Audit News

A Compilation from the Accounting World

India, January 2009

Audit News

Contents

3 5 6 11 13 15 18

Snapshot Accounting Pronouncements Auditing Pronouncements Other Pronouncements of ICAI Recent Developments US GAAP International Financial Reporting Standards

Snapshot
Accounting Pronouncements Accounting Standard for Local Bodies (ASLB) 3 on Revenue from Exchange Transactions ASLB 4 on Borrowing Costs Auditing Pronouncements Revised Standard on Auditing (SA) 250 on Consideration of Laws and Regulations in an Audit of Financial Statements SA 260 on Communication with Those Charged with Governance SA 570 on Going Concern SA 560 on Subsequent Events SA 230 on Audit Documentation Exposure Draft of Revised SA 210 on Agreeing the Terms of Audit Engagement Exposure Draft of SA 720 on The Auditors Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements Exposure Draft of Revised SA 320 on Materiality in Planning and Performing an Audit Exposure Draft of Revised SA 450 on Evaluation of Misstatements Identied During the Audit Exposure Draft of Revised SA 610 on Using the Work of Internal Auditors Standard on Internal Audit (SIA) 8 on Terms of Internal Audit Engagement SIA 9 on Communication with Management SIA 10 on Internal Audit Evidence SIA 11 on Consideration of Fraud in an Internal Audit Exposure Draft of SIA on Enterprise Risk Management Exposure Draft of SIA on Internal Control Evaluation Exposure Draft of SIA on Using The Work Of An Expert Exposure Draft of SIA on Internal Audit in an Information Technology Environment Exposure Draft of SIA on Knowledge of the Entity and its Environment Other Pronouncements of ICAI Internal Auditor can not be appointed as a Tax Auditor Technical Guide on Review and Certication of Investment Risk Management Systems and Processes of Insurance Companies Implementation Guide to Risk-based Audit of Financial Statements Handbook on Foreign Trade Policy and Guide to Export and Import Book on Principles and Practice of Life Insurance Book on Principles and Practice of General Insurance Book on Risk Management and Reinsurance Book on Business Strategic Planning and Information Technology for Insurance Sector

Recent Developments Peer Review of Audit Work Papers of Listed Companies Amendments to Clause 49 of the Listing Agreement with Stock Exchanges Modications in the Valuation Norms of Debt Securities by Mutual Funds Classication of Loans to Housing Finance Companies (HFCs) as Priority Sector Lending Prudential Norms for Off-Balance Sheet Exposure of Banks Buyback / prepayment of Foreign Currency Convertible Bonds (FCCBs) US GAAP FASB Staff Position (FSP) Emerging Issues Task Force (EITF) Issue No. 08-6 on Equity Method Investment Accounting Considerations EITF Issue No. 08-7 on Accounting for Defensive Intangible Assets EITF Issue No. 08-8 on Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount that is based on the Stock of an Entitys Consolidated Subsidiary Securities and Exchange Commission (SEC) releases new Financial Reporting Manual SEC Issues Interpretation on References to Third-Party Experts and Consents International Financial Reporting Standards Restructured version of International Financial Reporting Standard (IFRS) 1 Reclassication of Financial Assets Amendments to IAS 39 and IFRS 7 IFRIC 17 on Distributions of non-cash assets to owners Final report of the IASBs Expert Advisory Panel on valuing nancial instruments when markets are no longer active

Audit News

Accounting Pronouncements
Accounting Standard for Local Bodies (ASLB) 3 on Revenue from Exchange Transactions The ICAI has issued the above Standard, the Exposure Draft of which was published in the July 2008 edition of Audit News. The Standard will be mandatory for local bodies in a state from the date specied in this regard by the concerned State Government. Accounting Standard for Local Bodies (ASLB) 4 on Borrowing Costs The ICAI has issued the above Standard, the Exposure Draft of which was published in the July 2008 edition of Audit News. The Standard will be mandatory for local bodies in a state from the date specied in this regard by the concerned State Government.

