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part
01
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chapter 1
chapter 2
An overview of the Australian external reporting
environment
4
The conceptual framework of accounting and its
relevance to financial reporting
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The
Australian Accounting
Environment
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chapter 1
An overview of the Australian
external reporting environment
Learning objectives
Upon completing this chapter readers should:
LO5
understand the sources of accounting
regulation within Australia and thus be able
to explain the general functions of the
Australian Securities and Investments
Commission, the Australian Accounting
Standards Board, the Financial Reporting
Council and the Australian Securities
Exchange;
understand the magnitude of changes that
occurred in 2003 and 2004 in Australian
Accounting Standards as a result of the
Financial Reporting Council’s strategic
decision that Australia produce financial
statements that comply with standards
being issued by the International Accounting
Standards Board; and
LO6
understand that the practice of financial
accounting is quite heavily regulated within
Australia, and be aware of some of the
arguments for and against the regulation of
financial accounting.
understand the role of an accounting
standard and the process by which it is
developed;
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be able to explain the general functions of
the International Accounting Standards
Board and its direct relevance to Australian
accounting standard setting;
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understand the scope of regulation relating
to Australian external financial reporting;
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LO1
LO2
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1.1 Financial accounting defined
In this book our focus is on financial accounting, which can be considered to be a process involving the collection and
processing of financial information to meet the decision-making needs of parties external to an organisation. Financial
accounting can be contrasted with management accounting. Management accounting focuses on providing information
for decision making by parties within the organisation (that is, for internal as opposed to external users) and it is largely
unregulated. Financial accounting, by contrast, is subject to many regulations.
Because management accounting relates to the provision of information for parties within an organisation, the view is
taken that there generally is no need to protect the information needs or rights of these parties as, being insiders, they can
relatively easily access the information they require. By contrast, it is maintained that the information rights of outsiders,
who are not involved in the day-to-day operations of an organisation (such as shareholders of a listed company), must be
protected. Because financial statements prepared for external parties are often used as a source of information for parties
contemplating transferring resources to an organisation, it is arguably important that certain rules be put in place to govern
how the information should be compiled. That is, the adoption of a ‘pro-regulation’ perspective to protect the interests of
parties external to a firm requires some regulation relating to the accounting information that such firms should disclose. (We
will consider pro-regulation and ‘free-market’ perspectives in more detail towards the end of this chapter.)
1.2 Users’ demand for general purpose financial statements
General purpose financial statements may be used by an array of user groups for many purposes. As the ‘Framework for the
Preparation and Presentation of Financial Statements’ (which was released by the Australian Accounting Standards Board in
July 2004 and will be updated in the near future, as will be discussed in Chapter 2) states, users of general purpose financial
statements may be defined as including: ‘present and potential investors, employees, lenders, suppliers and other trade
creditors, customers, governments and their agencies and the public’ (paragraph 9).
Some parties with an interest in the financial affairs of an entity might be in a position to successfully
special purpose
demand financial statements that satisfy their specific information needs. For example, banks might demand,
financial statement
as part of a loan agreement, that a borrowing organisation provide information about its projected cash flows.
A report designed to
meet the needs of a
Such a financial statement would be considered a special purpose financial statement—in this case, a financial
specific group or to
statement prepared specifically to satisfy the needs of the bank. Other parties with interests in the affairs of an
satisfy a specific purpose.
organisation might not have the necessary power to demand financial statements that specifically address their
Can be contrasted
own information requirements, having instead to rely on financial statements of a general nature released by
with a general purpose
financial statement,
the reporting entity to meet the needs of a broad cross-section of users, such as investors, potential investors,
which is intended to meet
employees, employee groups, creditors, customers, consumer groups, analysts, media, government bodies and
the information needs
lobby groups. These financial statements are referred to as general purpose financial statements, as opposed
common to users who are
to special purpose financial statements (until recently, general purpose financial statements were also referred to
unable to command the
preparation of reports.
as general purpose financial reports). General purpose financial statements would be developed to generally meet
the information requirements of a cross-section of shareholders, as well as those of other stakeholder groups,
such as creditors, employees, government, potential investors and interest groups. In this book, we are concerned
general purpose
primarily with general purpose financial reporting. Our explanation of general purpose financial statements is
financial statement
consistent with the definition used in accounting standards. For example, paragraph 7 of AASB 101 Preparation
Financial statements that
comply with conceptual
and Presentation of Financial Statements defines general purpose financial statements in the following way:
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framework requirements
and accounting standards
and meet the information
needs common to users
who are unable to
command the preparation
of reports tailored
specifically to satisfy all
their information needs.
