatch in timings between the mandatoryeffective date of IFRS 9 and the likely effective date of a new standard on insurance contracts.

Furthermore, in response to suggestions made by some respondents, the IASB decided not to finaliserequirements for financial liabilities in IFRS 9. The IASB has begun the process of giving further consideration tothe classification and measurement of financial liabilities and it expects to issue final requirements during 2010.

A feedback statement providing comprehensive details of how the IASB has responded to comments receivedthrough the consultation process is available for download by clicking here.

The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Consistent withrequests by the G20 leaders and others, early adoption is permitted for 2009 year-end financial statements.

Commenting on IFRS 9, Sir David Tweedie, Chairman of the IASB, said:

We have delivered on our commitment to the G20 and stakeholders internationally to provide animproved financial instrument standard for the classification and measurement of financial assets foruse in 2009. Benefiting from unprecedented levels of consultation with stakeholders around theworld, the IASB has made significant changes in its initial proposals to improve the standard,

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provide enhanced transparency and respond to stakeholder concerns.

IFRS 9 Financial Instruments is available for eIFRS subscribers from today. Printed copies will be availableshortly, at £15 plus shipping, from the IASC Foundation Publications Department. Those wishing to subscribe toeIFRSs should visit the IASB online shop or contact:

IASC Foundation Publications Department, 30 Cannon Street, London EC4M 6XH, United Kingdom. Tel: +44 (0)20 7332 2730 Fax +44 (0)20 7332 2749 Email: [email protected] Web: www.iasb.org

Press enquiries

For press enquiries, please contact:

Mark Byatt, Director of Corporate Communications, IASB Telephone: +44 (0)20 7246 6472Email: [email protected] Horn, Communications Adviser, IASB, Telephone: +44 (0)20 7246 6463Email: [email protected]

Technical enquiries

For technical enquiries, please contact:

Gavin Francis, Director of Capital Markets, IASBTelephone: +44 (0)20 7246 6901Email: [email protected] Lloyd, Senior Technical Consultant, IASBTelephone: +44 (0)20 7246 6454Email: [email protected] Figgie, Senior Project Manager, IASBTelephone: +44 (0)20 7246 6925Email: [email protected]


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ABSTRACT

Beginning in 2011, International Financial Reporting Standards (IFRS) will replace the standards currently in theCICA Handbook -- Accounting, as Canadian GAAP for publicly accountable enterprises (PAE). While PAEsare busy preparing for this change, the Accounting Standards Board has been taking the necessary steps toensure that IFRS is available for use in Canada when needed. Once the IFRSs now in force have been added tothe Handbook, they will require updating to reflect changes made by the International Accounting StandardsBoard.

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Beginning in 2011, international financial reporting standards (IFRS) will replace the standards currently in theCICA Handbook - Accounting, as Canadian GAAP for publicly accountable enterprises. While PAEs are busypreparing for this change, the Accounting Standards Board (AcSB) has been taking the necessary steps toensure that IFRS is available for use in Canada when needed.

Because of the many references in Canadian legislation to Canadian GAAP and the Handbook, the AcSBcannot simply tell Canadians to report in accordance with IFRS. Instead, the board must incorporate IFRS intothe Handbook. First, it must expose IFRS for public comment in Canada, as is normal due process for proposedHandbook changes.

The AcSB began the process of exposing IFRS in spring 2008. Rather than expose the standards individually, itgrouped them in a series of omnibus IFRS exposure drafts. The first two exposure drafts were issued in April2008 and March 2009. Each exposed the IFRSs included in the most recent bound volume of IFRSs from theInternational Accounting Standards Board (IASB), and asked if there is any reason why a particular standardwould not work in Canada. It addressed other issues, including the definition of a PAE, and presented a draft ofnew introductory material for the Handbook once it contains IFRS. Based on the comments received, the AcSBcontinues with its plans to incorporate IFRS into the Handbookby the end of 2009. The third and final omnibusexposure draft, Adopting IFRSs in Canada, III, was issued early this fall. Comments are requested byNovember 15, 2009.

Once the IFRSs now in force have been added to the Handbook, they will require updating to reflect changesmade by the I ASB. This will be done on a real-time basis by exposing the IASB's proposals individually as theyare published. The AcSB has already issued separate exposure drafts of some recent IASB proposals becauseof the nature or importance of their subject matter.