Audit News

Auditing Pronouncements
Revised Standard on Auditing (SA) 250 on Consideration of Laws and Regulations in an Audit of Financial Statements The ICAI has issued the above Standard, the Exposure Draft of which was published in the April 2008 edition of Audit News. The Exposure Draft was named as The Auditors Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements The Standard is effective for audits of nancial statements for periods beginning on or after 1 April 2009. Revised Standard on Auditing (SA) 260 on Communication with Those Charged with Governance The ICAI has issued the above Standard, the Exposure Draft of which was published in the July 2008 edition of Audit News. The Standard is effective for audits of nancial statements for periods beginning on or after 1 April 2009. Revised Standard on Auditing (SA) 570 on Going Concern The ICAI has issued the above Standard, the Exposure Draft of which was published in the October 2007 edition of Audit News. The Standard is effective for audits of nancial statements for periods beginning on or after 1 April 2009. Revised Standard on Auditing (SA) 560 on Subsequent Events The ICAI has issued the above Standard, the Exposure Draft of which was published in the October 2006 edition of Audit News as Exposure Draft of Revised AAS 19. The Standard is effective for audits of nancial statements for periods beginning on or after 1 April 2009. Revised Standard on Auditing (SA) 230 on Audit Documentation The ICAI has issued the above Standard which is effective for audits of nancial statements for periods beginning on or after 1 April 2009. The Standard replaces the earlier Auditing and Assurance Standard (AAS) 3 on Documentation. The Standard deals with the auditors responsibility to prepare audit documentation for an audit of nancial statements. It does not limit the specic documentation requirements contained in other Standards or required by any laws and regulations. The Standard denes the following terms: Audit Documentation - It is a record of the audit procedures performed, relevant audit evidence obtained and conclusions reached. Audit File - It comprises of one or more folders or other storage media, in physical or electronic form containing the records that comprise the audit documentation for a specic engagement. Experienced Auditor - He is an individual (whether internal or external to the rm) who has practical audit experience, and reasonable understanding of: Audit processes; Standards on Auditing and applicable legal and regulatory requirements; Business environment in which the entity operates; and Auditing and nancial reporting issues relevant to the entitys industry. The Standard identies the following purposes of audit documentation: Evidence of the auditors basis for a conclusion reached about the achievement of the overall audit objective and planning and performance of the audit in accordance with the Standards on Auditing and the applicable legal and regulatory requirements. Assisting the engagement team in planning and performing the audit. Facilitating the supervision and review of the audit work. Enabling the engagement team to be accountable for its work. Retaining a record of matters of continuing signicance to future audits. Enabling the conduct of quality control reviews and external inspections in accordance with the applicable legal, regulatory and other requirements.

The Standard provides detailed guidance in respect of the following matters: Timely preparation of audit documentation. Form, content and extent of documentation. Documentation where there are departures from a relevant requirement. Documentation of matters arising after the date of the audit report. The auditor should assemble the audit documentation in an audit le and complete the assembling of nal audit le on a timely basis which is recommended to be within 60 days of the date of the auditors report. Once the nal le is assembled, the auditor should not delete or discard audit documentation of any nature before the end of its retention period which is recommended to be not shorter than ten years from the date of the auditors report, or, if later, the date of the group auditors report. Exposure Draft of Revised SA 210 on Agreeing the Terms of Audit Engagement The Exposure Draft of the SA deals with the auditors responsibilities in agreeing the terms of the audit engagement with the entity and also to respond to a request by the entity to change the terms of an audit engagement. The salient features of the Exposure Draft are as follows: An auditor should accept an audit engagement only when the preconditions for an audit and the common understanding between him and the client exist. An auditor should not accept engagements where the management or those charged with governance imposes limitations on the scope of the engagement that leads to a disclaimer of opinion by the auditor, unless required by law. The auditor should discuss with the Management and those charged with governance when there is a conict between the nancial reporting standards and the additional requirements of the applicable laws and regulations and provide effect of the same in the audit opinion. In case of recurring audits, the auditor should look at various factors before deciding whether a revised letter of engagement needs to be issued.

The SA provides detailed guidance on the Financial and General Reporting Framework and its acceptability that the auditor should consider while accepting the audit engagement. Exposure Draft of SA 720 on The Auditors Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements The Exposure Draft of the SA deals with the auditors responsibilities in relation to the other information in documents containing audited nancial statements and the auditors report thereon. The salient features of the Exposure Draft are as follows: Other Information for the purpose of this SA is dened as nancial and non- nancial information (other than the nancial statements and auditors report thereon) which is included either by law, regulation or custom, in a document containing audited nancial statements and the auditors report thereon. The auditor is not required to give his opinion on the other information or to determine whether or not other information is properly stated unless there is a specic requirement. The auditor should read the other information to identify material inconsistencies and assess whether, as a result thereof, the nancial statements or other information needs to be revised. If material inconsistencies are identied prior to the date of the audit report which requires revision of the nancial statements and the Management refuses to make the revisions, the auditor should modify his opinion. If the revision of the other information is necessary, and the revision is refused by the management, the auditor should communicate the matter to those charged with governance and also provide paragraph in auditors report on other matter or withdraw from the engagement. If any material inconsistencies are identied subsequent to the date of the audit report, and revision of audited nancial statements is necessary, the auditor should perform the procedures as provided in SA 560 on Subsequent Events.