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Examples of general purpose financial statements are the financial statements and supporting notes included
within an annual report presented to shareholders at a company’s annual general meeting (and thereafter typically
made available to shareholders and other interested parties on the organisation’s website). Our focus in this book
will be general purpose financial reporting practices that would typically be used by private-sector profit-seeking
entities. However, in recent years there have been moves by governments and government departments towards
adopting the kind of accounting procedures that are used by business entities in the private sector. Therefore much of our
discussion can be applied to government, particularly government trading enterprises that compete directly with private-sector
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General purpose financial statements (referred to as ‘financial statements’) are those intended to meet the needs
of users who are not in a position to require an entity to prepare reports tailored to their particular information
needs.
CHAPTER 1: AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT • 5
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firms (for example, government-controlled organisations involved in telecommunications, public transport and shipping).
Nevertheless, there continue to be some differences between the reporting practices of some government departments and
those of private-sector entities, and there are some accounting standards that are dedicated to government bodies (such as
AASB 1049 Whole of Government and General Government Sector Financial Reporting).
1.3 Sources of external financial reporting regulations
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In contrast with the position of most overseas jurisdictions with standard-setters, the AARF itself is not directly accountable
to the boards it services, but to the professional accounting bodies. This has led to the perception in some quarters that the
accounting profession may be in a somewhat privileged position in terms of potentially influencing the outcome of standard
setting. Whether this influence is actual or perceived, it is important for the credibility of the standard-setting process that it
is seen to be in fact independent and not subject to undue influence by any one group of interests.
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There are four principal bodies involved in formulating, interpreting and/or enforcing accounting regulations within Australia,
these being:
1. the Australian Securities and Investments Commission;
2. the Australian Accounting Standards Board;
3. the Financial Reporting Council; and
4. the Australian Securities Exchange.
In 2000, a number of major changes were made to how accounting regulations and requirements (such as accounting
standards) are developed in Australia. One implication of the changes was that the role of the Australian Accounting Research
Foundation (AARF) (a body that has since been disbanded but that was funded jointly by the Institute of Chartered Accountants
in Australia and CPA Australia and was therefore considered to be under the control of the Australian accounting profession)
in developing accounting regulations was effectively eliminated. The changes moved the development of accounting standards
into the hands of the government, rather than leaving it in the hands of the Australian accounting profession. This change
effectively reduced the ability of the accounting profession to ‘self-regulate’.
The new accounting standard-setting arrangements were passed by the Commonwealth parliament in October 1999 and
came into force on 1 January 2000. The amendments were consistent with proposed reforms included within the Corporate
Law Economic Reform Program (CLERP) Act 1999 (Cwlth).
The new arrangements increased the functions of the Australian Accounting Standards Board (AASB), which is a
government body. Under these arrangements, the AASB employs its own full-time staff (a number of whom initially transferred
from the AARF) and has its own dedicated secretariat rather than having to rely—as things stood—upon resources provided
by the AARF (that is, from the accounting profession).
The AARF, which, as noted above, was a body under the control of the Australian accounting profession (that is, it was
privately controlled rather than being under the control of government), was responsible for the Public Sector Accounting
Standards Board (PSASB). The PSASB was responsible for formulating accounting standards that did not have legal effect under
the Corporations Act (but were nevertheless adopted by some authorities, such as government). It also assisted the AASB
(the government body) to develop accounting standards that were to be applied by corporations and other entities whose
activities were governed by the Corporations Act. The PSASB was disbanded at the beginning of 2000, with all responsibilities
for developing accounting standards being passed to the AASB. As we will see shortly, as a result of the commitment that
Australia would comply with International Accounting Standards being released by the International Accounting Standards
Board (which is headquartered in London) from 2005, the AASB now relies almost entirely on the standards being developed
by the International Accounting Standards Board. Nevertheless, it remains the role of the AASB to release these internationally
developed standards in the Australian context.