Keep informed by subscribing to website updates or by viewing Exposure Drafts at www.acsbcanada.org.




http://www.acsbcanada.org


HM Revenue & Customs: National Insuranceand PAYE Service (NPS) - tax agents andadvisers’ issuesHM Revenue & Customs (HMRC) is committed to delivering an improved service to its Pay As You Earn(PAYE) customers who rely on them to ensure that they’re paying the right amount of tax and NationalInsurance, at the right time.

A new system for processing PAYE, the National Insurance and PAYE Service (NPS), which has one singlerecord for each individual customer containing all their PAYE details, is helping make this happen. As a result, inthe majority of cases, a customer’s question can be answered at the first point of contact with HMRC. Thismeans that most customers will only have to make one phone call to HMRC to have all of their tax and NationalInsurance issues resolved, saving them time and expense.

The new system is being introduced in three phases. The first upgrade in June 2009 was successfully delivered onschedule. This was the biggest change to PAYE processing in 25 years and further upgrades in November 2009and April 2010 will build on the changes that have already been implemented.

NPS is working well. HMRC is, however, aware of some specific issues that might affect tax agents and advisersfollowing its introduction. They want to let you know what action they’re taking, or what you need to do to putthings right.

System issues that may affect tax agents and advisers


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HM Revenue & Customs: Corporation TaxOnline - prepare your softwareFrom 1 April 2011, for any accounting period ending after 31 March 2010, all Company Tax Returns must befiled online with accompanying accounts and computations in Inline eXtensible Business Reporting Language(iXBRL) format.

In preparation for this, HM Revenue & Customs (HMRC) is updating their Corporation Tax Online service on23 November 2009. Although the main features of the online service will remain the same, many existing filingsoftware products that enable you to file your Company Tax Return online will no longer be accepted by HMRCsystems from this date. To file online on or after 23 November 2009, you need to make sure that your softwareincorporates the latest upgrade; otherwise it might not work properly. You should check with your softwaresupplier if you haven’t already done so.

The current HMRC Corporation Tax online return form will also be withdrawn and replaced with updatedsoftware on 23 November 2009. If you plan to use the online return before then, HMRC recommend you do soby 18 November 2009.

If you have any data saved on the current HMRC online return you must make sure that you save it onto yourown computer before 19 November 2009. You won’t be able to access your data through the HMRCCorporation Tax online filing service after that date.

More about Corporation Tax Online and online filing requirements


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Accounting Standards Board - Press NoticesThe Accounting Standards Board (ASB) has today published a Financial Reporting Exposure Draft (FRED)proposing an amendment to FRS 25 (IAS 32) ‘Financial Instruments: Presentation‘. The proposed amendmentrequires a rights issue involving the exchange of a fixed number of an entity’s own equity instruments for a fixedamount of cash denominated in a foreign currency to be classified as an equity instrument.

The proposed amendment follows the issue of ‘Classification of Rights Issues – Amendment to IAS 32’published by the International Accounting Standards Board (IASB) in October 2009. The IASB amendmentwas issued in response to a practical problem highlighted as a result of the global financial crisis. During the crisisthere has been an increase in the number of entities using rights issues to raise capital. If these rights issues aredenominated in a foreign currency, then under the current rules in FRS 25 they are classified as derivativeliabilities. The proposals state that if a fixed number of rights, options or warrants are issued pro rata to anentity’s existing shareholders for a fixed amount of foreign currency, these should be classified as equityregardless of the currency in which the exercise price is denominated. The rationale is that the proposedamendment better reflects the substance of the rights issue, which is a transaction with shareholders in theircapacity as owners.

The FRED proposes parallel amendments to FRS 25 with the objective of ensuring that FRS 25 remains fullyconverged with IAS 32.

The comment period for the FRED closes on 15 December 2009.


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http://www.frc.org.uk/asb/press/pub2164.html

Financial Reporting Council - Press NoticesThe Financial Reporting Council (FRC), the United Kingdom’s independent regulator responsible for promotingconfidence in corporate reporting and governance, has published two documents highlighting the challenges beingfaced by audit committees and users of actuarial information arising from the difficult economic conditions.

The current economic outlook appears to be less depressed than this time last year. However, significanteconomic risks remain and will present challenges for many during the 2009/10 reporting season.

Past experience shows that insolvencies have increased after the technical end of recessions as companies runout of working capital. Such conditions mean that the next twelve months are likely to be particularly difficult fordirectors, trustees and management and increase the risk that annual reports and accounts misreport facts andcircumstances and contain unidentified errors and omissions.