Audit News

 The other information should be obtained prior to the date of the auditors report or as soon as practicable. Exposure Draft of Revised SA 320 on Materiality in Planning and Performing an Audit The Exposure Draft of the SA deals with the auditors responsibility to apply the concept of materiality in planning and performing an audit of nancial statements. The Standard denes Performance Materiality as the amount or amounts set by the auditor at less than materiality for the nancial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the nancial statements as a whole. The key changes envisaged in the Exposure Draft are as follows: The auditor should determine the materiality for the nancial statements as a whole and also for one or more particular classes of transactions, account balances or disclosures after considering the risks of material misstatement, in specic circumstances. The materiality should be revised if circumstances so warrant. The above aspects should be adequately and appropriately documented. Exposure Draft of Revised SA 450 on Evaluation of Misstatements Identied During the Audit The Exposure Draft of SA deals with the auditors responsibilities to evaluate the effect of identied misstatements on the audit and of uncorrected misstatements, if any, on the nancial statements. The salient features of the Exposure Draft are as follows: The auditor should accumulate misstatements identied during the audit, other than those that are clearly trivial and evaluate the nature thereof. The auditor should consider the impact of the identied misstatements as the audit progresses to determine whether the overall audit strategy and audit plan needs to be revised. The auditor should communicate all misstatements on a timely basis to the appropriate level of management, request the management to correct the same and in case management refuses for the

correction, obtain understanding of managements reasons for not making corrections. The auditor shall evaluate the effect of uncorrected misstatements and determine whether the materiality needs to be revised. The auditor should request a written representation from the management and where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the nancial statements as a whole and a summary thereof should be attached to the representation. The auditor should document the amount below which misstatements would be clearly regarded as trivial, all misstatements identied during the audit and whether they have been corrected and a conclusion as to whether the uncorrected misstatements are material, individually or in aggregate, and the basis for that conclusion. Exposure Draft of Revised SA 610 on Using the Work of Internal Auditors The Exposure Draft of SA deals with the external auditors responsibilities regarding the work of internal auditors when the external auditor has determined that the internal audit function is likely to be relevant to the audit. The Exposure Draft deals with the following matters: Determining whether and to what extent to use the work of the Internal Auditors. Using specic work of the Internal Auditors Documentation of the conclusions and the audit procedures performed. Standard on Internal Audit (SIA) 8 on Terms of Internal Audit Engagement The ICAI has issued the above Standard, the Exposure Draft of which was published in the October 2008 edition of Audit News. The Standard is recommendatory in nature. Standard on Internal Audit (SIA) 9 on Communication with Management The ICAI has issued the above Standard, the Exposure Draft of which was published in the October

2008 edition of Audit News. The Standard is recommendatory in nature. Standard on Internal Audit (SIA) 10 on Internal Audit Evidence The ICAI has issued the above Standard, the Exposure Draft of which was published in the October 2008 edition of Audit News. The Standard is recommendatory in nature. Standard on Internal Audit (SIA) 11 on Consideration of Fraud in an Internal Audit The ICAI has issued the above Standard, the Exposure Draft of which was published in the October 2008 edition of Audit News. The Standard is recommendatory in nature. Exposure Draft of SIA on Enterprise Risk Management The purpose of the SIA is to establish standards and provide guidance for review of an entitys risk management initiatives during an internal audit or such other review exercise with the objective of providing an assurance thereon. The nature of the internal audits responsibilities should be adequately documented and approved by those charged with governance. The internal auditor should not manage any of the risks on behalf of the management or take risk management decisions. The internal auditor should not assume any accountability for risk management decisions taken by the management. The internal auditor should review the structure, effectiveness and maturity of an enterprise risk management system and ensure that a risk management policy setting out Roles and responsibilities and framing a Risk management activity calendar has been framed. The internal auditor should also review whether the enterprise risk management coordinators in the entity report on the results of the assessment of key risks at the appropriate levels viz. Risk Management Committee, Enterprise Business and Unit Heads and Audit Committee. The internal audit plan should be approved by the audit committee and should be based on the risk assessment as well as on issues highlighted by the audit committee and the senior management. The internal auditor should submit his report to the Committee of the Board delineating the information on