If we reflect on how the Australian accounting standard-setting arrangements have changed, with the development
of accounting standards being removed from the control of the accounting profession, we might view these changes as a
reaction by government to concerns about the accounting profession dominating the standard-setting process. As was noted
on page 26 of the 1997 Corporate Law Economic Reform Program (CLERP) Report:
6 • PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT
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The revised arrangements responded to these concerns by eliminating the role of the AARF in accounting standard
setting and certainly introducing other ‘voices’. Under the new system, the views of a broader constituency inform the
standard-setting process, as reflected by the membership of the Financial Reporting Council (FRC). As we will see in
the discussion to follow, the FRC oversees the activities of the AASB. The FRC was also responsible for the decision that
Australian reporting entities would adopt accounting standards issued by the International Accounting Standards Board
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(IASB) for accounting periods beginning on or after 1 January 2005. This decision by the FRC impelled a degree of change
in the Australian accounting standards regime that is greater than at any other time in Australian financial reporting history.
There were a number of major differences between Australian Accounting Standards and those issued by the IASB. These
differences were removed from 2005 and the adoption of accounting standards issued by the IASB (with these standards
being referred to as International Financial Reporting Standards) has had major implications for how financial accounting
is undertaken within Australia.
Another recent change in the structure of financial reporting regulation within Australia concerns the Auditing and
Assurance Standards Board (AUASB). The AARF was formerly also responsible for overseeing the AUASB—the body that
was responsible for releasing auditing standards. As a result of the Corporate Law Economic Reform Program (Audit Reform
and Corporate Disclosure) Bill (CLERP 9), released in October 2003, the functioning of the AUASB is now overseen by the
Financial Reporting Council (which, as we have noted, oversees the operations of the AASB). This further diminished the
power of the Australian accounting profession in the area of developing disclosure and audit requirements. Since July 2006,
auditing standards released by the AUASB have legislative backing.
We will now give further consideration to each of the four main bodies involved in formulating and/or enforcing
accounting regulations within Australia.
1. Australian Securities and Investments Commission
The Australian Securities and Investments Commission (ASIC) evolved from the Australian Securities
Australian Securities
Commission (ASC). The ASC was established in 1989 by the Australian Securities Commission Act 1989 (Cwlth),
and Investments
and it replaced the National Companies and Securities Commission (NCSC).
Commission (ASIC)
Body responsible for
The name of the ASC was changed to ASIC in July 1998 to reflect the increased responsibility assigned to the
administering corporation
ASC in relation to monitoring and regulating various investment products, including superannuation, approved
legislation in Australia.
deposit accounts and retirement savings accounts. The website of ASIC (www.asic.gov.au) provides an overview
It is independent
of its role. The information provided on the website about ASIC’s role is reproduced in Exhibit 1.1 overleaf.
of state ministers or
state parliaments and
As indicated in Exhibit 1.1, ASIC is solely responsible for administering corporations legislation in Australia.
reports directly to the
It is independent of state ministers or state parliaments, and reports directly to the Commonwealth parliament
Commonwealth Parliament
and the treasurer. Among other things, the Corporations Act—which is administered by ASIC—outlines the
and the Attorney-General.
responsibilities of company directors in relation to the nature of their conduct, financial statement preparation,
lodgement and distribution. Since the Corporations Act enacts the majority of legislative requirements pertaining
to financial accounting, this discussion of ASIC will include a look at a number of the Act’s requirements. For those readers
interested in reviewing the contents of the Corporations Act (as well as other Acts), free access to electronic versions is
available at a site known as ComLaw (http://www.comlaw.gov.au), which, according to the website, is an integral part of
the Australian Law Online initiative to bring the community low-cost or no-cost access to the law and is maintained by the
Attorney-General’s department.
An important requirement of the Corporations Act is for directors of public companies, large proprietary companies,
organisations with securities listed on the Australian Securities Exchange and some small proprietary companies to present
shareholders with true and fair financial statements for a given financial year. (This and other requirements of the Corporations
Act do not apply to organisations outside the ambit of the Act, for example partnerships.) ‘Financial statements for the year’
is defined at s. 295(2) of the Corporations Act. Specifically, s. 295(2) states:
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a statement of financial position as at the end of the period;
a statement of comprehensive income for the period;
a statement of changes in equity for the period;
a statement of cash flows for the period;
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(b)
(c)
(d)
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Therefore the above requirements rely directly upon accounting standards, which are released by the AASB (and which, as
we now know, are generally developed at an international level by the IASB, based in London). To determine which ‘financial
statements’ would be included in a financial report we can refer to Accounting Standard AASB 101 Presentation of Financial
Statements, which was amended and rereleased in September 2007. Paragraph 10 of the standard states that a complete set
of financial statements comprises:
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The financial statements for the year are:
(a) the financial statements in relation to the entity reported on that are required by the accounting standards; and
(b) if required by the accounting standards—the financial statements in relation to the consolidated entity that are
required by the accounting standards.