The current year questions for audit committees focus upon the risks that arise as companies change theirbusiness models to help manage through the effects of a significant recession. Such changes often involvemodifying the terms of trade including arrangements with pension funds. The existence of such changes may callinto question whether accounting policies remain appropriate, whether internal control systems capture all of therelevant data in a reliable way and whether assumptions used in models for accounting and actuarial purposes areappropriate in the circumstances.

The current year questions for users of actuarial information are particularly relevant to the governing bodies ofinsurers and pension schemes, but may also be useful for scheme sponsors, auditors and audit committees. Thequestions focus on the risks surrounding the business model, how those risks are managed, on understanding thekey assumptions and cash flows underlying discounted values and on the quality controls on actuarial work.

Ian Wright, Director of Corporate Reporting of the FRC said:

“Many companies and pension schemes did sterling work last year to make sure that all material issues werecaptured properly and reported in an appropriate way in their financial reports. Whilst there are some positiveeconomic signs we must be even more alert to the risk of error and omission at this time given the risk of a rise ininsolvencies over the next few months”.

Louise Pryor, Director, Actuarial Standards of the FRC said:

“The last year has demonstrated how critical it is to understand risk and uncertainty when making significant andcomplex financial decisions. Trustees, directors and others who base their decisions on actuarial information needto be sure that they and their actuaries have a shared understanding of the relevant risks”.


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http://www.frc.org.uk/press/pub2160.html

Financial Reporting Council - Press NoticesOn 11 September Lord Mandelson, Secretary of State for Business, Innovation and Skills announced that hehad asked the FRC to consider various matters raised in the report of the inspectors appointed under theCompanies Act to investigate the affairs of Phoenix Venture Holdings Limited, MG Rover Group Limited and 33other companies. The FRC has written to the Department for Business, Innovation and Skills with a report of theprogress on its review.

The main points made in the report include:

The investigation by the Accountancy and Actuarial Discipline Board into the conduct of Deloitte &Touche LLP as auditors and advisers to the MG Rover Group, which was initiated in August 2005,continues and is taking into consideration the information contained in the inspectors’ report. The results ofthe investigation, which may take several more months to complete, will be announced in due course.The Accounting Standards Board is considering whether to enhance the disclosure requirements relating totransactions with group companies in UK Financial Reporting Standard 8 (“Related Party Transactions”)and to going concern in UK Financial Reporting Standard 18 (“Accounting Policies”). If the Boardconcludes that any changes are warranted it will consult publicly.The Auditing Practices Board is considering whether to amend auditing standards to require moreinformative audit reports. If the Board concludes that any changes are warranted it will consult publicly.The Auditing Practices Board is considering the implications of the matters covered in the inspectors’report for the review which is already underway of the extent to which it is appropriate for auditors toprovide non-audit services to their audit clients.

The FRC has also drawn to the attention of the Government that the Regulations made under the Companies Act2006 do not include a requirement for disclosure by a company of fees paid to its auditors by the directors of thecompany or entities controlled by them. It is at least arguable that readers of financial statements would have aninterest in those amounts in addition to the amounts paid directly by the company and its subsidiaries. The contentof these Regulations is a matter for the Government and the FRC has recommended that they be reviewed afterthe results of the APB consultation on non-audit services are known.





Financial Reporting Council - Press NoticesThe Financial Reporting Council (‘FRC’) has written to Mr John McFall, Chairman of the House of CommonsTreasury Committee to inform the Committee of the steps which it has taken in connection with the Committee’sNinth report of Session 2009-09 “Banking Crisis: reforming corporate governance and pay in the City”. Thereport contains a number of recommendations which are either expressly addressed to the Financial ReportingCouncil or one of its operating bodies or deals with matters which are within our responsibilities.

Paul Boyle, FRC Chief Executive, said:

“The Treasury Committee made a number of significant recommendations in relation to corporate governance,corporate reporting and auditing. We welcome their interest in our work and we hope that publication of ourresponse to the Committee’s Report will be helpful to our stakeholders in understanding the steps we have takenor are taking in relation to the matters within the scope of the FRC’s responsibilities.”