Assurance rating, Test conducted, Samples covered and Detailed assurance comments. Exposure Draft of SIA on Internal Control Evaluation The purpose of the SIA is to establish standards and provide guidance on the procedures to be followed by the internal auditor in evaluating the system of internal control in an entity and for communicating weaknesses therein to those charged with governance. The internal auditor should examine and contribute to the ongoing effectiveness of the internal control system through evaluation and recommendations. The internal auditor should obtain an understanding of the signicant processes and internal control systems sufcient to plan the engagement and develop an effective audit approach. He should also understand and document the design and operations of internal control to evaluate the effectiveness of the control environment. The following aspects need to be considered whilst evaluating the internal control system in an entity: Ascertaining whether the entity has a mission statement and written goals and objectives. Assessing risks at the entity and the process level. Completing a Business Controls Worksheet for each signicant process / activity in each function/ department with documentation of the associated controls and their degree of effectiveness and also identifying the control gaps. The Internal auditor should ensure that in general adequate segregation of duties exists and in case of a small department size he should ensure that a detailed supervisory review of related activities is in practice, as a compensating control activity. While evaluating the information technology controls in a system-driven environment, the internal auditor should determine whether the entity uses tools that protect condential or sensitive information from unauthorized individuals, back-up and restore facility, virus protection software and passwords that restrict user access to networks, data and applications. The internal auditor should evaluate whether the internal controls are designed and operating as

Audit News

contemplated in the preliminary assessment of control risk and whether same were in use throughout the period. He should identify internal control weaknesses that have not been corrected and make recommendations to correct the same. He should also document the rational in deciding which audit recommendations should be followed up on and when, in contrast with recommendations where no follow-up is needed. The internal auditor, in his report to the management, should provide a description of the signicant deciency or material weakness in internal control and his opinion on the possible effect of such weakness on the entitys control environment. Exposure Draft of SIA on Using The Work Of An Expert The purpose of the SIA is to establish standards and guidelines in cases where the internal auditor uses the work performed by an expert. An internal auditor should obtain technical assistance and advice from experts if the internal audit team does not possess the necessary knowledge, skills, experience or expertise needed to perform all or part of internal audit engagement. An expert is dened as a person, rm or association of persons possessing special skill, expertise, knowledge and experience in a particular eld. The following are the various aspects which need to be considered before an internal auditor decides to use the work performed by an expert: The independence of the expert. Skills, competence and objectivity of the expert The materiality, nature and complexity of the item on which advice or assistance is sought. Evaluating the work of the expert The SIA provides that the internal auditor should not, normally, refer to the work of an expert in the internal audit report. In case of referring to work of the expert, the internal auditor should outline the assumptions, broad methodology and conclusion of the expert. The Internal Auditor should obtain prior consent of the expert in case his identity is disclosed in the report.

Exposure Draft of SIA on Internal Audit in an Information Technology Environment The purpose of the SIA is to establish standards on procedures to be followed when an internal audit is conducted in an information technology (IT) environment. The internal auditor should evaluate the extent to which the IT environment is used to record, compile, process and analyse information and study the internal control system in existence. He should also consider whether he has the necessary skills and competence to work in an IT environment or else he should seek the assistance of an expert. The internal auditor should obtain an understanding of the IT environment at the planning stage to determine the nature, timing and extent of audit procedures to be performed and also evaluate the nature of inherent and control risks which are prevalent. He should also perform audit procedures based on the review of the robustness of the IT environment. The extent of reliance which can be placed when the information is processed by an outsourced agency together with the risks associated thereon should also be considered. The internal auditor should document the internal audit plan, the nature, timing and extent of audit procedures performed and the conclusions drawn from the evidence obtained. He should also satisfy himself that evidence in the electronic form is adequately and safely stored and is retrievable in its entirety when required. Exposure Draft of SIA on Knowledge of the Entity and its Environment The purpose of the SIA is to establish standards and guidelines on the knowledge of the entitys business and the techniques to be adopted by the internal auditor in acquiring such knowledge about the client entity and its environment, prior to commencing the audit engagement and subsequently thereafter, at all stages of the internal audit process. The internal auditor whilst performing an internal audit should obtain knowledge of the entitys business and its operating environment to enable him to review the key risks, processes, systems, procedures and controls. The standard deals with the information that internal auditor should obtain prior to and after acceptance of an engagement.

