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Fees
Introduction
905.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120Section 120 to identify, evaluate and address threats to independence. 905.2 Fees or other types of remuneration might create a self-interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework to identify, evaluate and address threats to independence arising from fees charged to assurance clients.
Requirements and Application Material
Fees Paid by an Assurance Client
905.3 A1 When fees are negotiated with and paid by an assurance client, this creates a self-interest threat and might create an intimidation threat to independence. 905.3 A2 The application of the conceptual framework requires that before a firm accepts an assurance engagement for an assurance client, the firm determines whether the threats to independence created by the fees proposed to the client are at an acceptable level. The application of the conceptual framework also requires the firm to re-evaluate such threats when facts and circumstances change during the engagement period. 905.3 A3 Factors that are relevant in evaluating the level of threats created when fees are paid by the assurance client include: • The level of the fees for the assurance engagement and the extent to which they have regard to the resources required, taking into account the firm’s commercial and market priorities. • The extent of any dependency between the level of the fee for, and the outcome of, the service. • The level of the fee in the context of the service to be provided by the firm or a network firm. • The significance of the client to the firm or partner. • The nature of the client. • The nature of the assurance engagement. • The involvement of those charged with governance in agreeing fees. • Whether the level of the fee is set by an independent third party, such as a regulatory body. 905.3 A5 The requirements and application material that follow identify circumstances which might need to be further evaluated when determining whether the threats are at an acceptable level.
For those circumstances, application material includes examples of additional factors that might be relevant in evaluating the threats.
Level of Fees for Assurance Engagements
905.4 A1 Determining the fees to be charged to an assurance client, whether for assurance or other services, is a business decision of the firm taking into account the facts and circumstances relevant to that specific engagement, including the requirements of technical and professional standards. 905.4 A2 Factors that are relevant in evaluating the level of self-interest and intimidation threats created by the level of the fee for an assurance engagement when paid by the assurance client include: • The firm’s commercial rationale for the fee for the assurance engagement. • Whether undue pressure has been, or is being, applied by the client to reduce the fee for the assurance engagement. 905.4 A3 Examples of actions that might be safeguards to address such threats include: • Having an appropriate reviewer who does not take part in the assurance engagement assess the reasonableness of the fee proposed, having regard to the scope and complexity of the engagement. • Having an appropriate reviewer who did not take part in the assurance engagement review the work performed.
Contingent Fees
905.5 A1 Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed. A contingent fee charged through an intermediary is an example of an indirect contingent fee. In this section, a fee is not regarded as being contingent if established by a court or other public authority.
R905.6
A firm shall not charge directly or indirectly a contingent fee for an assurance engagement.
R905.7
A firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an assurance client if the outcome of the non-assurance service, and therefore, the amount of the fee, is dependent on a future or contemporary judgment related to a matter that is material to the subject matter information of the assurance engagement. 905.7 A1 Paragraphs R905.6 and R905.7 preclude a firm from entering into certain contingent fee arrangements with an assurance client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an assurance client, it might still impact the level of the self-interest threat. 905.7 A2 Factors that are relevant in evaluating the level of such a threat include: • The range of possible fee amounts. • Whether an appropriate authority determines the outcome on which the contingent fee depends. • Disclosure to intended users of the work performed by the firm and the basis of remuneration. • The nature of the service. • The effect of the event or transaction on the subject matter information. 905.7 A3 Examples of actions that might be safeguards to address such a self-interest threat include: • Having an appropriate reviewer who was not involved in performing the non-assurance service review the relevant assurance work. • Obtaining an advance written agreement with the client on the basis of remuneration.
Total Fees―Overdue Fees
905.8 A1 The level of the self-interest threat might be impacted if fees payable by the assurance client for the assurance engagement or other services are overdue during the period of the assurance engagement. 905.8 A2 It is generally expected that the firm will obtain payment of such overdue fees before the assurance report is issued. 905.8 A3 Factors that are relevant in evaluating the level of such a self-interest threat include: • The significance of the overdue fees to the firm. • The length of time the fees have been overdue. • The firm’s assessment of the ability and willingness of the client or other relevant party to pay the overdue fee. 905.8 A4 Examples of actions that might be safeguards to address such a threat include: • Obtaining partial payment of overdue fees. • Having an appropriate reviewer who did not take part in the assurance engagement review the work performed.
R905.9
When a significant part of the fees due from an assurance client remains unpaid for a long time, the firm shall determine:
Total Fees―Fee Dependency
905.10 A1 When the total fees generated from an assurance client by the firm expressing the conclusion in an assurance engagement represent a large proportion of the total fees of that firm, the dependence on, and concern about the potential loss of, fees from that client impact the level of the self-interest threat and create an intimidation threat. 905.10 A2 A self-interest and intimidation threat is created in the circumstances described in paragraph 905.10 A1 even if the assurance client is not responsible for negotiating or paying the fees for the assurance engagement. 905.10 A3 In calculating the total fees of the firm, the firm might use financial information available from the previous financial year and estimate the proportion based on that information if appropriate. 905.10 A4 Factors that are relevant in evaluating the level of such self-interest and intimidation threats include: • The operating structure of the firm. • Where the firm is expected to diversify such that any dependence on the assurance client is reduced. 905.10 A5 Examples of actions that might be safeguards to address such threats include: • Reducing the extent of services other than assurance engagements provided to the client. • Increasing the client base of the firm to reduce dependence on the assurance client. 905.10 A6 A self-interest or intimidation threat is created when the fees generated by a firm from an assurance client represent a large proportion of the revenue from an individual partner’s clients. 905.10 A7 Factors that are relevant in evaluating the level of such threats include: • The qualitative and quantitative significance of the assurance client to the partner. • The extent to which the compensation of the partner is dependent upon the fees generated from the client. 905.10 A8 Examples of actions that might be safeguards to address such a self-interest or intimidation threat include: • Having an appropriate reviewer who was not an assurance team member review the work. • Ensuring that the compensation of the partner is not significantly influenced by the fees generated from the assurance client. • Increasing the client base of the partner to reduce dependence on the client.