The main points made in the letter to Mr McFall include:

During its current review of the Combined Code on corporate governance the FRC has been workingclosely with Sir David Walker who has been reviewing the corporate governance of banks and otherfinancial institutions (‘BOFIs’). The FRC has sought views as to the extent to which Sir David’s draftrecommendations for BOFIs should be incorporated into the Code.The FRC has work underway in relation to a number of the issues raised by the Committee on the workof auditors. Specifically the Auditing Practices Board has initiated a consultation on the provision byauditors of non-audit services to their audit clients. The FRC is also continuing its work on mitigating therisks posed by the degree of concentration in the audit market.The FRC has also completed or initiated work dealing with a number of the Committee’srecommendations on corporate reporting. The FRC has recently finalised update Guidance for Directorson Going Concern and Liquidity Risk and earlier this year it launched a discussion paper (“Louder ThanWords”) on the complexity and relevance of corporate reports. A review of narrative reporting recentlypublished by the Accounting Standards Board highlighted the importance of companies articulating clearlytheir business models.





Corporate insolvency market faces fair tradeprobe - Accountancy AgeIt follows recent concerns raised by the government and Insolvency Service over the way insolvencypractitioners are appointed.

The study will collect and analyse data from accountancy firms, law practices, government, regulators and tradebodies, with the OFT planning to release its findings at the end of 2010, unless it is necessary to conduct asecond stage.

Clive Maxwell, OFT senior director of services, said: “We want to identify any potential problems within thecorporate insolvency market to ensure that firms and practitioners are competing freely and that the market isworking well for the end consumers. Efficient insolvency services are an important component of a modernmarket economy.”

Listed accountancy company Tenon welcomed the announcement, stating that it supported “our long held beliefthat a competitive and transparent market within the insolvency industry is in the best interests of all stakeholders,including practitioners, creditors and the public”.


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Companies Act 2006 | Publications | Members |ACCABy Barinder Chadha, Glenn Collins

Studying this technical article and answering the related questions can counttowards your verifiable CPD if you are following the unit route to CPD and thecontent is relevant to your learning and development needs. One hour of learningequates to one hour of CPD. We'd suggest that you use this as a guide whenallocating yourself CPD units.

The Companies Act 2006 is described as the largest act to pass through Parliament. With over 1,300 sections, ithas been a long journey from its royal assent in November 2006, with parts and sections coming into force atvarious times.

There are a number of changes that came into force on 1 October 2009; however, the most significant changesare listed below:

Registrars powers, Single Alternative Inspection Location (SAIL) and document retention;Form changes;Incorporation;Change of constitution;Change of company name;Directors' service addresses;Administrative restoration;Voluntary dissolution; andShare capital/statement of capital.

It is important that existing companies review their articles and consider if amendments are needed.

Some of the changes introduced by the Act will not be reflected in the existing articles and do not applyautomatically. The changes to consider are electronic communication, authorised share capital, objects clauses,meetings, the requirement of a secretary and directors' conduct.

There is an extension to the registrars' powers to include the form and manner in which a company delivers itsdocuments. In addition, the registrar can decide what documents are needed and has scope for electronicdelivery of documents.

This falls in line with the impending changes to the filing platform that will be accepted for company filing.Companies House will require filing to be submitted using the filing platform Inline eXtensible Business ReportingLanguage (iXBRL) from summer 2010.

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There are certain documents to which these new powers do not extend:

Incorporation documents;Change of company name;Re-registration;Becoming or ceasing to be a community interest company;Reduction of share capital;Change of registered office;Registration of a charge; andDissolution.

The Act also introduces changes to arrangements when inspecting company registers. A company may need tohold as many as 13 registers, which must be held at either the registered office or at the Single AlternativeInspection Location (SAIL). If a company wishes to set up a SAIL address, it must notify Companies Houseand state which registers will be held at this address.

The previous requirement for the registrar to retain paper documents has reduced from 10 to three years, afterwhich the documents are destroyed, providing the information contained in them is copied.

For dissolved companies, the registrar retains the documents for two years after dissolution and then may directthe documents to the Public Record Office.

Form changes

There has been, and will be, a rationalising process of the forms that a company needs to submit. Up to 1October there were approximately 200 forms a company could submit. These have been, and will be, broughtup to date, deleted and/or replaced where necessary. In certain areas the number of forms will increase; forexample, the director and secretary forms 288a, 288b and 288c are being replaced by four appointment (AP01,AP02, AP03 and AP04), two termination (TM01 and TM02) and four change of details (CH01, CH02, CH03and CH04).