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Other Pronouncements of ICAI

Internal Auditor can not be appointed as a Tax Auditor The ICAI has claried that an internal auditor of an assessee, whether working with an organization or independently practicing chartered accountant or a rm of chartered accountants, can not be appointed as his tax auditor. Technical Guide on Review and Certication of Investment Risk Management Systems and Processes of Insurance Companies Committee on Insurance and Pensions of the ICAI has issued the technical guide which provides detailed guidance on the manner in which the compliance verication of the Investment Risk Management System is required to be carried out in accordance with the circular issued by the Insurance Regulatory and Development Authority (IRDA) directing all insurers to le a compliance certicate issued by a Chartered Accountant, certifying that the Investment Risk Management Systems and Processes are in place and are working effectively. Implementation Guide to Risk-based Audit of Financial Statements The salient features of the Guide are as follows: Explains the basic requirements of the new two risk based Standards issued by the Board under the Clarity Project, i.e., SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment and SA 330, The Auditors Responses to Assessed Risks, and make their implementation easier. Deals with the implications of Revised SA 240, The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements and Revised SA 300, Planning an Audit of Financial Statements in carrying out risk-based audits. Adopts a practical and a case study approach to explain. Handbook on Foreign Trade Policy and Guide to Export and Import The committee on Trade Laws and WTO of the ICAI has published the handbook to provide guidance to the Chartered Accountants in practice and in service and others concerned in the eld of International Trade Laws and WTO. The salient features of the said Handbook are as under: Gives history of foreign trade and foreign trade policy; enunciating legal framework of foreign trade policy and general provisions for exports and imports. Provides explanation of promotional measures, Duty Exemption and Remission Schemes, provisions applicable to EOUs, EHTPs, BTPs, STPs and SEZs. Role of Chartered Accountants in the eld of Foreign Trade Book on Principles and Practice of Life Insurance The Committee on Insurance and Pension of the ICAI has published the book, which deals with the following aspects: Explain the basic concepts of Life Insurance Business, various types of insurance products available in the market. Process of Claim Settlement and lapsation and revival of life insurance policies. Dene actuarial principles and techniques for ascertaining the liability of a life insurer Book on Principles and Practice of General Insurance The Committee on Insurance and Pension of the ICAI has published the book, which deals with the following aspects: Introduction to General Insurance Business, General Insurance Contract Design and various legislations which governs the general insurance business in India. Various types of general insurance business and introduction to general insurance products available in the market. Regulations and law governing the Accounting and Investment of insurance companies. Book on Risk Management and Reinsurance The Committee on Insurance and Pension of the ICAI has published the book, which deals with the following aspects:

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 Introduction to and essential of risk management, measuring severity and frequency of risk and the process of risk management. Dene the strategic risk management and corporate risk management with case studies. Introduction of reinsurance and reinsurance theory, regulations and law governing the reinsurance business. Reinsurance administration, accounting, nancial and reinsurance practices. Book on Business Strategic Planning and Information Technology for Insurance Sector The Committee on Insurance and Pension of the ICAI has published the book, which deals with the following aspects:

Classify insurance business, functions and general introduction to various Law and Regulations applicable on insurance sector. Management of assets- liability of insurance company. BPO and insurance companies System development process including system analysis and design, implementation and operation. Various techniques of data storage and processing methods and information system controls

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Recent Developments
Peer Review of Audit Work Papers of Listed Companies Securities and Exchange Board of India (SEBI) has vide a press release dated 9 January 2009 recommended that a peer review of the working papers of auditors would be conducted in respect of companies constituting the NSE NIFTY 50 and the BSE Sensex as well as certain other listed companies selected on a random basis. The review would be in relation to the last quarterly results and the last annual audited nancial results. The review would be undertaken by a panel of auditors as prepared by SEBI following the publication of the 3rd quarter results. Amendments to Clause 49 of the Listing Agreement with Stock Exchanges SEBI has claried that for indentifying persons who are related to any promoter in cases where the promoter is a listed or unlisted entity, the following criteria would apply: If the promoter is a listed entity, its directors other than independent directors, its employees or its nominees shall be deemed to be related to it. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it. Modications in the Valuation Norms of Debt Securities by Mutual Funds SEBI has increased the discretion permitted in the valuation of debt securities by mutual funds as under: In case of rated securities: Category Upto 2 years duration Over 2years duration In case of unrated securities: Category Upto 2 years duration Current Discretionary discount of upto + 50 bps over and above mandatory discount of + 50 bps Discretionary discount of upto + 50 bps over and above mandatory discount of + 25 bps Proposed Discretionary discount of upto + 450 bps over and above mandatory discount of + 50 bps Discretionary discount of upto + 375 bps over and above mandatory discount of + 25 bps Current + 100 bps 75 bps Current 50 bps 25 bps Proposed + 500 bps 400 bps Proposed 150 bps 100 bps In cases where the derivative contract is restructured, the mark-to-market value of the contract on the date of restructuring should be cash settled. Buyback / prepayment of Foreign Currency Convertible Bonds (FCCBs) The RBI has recently permitted buyback / prepayment of FCCBs by Indian companies both under the automatic route and under the approval route subject to compliance with certain conditions as indicated hereunder: Classication of Loans to Housing Finance Companies (HFCs) as Priority Sector Lending The Reserve Bank of India (RBI) has notied that loans to HFCs approved by the National Housing Bank for the purpose of renance for on-lending to individuals for purchase / construction of dwelling units may be classied under priority sector lending provided the loans do not exceed Rs. 2 million per dwelling unit per family. However, the total of all such loans should be restricted to 5% of the individual banks total priority sector lending on an ongoing basis. Prudential Norms for Off-Balance Sheet Exposure of Banks The RBI has issued certain clarications in respect of overdue payments in respect of derivative transactions, which are indicated hereunder: The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset if it remains unpaid for 90 days or more. In such cases, all other funded facilities with the said client would also be classied as non-performing assets. If the client also has a cash credit or overdraft facility, the above amount may be debited to the same on the due date and its impact on non-payment would be reected in the cash credit or overdraft account. In cases where the derivative contract provides for settlement of the current mark-to-market value before its maturity, only the current credit exposure would be classied as a non-performing asset after an overdue period of 90 days. In such cases, the income should be reversed and held in a suspense account.