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(e) notes, comprising a summary of significant accounting policies and other explanatory information; and
(f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements.
An entity may use titles for the statements other than those used in this Standard.
In relation to the above requirements, some of the terminology in the 2007 revised version of AASB 101 Presentation of
Financial Statements was new. For example, reference is made to the ‘statement of financial position’. This is equivalent to
what many people traditionally called a balance sheet. Further, rather than referring to an ‘income statement’, as was the case
in the ‘old’ AASB 101, reference is now made to a ‘statement of comprehensive income’. We will address the components
Exhibit 1.1
WHAT WE DO
The role of ASIC
ASIC is Australia’s corporate, markets and financial services regulator.
We contribute to Australia’s economic reputation and wellbeing by ensuring that Australia’s financial markets are fair
and transparent, supported by confident and informed investors and consumers.
We are an independent Commonwealth Government body. We are set up under and administer the Australian
Securities and Investments Commission Act (ASIC Act), and we carry out most of our work under the Corporations
Act.
The Australian Securities and Investments Commission Act 2001 requires us to:
• maintain, facilitate and improve the performance of the financial system and entities in it
• promote confident and informed participation by investors and consumers in the financial system
• administer the law effectively and with minimal procedural requirements
• enforce and give effect to the law
• receive, process and store, efficiently and quickly, information that is given to us
• make information about companies and other bodies available to the public as soon as practicable.
OUR PRIORITIES
ASIC’s priorities are:
1. Assist and protect retail investors and consumers in the financial economy
2. Build confidence in the integrity of Australia’s capital markets
3. Facilitate international capital flows and international enforcement
4. Manage the domestic and international implications of the global financial turmoil
5. Lift operational effectiveness and service levels for all ASIC stakeholders
6. Improve services and reduce costs by using new technologies and processes
WHO WE REGULATE
We regulate Australian companies, financial markets, financial services organisations and professionals who deal
and advise in investments, superannuation, insurance, deposit taking and credit.
As the corporate regulator, we are responsible for ensuring that company directors and officers carry out their
duties honestly, diligently and in the best interests of their company.
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As the financial services regulator, we license and monitor financial services businesses to ensure that they operate
efficiently, honestly and fairly. These businesses typically deal in superannuation, managed funds, shares and
company securities, derivatives and insurance.
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As the markets regulator, we assess how effectively authorised financial markets are complying with their legal
obligations to operate fair, orderly and transparent markets. We also advise the Minister about authorising new
markets.
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8 • PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT
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Source: www.asic.gov.au
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We have powers to protect consumers against misleading or deceptive and unconscionable conduct affecting all
financial products and services, including credit.
2/9/09 11:08:42 AM
of the statement of comprehensive income in another chapter (Chapter 17), but at this stage we note that paragraph 81 of
AASB 101 states that:
An entity shall present all items of income and expense recognised in a period:
(a) in a single statement of comprehensive income; or
(b) in two statements: a statement displaying components of profit or loss (separate income statement) and a second
statement beginning with profit or loss and displaying components of other comprehensive income (statement of
comprehensive income).
Hence there is still the option to present a ‘traditional’ income statement as long as it is also presented with a ‘statement of
comprehensive income’. Again, we will return to the statement of comprehensive income later in this textbook.
As we have noted above, the Corporations Act requires financial statements, as defined above, to be ‘true and fair’. The
requirement to produce true and fair financial statements is set out in s. 297 of the Corporations Act. Specifically, s. 297
requires that:
The financial statements and notes for a financial year must give a true and fair view of:
(a) the financial position and performance of the company, registered scheme or disclosing entity; and
(b) if consolidated financial statements are required, the financial position and performance of the consolidated entity.