It is worth checking when filing that the form is still applicable, as it is likely to have been updated. Links areavailable at http://uk.accaglobal.com/uk/members/te chnical

Incorporation

A key feature of the new Companies Act was to simplify the administrative burden that companies faced. Forexample: no requirement to hold an annual or general meeting; all shares being fully paid up; removal of directors'retirement clauses; the concept of single member companies; simplified directors' decision-making; and removalof authorised share capital. In line with this overall philosophy, the incorporation procedures will make it easier toset up and run a company.

The new procedure for incorporating a company will start with the submission of Form IN01, together with thememorandum of association; articles of association; and correct fee.

The memorandum of association may conjure up images of a lengthy, legalistically written document of the past,mainly due to the objects clause. The new document will, in effect, be a form-filling exercise. The new document



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no longer requires an objects clause, as a company's objects are unrestricted. There may be situations where thecompany's objects are to be restricted; for example, for charitable companies, community interest companies orjoint ventures. There may also be other instances where companies may wish to restrict actions; for example,having the option of conference call board meetings may not be suitable for every company. The memorandummust be in the prescribed form and authenticated by each subscriber of shares. The details must include:

The company's proposed name;Whether the company's registered office is to be situated in England and Wales (or in Wales), Scotland orNorthern Ireland;Whether the liability of the members of the company is to be limited, and if so whether it is to be limited byshares or by guarantee;Whether the company is to be a private or public company; In the case of a company that is to have a share capital, a statement of capital and initial shareholdings; In the case of a company that is to be limited by guarantee, a statement of guarantee;A statement of the company's proposed officers;A statement of the intended address of the company's registered office; andA copy of any proposed articles of association.

For details on the form and content of the memorandum of association, please view schedule 1 and 2 of TheCompanies (Registration) Regulations 2008 (SI 3014) atwww.opsi.gov.uk/si/si2008/pdf/uksi_20083014_en.pdf

From 1 October, the new model articles have superseded table A as the default for companies. They havesensibly not been drafted as a one-size fits all in the mould of the old table A. The three model articles availableare for a private company limited by shares; a private company limited by guarantee; and a public company.

The model articles can be found at www.companieshouse.gov.uk/about/modelArticles/modelArticles.shtml

Changes of constitution

Companies Act 2006 introduced the concept of entrenchment.

Entrenchment provisions can be detailed in the articles of association and established restrictions. Theses can beincluded before or after the company's formation. Where there are changes to the constitution of a company,changes need to be informed. Changes include:

The presence and removal of such provisions of entrenchment;When the company amends its articles and these contain provisions for entrenchment; andWhen the company's constitution is amended by court order or by enactment.

Company name change

The process of changing a company's name will now be simpler. There are four methods to change the name:

By resolution;By conditional resolution;By resolution from the directors; or



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By means provided in the company's articles.

Since October 2008, a company's name could be changed via the Company Names Tribunal, usually precededby a complaint. This is administered by the Patent Office. More information is available at www.ipo.gov.uk/

The treatment of names has also been changed. The rule concerning similar names, often described as the 'sameas' rule, the definition of 'same as' is now stricter. When looking at the 'same as' rule, names such as 'GB','services' and 'com' are ignored.

Companies that belong, or are intending to belong, to a group are allowed to use similar names. In these cases,written consent must be given.

Directors' service addresses

From 1 October 2009, all company directors must provide their usual residential address, together with a serviceaddress for each directorship held. The different treatment between the two types of address is that the servicedaddress will be in the public domain, with the residential address protected. The serviced address is one wheredocuments can be delivered to and can, for example, be the company's address or the registered office,therefore preventing PO box and DX number addresses. The residential address will be kept private and willonly be available to regulatory authorities such as the police, HMRC and perhaps credit reference agencies.

Administrative restoration

This is in respect of company restoration, which was previously only the domain of the courts. The court role willremain, however. This will be supplemented in a limited number of circumstances with administrative restoration.This can be used when:

The company was carrying on business, or in operation, at the time of dissolution;The company has been struck off under section 1000 or 1001 of the Companies Act 2006;The application is made within a period of six years after the date of dissolution;The application is made by a former director or former secretary of the company;The Crown has signified consent, a bona vacantia issue;The company has delivered all the necessary documents to bring the company up to date; ie, alloutstanding documents at the time of dissolution and any due during the period of dissolution.

From 1 October 2009, voluntary dissolution will be available to plcs.