Over 2years duration

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 In case of FCCBs issued under the automatic route, the buyback value should be at a minimum discount of 15% of the book value, the funds whereof shall be out of the existing foreign currency funds held either in India or abroad or out of fresh ECBs raised. In case of FCCBs issued under the approval route, the buyback value shall be at a minimum discount of 25% of the book value, the funds whereof shall be out of internal accruals as certied by the Statutory Auditor and the total amount shall not exceed USD 50 million per company.

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US GAAP
FASB Staff Position (FSP) on Disclosures Related to Asset Transfers, Variable Interest Entities (VIEs), and Qualifying Special Purpose Entities (QSPEs) The FASB has issued FSP FAS 140-4 and FIN 46(R)-8, which requires public companies to provide disclosures similar to those proposed in the pending amendments to Statement 140 and Interpretation 46(R). The FSP requires additional disclosures about transfers of nancial assets and an enterprises involvement with VIEs, including QSPEs. These disclosures should help improve transparency in the current market environment. Disclosures Related to Asset Transfers: These additional disclosure requirements primarily focus on the transferors continuing involvement with transferred nancial assets and the related risks retained. A transferor must disclose whether it provided nancial or other support to the transferee (or its benecial interest holders) that it was not previously contractually required to provide, including the primary reasons for providing the support, and details of any arrangements that could require any future nancial support. The FSP states that this includes any future nancial support that could result from explicit written arrangements, communications between the transferor and the transferee or its benecial interest holders, and unwritten arrangements customary in similar transfers (emphasis added). The disclosures must also include details about any SPEs involved in the transfer, including the nature, purpose, size, and activities of the SPE, and how it is nanced. Disclosures Related to VIEs: These additional disclosure requirements focus on an enterprises involvement with VIEs. For example, these disclosures must include the method for determining whether an enterprise is the primary beneciary of a VIE, including the signicant judgments and assumptions made, and whether the consolidation conclusion has changed in the most recent nancial statements. The FSP also requires disclosure of the details of any nancial or other support provided to a VIE that the enterprise was not previously contractually required to provide, as well as the primary reasons for providing the support. The primary beneciary of a VIE is also required to disclose the terms of any arrangements, including both explicit arrangements and implicit variable interests, that could require the enterprise to provide future support to the VIE. Disclosures Related to QSPEs: Enterprises are exempt, with limited exceptions, from applying the consolidation and disclosure provisions in Interpretation 46(R) to entities that qualify as QSPEs. The FSP amends Interpretation 46(R) to require that a non-transferor public enterprise provide certain disclosures if it is either (1) the sponsor of a QSPE and holds a variable interest in the QSPE or (2) the servicer of a QSPE and holds a signicant variable interest. The FSP does not amend the accounting for these entities. These disclosures must include details about the QSPE, including the nature, purpose, size, and activities of the QSPE, and how it is nanced. Further, the FSP states that any arrangements that could require the enterprise to provide nancial support to the QSPE also must be disclosed, after all evidence is considered, including, but not limited to, explicit written arrangements, communications between the sponsor or servicer and the [QSPE] or its benecial interest holders, and unwritten arrangements that are customary in similar relationships (emphasis added). Finally, an enterprise must also disclose whether it has provided nancial or other support to the [QSPE] that it was not previously contractually required to provide, including the primary reasons for providing the support, and its maximum exposure to loss as a result of the involvement with the QSPE. The FSP is effective for the rst reporting period (interim or annual) that ends after 15 December 2008. Calendar-year-end companies must provide the required disclosures in their 31 December 2008, annual lings, and companies with non calendar year-ends must provide the disclosures in their quarterly lings for their rst quarterly period ending after 15 December 2008. The disclosures are required in all subsequent annual and quarterly nancial statements. Emerging Issues Task Force (EITF) Issue No. 08-6 on Equity Method Investment Accounting Considerations In this Issue, the Task Force considered the effects of the issuances of Statements 141(R) and 160 on an entitys application of the equity method under Opinion 18. Certain provisions in Opinion 18 require entities to account for equity method investments as if the investee were consolidated. Statements 141(R) and 160, which are effective for scal years beginning on or after 15 December 2008, amend the accounting for consolidated subsidiaries. Questions have arisen regarding the application of equity method accounting