But why do we need a ‘true and fair’ requirement? Because it is generally accepted that it would be unrealistic to
assume that specific disclosure rules or accounting standards could be developed to cover every possible transaction or
event. For situations not governed by particular rules or standards, the ‘true and fair view’ requirement is the general criterion
to assist directors and auditors to determine what disclosures should be made and to consider alternative recognition
and measurement approaches. Although there is no definition of ‘true and fair’ in the Corporations Act—which is perhaps
somewhat surprising—it would appear that for accounts to be considered true and fair, all information of a ‘material’ nature
should be disclosed so that readers of the financial statements are not misled. However, ‘materiality’ is an assessment calling
for a high degree of professional judgment. It is not possible to give a definition of ‘material’ that covers all circumstances.
Paragraph 9 of Accounting Standard AASB 1031 Materiality provides that:
Information is material if its omission, misstatement or non-disclosure has the potential, individually or collectively to:
(a) influence the economic decisions of users taken on the basis of the financial statement; or
(b) affect the discharge of accountability by the management or governing body of the entity.
The contents of AASB 1031 are consistent with how the concept of materiality is utilised in the IASB’s ‘Framework for the
Preparation and Presentation of Financial Statements’ (the IASB Framework) (paragraphs 29–30). The contents of AASB 1031
are also consistent with the definition of materiality provided in other accounting standards. For example, paragraph 7 of
AASB 101 Presentation of Financial Statements states:
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Moving on to other requirements of the Corporations Act, we note that directors of large and listed companies, as well
as some other entities, are required by the Act to attach to the company’s financial statements a Directors’ Declaration and
a Directors’ Report. The Corporations Act also requires a declaration to be made by the chief executive officer and the chief
financial officer. We will consider each of these requirements, in turn, below.
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Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions
that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be
the determining factor.
Assessing whether an omission or misstatement could influence economic decisions of users, and so be material, requires
consideration of the characteristics of those users. The Framework for the Preparation and Presentation of Financial
Statements states in paragraph 25 that ‘users are assumed to have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the information with reasonable diligence’. Therefore, the assessment
needs to take into account how users with such attributes could reasonably be expected to be influenced in making economic
decisions.
Directors’ declaration
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Within the Directors’ Declaration, required pursuant to s. 295(4) of the Corporations Act, directors must state whether, in
their opinion, the financial statements comply with accounting standards, and that the financial statements give a true and
fair view of the financial position and performance of the entity. Importantly, directors must also state whether or not in their
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opinion there were, when the declaration was made out, reasonable grounds to believe that the company would be able to
pay its debts as and when they fall due. Specifically, s. 295(4) states:
The directors’ declaration is a declaration by the directors:
(c) whether, in the directors’ opinion, there are reasonable grounds to believe that the company, registered scheme or
disclosing entity will be able to pay its debts as and when they become due and payable; and
(d) whether, in the directors’ opinion, the financial statement and notes are in accordance with this Act, including:
(i) section 296 (compliance with accounting standards); and
(ii) section 297 (true and fair view); and
(e) if the company, disclosing entity or registered scheme is listed—that the directors have been given the declarations
required by section 295A.
Should directors make such a declaration fraudulently, carelessly or recklessly, it is possible that they might become personally
liable for any outstanding debts of the company. Exhibit 1.2 reproduces the Directors’ Declaration in the 2008 annual report
of BHP Billiton Ltd.
Exhibit 1.2
Directors’ Declaration
of BHP Billiton Limited
(reproduced from 2008
annual report)
In accordance with a resolution of the Directors of the BHP Billiton Group, the Directors declare that:
(a) the financial statements and notes, set out on pages 165 to 239 are in accordance with the United Kingdom
Companies Act 1985 and the Australian Corporations Act 2001, including:
(i) Complying with the applicable Accounting Standards; and
(ii) Giving a true and fair view of the financial position of the BHP Billiton Group as at 30 June 2008 and of its
performance for the year ended 30 June 2008.
(b) the Directors’ Report includes a fair review of the development and performance of the business and the
financial position of the BHP Billiton Group and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that the Group faces; and
(c) in the Directors’ opinion there are reasonable grounds to believe that each of the BHP Billiton Group, BHP
Billiton Limited and BHP Billiton Plc will be able to pay its debts as and when they become due and payable.
The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the
Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2008.
Signed in accordance with a resolution of the Board of Directors.