Share capital

The requirement for an authorised share capital will disappear for 1 October 2009, but the available capital toissue will still remain for existing companies formed prior to 1 October that have not made the amendment. It willalso not need to be stated on the memorandum of association. In addition, there is significant relaxing of the rulesgoverning the ability to issue private company shares, where only class of shares are in issue. Reserve capital isalso abolished from 1 October 2009.

The relaxing on share capital falls in line with the relaxing on reduction of share capital, acquisition of own shares,



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financial assistance and the simplification of share class rights.

Companies incorporating on or after 1 October 2009 will have to complete a statement of capital and initialshareholdings. This information is again repeated on the annual return submitted on or after 1 October 2009, andon the following forms referring to:

Allotment of shares;Notice of consolidation, subdivision of shares or reconversion of stock into shares or redemption ofredeemable shares;Redenomination of shares;Reduction of capital as a result of redenomination; Cancellation or repurchased shares, or (for plcs)immediate cancellation of shares repurchased into treasury;Subsequent cancellation of shares held in treasury by a plc; andCancellation of shares held by or for a plc in accordance with Section 662 of Companies Act 2006.

Barinder Chadha is a technical adviser at ACCA and Glenn Collins is ACCA UK's head of advisoryservices

View the multiple choice questions




Revenue recognition | Publications | Members |ACCABy Graham Holt

Studying this technical article and answering the related questions can counttowards your verifiable CPD if you are following the unit route to CPD and thecontent is relevant to your learning and development needs. One hour of learningequates to one hour of CPD. We'd suggest that you use this as a guide whenallocating yourself CPD units.

The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB)recently published a discussion paper setting out a joint approach for the recognition of revenue.

Revenue-recognition requirements in US GAAP differ from those in International Financial Reporting Standards(IFRSs) and both are considered in need of improvement. A major cause of complexity appears to be theoverabundance of FASB revenue-recognition rules in comparison with the IASB standards. Many of thestandards are industry-specific and some can produce conflicting results for similar transactions.

The number of FASB's revenue-recognition rules has grown to more than 100 standards, plus rule exceptionsaddressing over 20 different industries. Although IFRS contain fewer standards on revenue recognition, itsstandards have conflicting principles, and can be difficult to understand and apply beyond simple transactions.Both bodies of standards have led to diversity in practical application and a skewing of economic reality.

The boards' objective is to develop a single revenue model that can be applied consistently, regardless ofindustry. Under the proposed standard a company would recognise revenue when it satisfies a performanceobligation by transferring goods and services to a customer as contractually agreed. This principle is similar tomany existing requirements and the boards expect that most transactions would remain unaffected. Revenuerecognition is an area susceptible to a range of errors and possibly fraud.

The proposed model applies to contracts with customers. The discussion paper defines a contract as 'anagreement between two or more parties that creates enforceable obligations'. A customer is defined as 'a partythat has contracted with an entity to obtain an asset (such as a good or service) that represents an output of theentity's ordinary activities.' Agreements do not have to be in writing to be a contract.

In principle the model could apply to all contracts, but there is uncertainty about whether it is appropriate forsome financial instruments; insurance contracts; and leasing contracts.

In a contract, an entity receives consideration (rights) from, and promises to transfer assets (performanceobligations) to, a customer. Under the proposed model, the rights and obligations give rise to a net contractposition and revenue is recognised when a contract asset increases or a contract liability decreases as an entitysatisfies its performance obligations.

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The key change from the current model is that revenue will be based on the changes in contract assets andliabilities. All contracts (with the possible exception of the above) would be analysed into contract assets andcontract liabilities. Revenue would only be recognised when either the net contract liability is reduced or the netcontract asset has increased, both as a result of the entity discharging its contract liabilities by performance.Revenue should only be recognised on the fulfilment of a performance obligation under a contract. The transfer ofcontrol evidences fulfilment.

Example 1

Entity A agrees to sell Entity B a product for £30,000, which is 'the transaction price'. Entity A has an obligation(and therefore a liability) to provide a product worth £30,000 and a right to receive payment (and an asset of£30,000). The net position is zero.

The position changes when Entity A completes the sale and has no further obligation. Entity A still has an asset of£30,000 (the money due from the customer), but no further obligation and therefore a liability of zero. The netposition in the contract as a result of the satisfaction of the performance obligation is now an asset of £30,000,and so the business would recognise £30,000 revenue.