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guidance because of the signicant changes to the guidance on business combinations and subsidiary equity transactions and the increased use of fair value measurements as a result of these Statements. The Task Force reached a consensus that: An entity should determine the initial carrying value of an equity method investment by applying the cost accumulation model described in paragraphs D3D7 of Statement 141(R). An entity should use the other-than-temporary impairment model of Opinion 18, not some other method that disaggregates the investment into the individual assets of the investee, when testing equity method investments for impairment. However, investors should adjust any impairments recorded by an investee for existing differences between the investors basis and the underlying investees basis in such impaired assets. Share issuances by the investee should be accounted for as if the equity method investor had sold a proportionate share of its investment (i.e., any gain or loss is recognized in earnings). When an investment is no longer within the scope of equity method accounting and instead is within the scope of cost method accounting or Statement 115, the investor should prospectively apply the provisions of Opinion 18 or Statement 115 and use the current carrying amount of the investment as its initial cost. To coincide with the effective dates of Statements 141(R) and 160, the consensus is effective for transactions occurring in scal years, and interim periods within those scal years, beginning on or after 15 December 2008. Early adoption is not permitted. EITF Issue No. 08-7 on Accounting for Defensive Intangible Assets The Task Force reached a consensus that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., an asset separate from other assets of the acquirer); an acquired research and development asset is outside this Issues scope and should be accounted for pursuant to paragraph 16 of Statement 142;

the useful life assigned to an acquired defensive asset should be based on the period during which the asset would diminish in value; and it would be rare for an entity to conclude that a defensive asset has an indenite life. The Issue includes examples illustrating how to determine the assets amortization period. To coincide with the effective date of Statement 141(R), the consensus is effective for defensive intangible assets acquired in scal years beginning on or after 15 December 2008. EITF Issue No. 08-8 on Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount that is based on the Stock of an Entitys Consolidated Subsidiary Reporting entities that enter into freestanding nancial instruments (or instruments that contain embedded features) for which the payoff to the counterparty is indexed to the stock of a consolidated subsidiary. The Task Force reached a consensus that freestanding nancial instruments or embedded features) that are indexed to, in whole or in part, the stock of a consolidated subsidiary are considered indexed to the entitys own stock in the consolidated nancial statements if the requirements of Issue 07-5 are met and the subsidiary is a substantive entity. This Issue requires that any subsidiary referenced in the freestanding instrument (or embedded feature) be substantive to ensure that entities cannot receive equity classication for a nancial instrument referenced to a subsidiary that has no business purpose (e.g., the subsidiary was formed to hold a derivative instrument or a commodity). The Task Force also reached a consensus that an equityclassied instrument (including an embedded feature that is separately recorded in equity) within the scope of this Issue should be presented as a component of non controlling interest in the consolidated nancial statements in a manner consistent with the conclusions in Statement 160.

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However, if an equity-classied instrument within the scope of this Issue is entered into by the parent and expires without being exercised, the carrying amount of the instrument at expiration would be reclassied from non controlling interest to controlling interest. To coincide with the effective date of Statement 160, the consensus is effective for scal years, and interim periods within those scal years, beginning on or after 15 December 2008. At transition, the carrying value of the instrument (or separated embedded feature) previously classied as a liability will be reclassied to non controlling interest. Early adoption is not permitted. Securities and Exchange Commission (SEC) releases new Financial Reporting Manual The SECs Division of Corporation Finance released its updated Financial Reporting Manual. The new manual supersedes the Division of Corporation Finances Accounting Disclosure Rules and Practices: An Overview (also known as the SEC Staff Training Manual), which had not been updated since 2000. The Financial Reporting Manual provides helpful insight into how the SEC staff applies SEC rules and regulations to topics such as SEC registrants and acquired businesses nancial statements, pro forma nancial statements, MD&A, and non-GAAP measures.