D R Argus—Chairman
M Kloppers—Chief Executive Officer
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At this stage you, the reader, should try to obtain some recent corporate annual reports. Find the Directors’ Declaration in
each report. You will see that, in most cases, the declaration will be similar in form to the example shown here. As we discuss
other accounting requirements throughout this book, make a point of referring to your collection of recent annual reports to see
how the companies in your sample are complying with the various requirements that we are discussing. Referring to corporate
annual reports as you progress through this book will serve to give the material you read a more ‘real-world’ feel. Most large,
listed, Australian companies provide copies of their annual reports on their websites. Indeed, in recent years companies have
provided their annual reports on their websites as an alternative to posting them out to their shareholders. For example, see the
websites of:
• BHP Billiton (www.bhpbilliton.com)
• Westpac Banking Corporation (www.westpac.com.au)
• AMP (www.amp.com.au)
• Australia and New Zealand Banking Group Limited (www.anz.com.au)
• National Australia Bank (www.nab.com.au)
• Commonwealth Bank (www.commbank.com.au)
The annual reports of corporations will typically be available by clicking on an ‘investors’ or ‘shareholders’ option (or
something similar) that is commonly shown on the home page of a company’s website.
Financial Accounting in the News 1.1 (opposite) provides an extract from an article that illustrates what can happen if a
company continues trading when it is alleged that the directors knew, or ought to have known, that their company could not
pay its debts as and when they fell due. The illustration relates to a company in which a high-profile Australian businessman,
John Elliott, was a director. What the article emphasises is that directors can become personally liable because they appear
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Dated this 9th day of September 2008
2/9/09 11:08:42 AM
Accounting
in the News
1.1 Financial
HIH and One.Tel cast long shadows as
justice takes a sword to Elliott
Stephen Bartholomeusz
The Age, 1 July 2003, p. 3
If non-executive directors were curious about the wider implications of
yesterday’s Victorian Supreme Court sentencing of John Elliott and two
of his fellow Water Wheel directors, they needed to look no further than
the press release issued by the Australian Securities and Investment
Commission.
ASIC’s chairman, David Knott, was quick to provide a context for
the judgements, in which Elliott was fined $15,000, ordered to pay
shared compensation of $1.4 million to Water Wheel creditors and
banned from managing a company for four years.
‘ASIC,’ Knott said, ‘is satisfied that the penalties imposed in this
case have underlined the importance of the insolvent trading laws and
highlighted the serious consequences that may result when directors
exercise inadequate care and diligence.’
The true significance of the case is not that it breaks new ground in
relation to either insolvency law or directors’ duties but that it reflects
a relatively new-found determination by ASIC to step up its litigation in
the area.
Civil actions for damages from insolvent trading can be taken by a
liquidator or ASIC and, in limited circumstances, individual creditors.
In most instances, the potential recoveries aren’t worth the cost and
effort. Auditors provide a much more lucrative target.
ASIC hasn’t been particularly active or aggressive in bringing actions
against directors of failed companies. With Elliott, it had an opportunity
to pursue a high-profile target and took it. It appears it wanted to make
a statement of intent on insolvent trading—and it has.
That probably relates not just to the more aggressive and litigious
posture ASIC has adopted generally since Knott became chairman, but
to the heightened consciousness in relation to insolvent trading after
One.Tel and HIH.
While Justice Mandie differentiated between the responsibilities
of Water Wheel’s managing director, Bernard Plymin, its chairman,
William Harrison, and that of Elliott, a non-executive—he said Elliott
was significantly less culpable than Plymin and less culpable than
Harrison—Elliott’s contraventions were serious and represented ‘a
sustained and continuous course of inexcusable and unjustifiable
neglect of important duties of a non-executive director’.
Elliott had displayed no contrition or remorse and there was no
indication that he understood how he had failed to fulfil his duties as
a director.
Elliott has already said he will appeal against the judgement, which
he described as ‘grossly unfair’.
In his original findings, Justice Mandie said non-executive
directors were expected to take steps to put themselves in a position
to monitor the company and to exercise and form independent
judgements, and take diligent and intelligent interest in the information
available to them or which they might fairly demand from the staff of
the company.
Apart from demonstrating diligence, the judgement appears to
require non-executives to take positive steps, particularly if there have
been any warning signs, to assure themselves that the company is in a
position to pay its debts as and when they fall due.