Challenges and changes

The focus on the transfer of assets via control may change many existing revenue models. Current revenuestandards consider other criteria, such as when risks and rewards are transferred to the customer, or whencollectability is reasonably assured. The proposed model could have a considerable impact on the timing ofrevenue recognition if control of an asset transfers at a different time than the transfer of risks and rewards.

Collectability could potentially impact the measurement of the contractual rights, but may not by itself precluderevenue recognition. In some cases, the transfer of control of an asset coincides with the transfer of risks andrewards of owning an asset, but in other cases it may not.

This proposal may present challenges for companies that do not determine the satisfaction of a performanceobligation by evaluating the transfer of control of assets to customers. It is difficult to assess whether the papercontains sufficient information about how control would be determined in practice to decide whether theprinciples can be applied consistently to complex transactions such that their substance is articulated.

The paper considers control to pass only when the goods or services are delivered to the customer, but it isarguable that, for bespoke and customised items, the specification and output of these items may be controlledfrom the outset by the customer, and so the customer is able to restrict the control the supplier has over the asset.Transfer of control may be difficult to determine even in many quite simple service contracts, and it is apparententities can interpret the notion of control in very different ways. Although this seems conceptually straightforwardand follows the IASB's framework 'balance sheet' approach.

Entities are going to have to identify what performance obligations have to be satisfied (the delivery of either agood or a service) and allocate a value to each. Additionally, construction contracts, which are currently coveredby IAS 11, Construction contracts, fall within the scope of this project. Thus, it will be important to identifywhen performance has been satisfied, as it could take place over a period of time, or at the very end of a project.



The IASB acknowledges that there are several areas where further consideration is required. This includes themeasurement of contract assets, how much someone is going to pay the entity to satisfy the obligations, theimpact of any changes to contractual terms, how revenue will be presented, and a decision on whether and howthe fair value of certain performance obligations should be measured.

Revenue for construction contracts would be recognised during construction, only if the customer controls theitem as it is constructed. This could lead to revenue being recognised later than at present. However, ifconstruction activities continuously transfer assets to a customer, then the proposed model would not significantlychange the present IFRS-based practice of recognising revenue for construction-type contracts during theconstruction phase.

The timing of revenue recognition could be close to current practice, or considerably different, depending on theapplication of the key concepts, such as when an asset is transferred and when the customer has control of theasset. Guidance on the transfer of control needs to be provided in order to make the principles operational.

A single, contract-based revenue-recognition model will always allow entities to manage the timing of revenuesby the changing of the contract terms, but strict application of legal form of the contract will result in differingtreatments, depending on the laws of different countries.

Performance obligations must be identified and separated. For example, a warranty, or a guarantee, or a right ofreturn may be identified as separate performance obligations. A sale with a warranty involves two distinctperformance obligations. First, there is the sale of the goods specified in the contract. Second, there is theobligation to do whatever the warranty specifies. The criteria in existing standards will no longer be relevant.Companies will separate the performance obligations in a contract whenever a company transfers the promisedassets to a customer at different times. The transaction price will be allocated to separate performanceobligations.

Current practices of accruing warranty costs at the time of revenue recognition may be eliminated. Instead, awarranty may be considered a performance obligation to which a portion of the total consideration will have tobe allocated and then recognised as revenue when the warranty obligation is satisfied. The satisfaction of thewarranty obligation may not necessarily occur evenly over the contract life.

Rights of return are accounted for using an estimated failed sale model where, if certain conditions are met,revenue is reduced to reflect estimated returns. The boards are uncertain as to whether rights of return should betreated as either a performance obligation or a failed sale.

Example 2

An entity sells an item with a warranty for £20,000. If it sold the item and the warranty separately it would cost£18,000 for the goods and £3,000 for the warranty. The overall transaction price of £20,000 would be allocatedprorata to the two distinct obligations. The sale of goods element would be £17,143, and the amount allocated tothe warranty element would be £2,857. The business would recognise revenue of £17,143 on the sale of thegoods and recognise revenue of £2.857 relating to the warranty over its life.

Next steps



The boards have proposed a single revenue recognition model that can be applied consistently across a range ofindustries and geographical regions.

The boards will review the comments received on this discussion paper and modify or confirm their preliminaryviews. They will then use the views to develop for public comment an exposure draft of a comprehensivestandard on revenue recognition.

Graham Holt, ACCA examiner and principal lecturer in accounting and finance, ManchesterMetropolitan University Business School

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20091118 - Accounting & Business Direct

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