SEC Issues Interpretation on References to ThirdParty Experts and Consents The SECs Division of Corporation Finance issued several new and revised Compliance and Disclosure Interpretations (C&DIs) on Securities Act sections. The following are two notable new questions from the C&DIs: Question 141.01, which indicates that a registration statement that describes or includes an investment bankers fairness opinion must also include the bankers consent to being named in the registration statement. Question 141.02, which addresses whether a registrant that chooses to refer to a third-party expert must name the third party and obtain the third partys consent. It also distinguishes between statements of the registrant, which do not require a consent, and statements attributed to a third-party expert, which would require a consent.

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International Financial Reporting Standards

Restructured version of International Financial Reporting Standard (IFRS) 1 The International Accounting Standards Board (IASB) has released a restructured version of IFRS 1 on Firsttime Adoption of International Financial Reporting Standards. IFRS 1 was rst issued in June 2003, and since then it has been amended frequently. As a result, the Standard has become more complex and less clear. In 2007, therefore, the Board proposed, as part of its annual improvements project, to change IFRS 1 to make it easier for the reader to understand and to design it to better accommodate future changes. This new version of IFRS 1 retains the substance of the previous version, but within a changed structure. It replaces the previous version and is effective for entities applying IFRSs for the rst time for annual periods beginning on or after 1 July 2009. Earlier application is permitted. Reclassication of Financial Assets Amendments to IAS 39 and IFRS 7 The IASB has issued amendments to International Accounting Standard (IAS) 39 on Financial Instruments: Recognition and Measurement and IFRS 7 on Financial Instruments: Disclosures that permit reclassication of some nancial assets out of the fair value through prot or loss-category and out of the available-for-sale-category as dened in IAS 39. The amendments introduce into IFRSs the same possibility of reclassications that is already permitted under US GAAP in certain circumstances. Reclassications made under the amendment require additional disclosures in accordance with IFRS 7. The amendments are effective on 1 July 2008. Any reclassication made on or after 1 November 2008 takes effect from the date of reclassication. However, any reclassication before 1 November 2008 can take effect from 1 July 2008 or a subsequent date. A reclassication cannot be applied retrospectively before 1 July 2008. IFRIC 17 on Distributions of non-cash assets to owners The International Financial Reporting Interpretations Committee (IFRIC) has issued IFRIC 17 on Distributions of Non-cash Assets to Owners. IFRIC 17 aims to provide accounting guidance when a distribution to owners is not in cash. The interpretation claries: a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. an entity should measure the liability for the dividend payable at the fair value of the net assets to be distributed. an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in prot or loss when the dividend is distributed. an entity should provide additional disclosures about the net assets being held for distribution to owners when the entity is committed to distribute them. The scope section claries that only pro-rata distributions in non-common control situations are within the scope of the IFRIC 17. IFRIC 17 is applicable prospectively for annual periods beginning on or after 1 July 2009 with earlier application permitted. Final report of the IASBs Expert Advisory Panel on valuing nancial instruments when markets are no longer active The IASB has published educational guidance on the application of fair value measurement when markets become inactive. The report is a summary of seven meetings held by the IASBs Expert Advisory Panel. While not mandatory, the document aims to provide useful information and educational guidance about the processes used and judgements made when measuring and disclosing fair value.

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Private circulation to clients of Deloitte Haskins & Sells This document/publication prepared by Deloitte Haskins & Sells on the basis of information obtained and collected from various sources, specically mentioned in the report, contain general information only. While due care has been taken to ensure the accuracy of the information contained herein, no warranty, express or implied, is being made, by Deloitte Haskins & Sells, as regards the accuracy and adequacy of the information contained herein. Deloitte Haskins & Sells, by means of this publication, is not rendering accounting, business, nancial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your nances or your business. Before making any decision or taking any action that may affect your nances or your business, you should consult a qualied professional adviser. Deloitte Haskins & Sells shall not be responsible for any loss whatsoever sustained by any person who relies on this publication. 2009 Deloitte Haskins & Sells Designed and produced by the CitiPress Design Studio - info@citipress.net

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