There doesn’t appear to be any significant new law in the Water
Wheel case but it does conform to the broader trends within the courts
and the community that place an increasing responsibility—some would
say an ever-increasing responsibility—on non-executive directors to
actively discharge their duties.
Non-executives may have to prove not that they weren’t aware of
a company’s insolvency or potential insolvency but that they actively
took all reasonable steps to satisfy themselves that the company was
solvent.
As Knott said yesterday, the directors have to be able to show
that they have probed and are diligent—they can’t perform their duty
by simply asking the management whether or not the company is
solvent.
The significance of the penalties and the compensation ordered was,
Knott said, that none of the three men was being punished for making
mistakes—the punishment was for failing to act with reasonable care
and diligence and the scale of the punishment reflected an increase in
punishments being levied for white-collar offences.
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not to have taken reasonable care and diligence, and not simply because they have been seen to make specific mistakes or to
have acted fraudulently.
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In the Directors’ Report, required pursuant to ss. 298–300A of the Corporations Act, directors must provide items of
information, such as the names of the directors, details of directors’ emoluments, the principal activities of the company,
review of operations during the year, significant changes in the state of affairs of the company, likely future developments and
results, significant post-balance-date events, and details about compliance with environmental laws.
The Directors’ Report often includes a great deal of information that is provided by corporations on a voluntary basis.
That is, while the Corporations Act stipulates the minimum level of disclosure that must be made in a Directors’ Report, many
organisations voluntarily produce additional information (which raises a number of interesting issues about why they elect to
disclose additional information when not required to—we will consider this again in Chapter 3). For example, in recent years
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it has been common to find companies voluntarily providing information about community-based projects in which they are
participating, as well as employee-training schemes and safety initiatives, and company-promoted environmental initiatives.
Review the Directors’ Reports of a number of companies to see the variety of topics that are addressed in these reports.
As a result of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill (CLERP 9)
released in October 2003, the Directors’ Report also has to include an operating and financial review (from July 2004). The review
should include information that shareholders of the company would reasonably require to make informed assessments of the
operations, financial position and future strategies of the organisation. Specifically, s. 299A(1) of the Corporations Act states:
The directors’ report for a financial year for a company or disclosing entity that is a listed public company must also contain
information that members of the company would reasonably require to make an informed assessment of:
(a) the operations of the entity reported on;
(b) the financial position of the entity; and
(c) the entity’s business strategies and its prospects for future financial years.
Declaration by chief executive officer and chief financial officer
By virtue of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill (CLERP 9) released in
October 2003 the chief executive and chief financial officers of entities with securities listed on the Australian Securities Exchange
are required to provide a written declaration to the board of directors that the annual financial statements are in accordance with
the Corporations Act and accounting standards and that the financial statements present a true and fair view of the entity’s financial
position and performance. Specifically, s. 295A of the Corporations Act states that a declaration is to be made that:
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2. Australian Accounting Standards Board
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While the Corporations Act, which is administered by ASIC, requires corporations to comply with accounting
standards (as per s. 296 of the Corporations Act), ASIC does not actually develop accounting standards. This
responsibility is borne by the Australian Accounting Standards Board (AASB).
The AASB began operations on 1 January 1991 and replaced the Accounting Standards Review Board.
While its functions, membership and structure were changed in 2000 as a result of amendments included in
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accounting practices,
making and formulating
accounting standards,
and participating in and
contributing to the
development of a single set
of accounting standards for
worldwide use.
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As we can see from the Directors’ Declaration provided in Exhibit 1.2, towards the end, the Directors’ Declaration of
BHP Billiton specifically notes that the directors received the declaration by the chief executive officer and the chief financial
officer.
Also of relevance to the functioning of ASIC is the establishment of the Financial Reporting Panel (FRP). This panel,
which functions under the auspices of ASIC, commenced operations in July 2006. The FRP acts to resolve disputes, on a
non-binding basis, between ASIC and companies in regard to whether companies’ financial statements have been prepared
in accordance with accounting standards, and whether financial statements present a true and fair view. The intention is for
the FRP to provide:
• a timely, efficient and cost-effective way of resolving disputes concerning accounting treatments in financial reports;
• the opportunity to be heard by persons with relevant expertise; and
• a mechanism to alleviate some concerns regarding the use of the courts for adjudication on technical accounting issues.
Various matters can be referred to the FRP by ASIC or by the respective reporting entities to the extent ASIC consents
to this. Once the FRP makes a finding, such finding is not binding on either ASIC or the company, and the dispute might
still be pursued in the Federal Court. The FRP is not a general Interpretations body like the International Financial Reporting
Interpretations Committee (which we will discuss later in this chapter), but rather its mandate is to decide on
matters specific to a single company with due regard to the facts and circumstances particular to that company.
Australian Accounting
The FRP has a dedicated website at www.frp.gov.au.
Standards Board
Lastly, from time to time ASIC also releases policy statements and guidelines that relate to various issues,
Body charged with
developing a conceptual
including financial reporting. For example, ASIC has released statements in relation to pension accounting and
framework for
valuing share options. To see current ASIC policy statements go to ASIC’s website at www.asic.gov.au.
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(a) the financial records of the company, disclosing entity or registered scheme for the financial year have been properly
maintained in accordance with section 286;
(b) the financial statements, and the notes referred to in paragraph 295(3)(b), for the financial year comply with the
accounting standards;
(c) the financial statements and notes for the financial year give a true and fair view (see section 297); and
(d) any other matters that are prescribed by the regulations for the purposes of this paragraph in relation to the financial
statements and the notes for the financial year are satisfied.
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the Corporate Law Economic Reform Program Act 1999 (Cwlth), the body charged with formulating accounting standards has
retained the name ‘Australian Accounting Standards Board’. The functions of the AASB are listed at s. 227 of the ASIC Act
and include to:
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The AASB is responsible for ‘making’ accounting standards that have the force of law pursuant to s. 334 of the Corporations
Act, and also for ‘formulating’ accounting standards that are to be used in the public and non-profit sectors (that is, by entities
that are not governed by the Corporations Act). The difference in terminology between ‘making’ and ‘formulating’ accounting
standards can be explained as follows. When the AASB develops accounting standards that have the force of the Corporations
Act, it is said to be making standards. When it develops accounting standards that are to be applied by entities other than those
governed by the Corporations Act, it is said to be formulating accounting standards. For many years within Australia we had two
sets of accounting standards: those that applied to corporations and other entities that are governed by the Corporations Act
(which had the prefix AASB); and another set that applied to entities not governed by the Corporations Act (bearing the prefix
AAS, which referred to Australian Accounting Standards). Having two sets of accounting standards was a source of confusion for
many. To remove some of this confusion it became the practice of the AASB to issue only one set of accounting standards (with
the prefix AASB), which have general applicability to the private, public and not-for-profit sectors. That is, the AASB adopted
a ‘sector-neutral’ approach to the development of accounting standards. Within 2008, the few remaining public-sector related
standards (which were AAS 27 ‘Financial Reporting by Local Governments’; AAS 29 ‘Financial Reporting by Government
Departments’; and AAS 31 ‘Financial Reporting by Governments’) were withdrawn, and government-specific requirements
were included as additional requirements in other accounting standards. This is in line with the aim of the AASB that all
standards should be sector-neutral—meaning that there will be no need to have standards that are specifically developed for
the government sector, the not-for-profit sector or the for-profit sector. Hence, it is expected that accounting standards with the
AAS prefix will gradually disappear over time (at the time of writing, the only remaining AAS standard was AAS 25 ‘Financial
Reporting by Superannuation Plans’). No new AAS accounting standards (which generally applied to non-corporate entities)
have been issued since the end of 1999.
For many years the AASB has been responsible for making accounting standards with the force of law under the
Corporations Act (the standards with the prefix AASB). It is only since the beginning of 2000 that the AASB has also had the
responsibility for formulating accounting standards for entities not governed by the Corporations Act. As noted above, this was
previously the responsibility of the Public Sector Accounting Standards Board (PSASB), which has since been disbanded (the
PSASB was under the control of the accounting profession). As also indicated above, from 2000 AASB standards apply to all
types of entities, that is to entities regulated under companies legislation and to all other types of entities.
We will consider the full list of AASB accounting standards later in this chapter. It is worth re-emphasising here that the
majority of AASB standards underwent changes in 2003 or 2004 as Australia moved towards adopting accounting standards
released by the IASB from 2005. We will focus on the AASB standards, which are mostly the same as the standards issued by
the IASB, throughout the balance of this book.
The AASB reports to the Financial Reporting Council (FRC). The FRC assumes an oversight function in regard to
the AASB, and appoints the twelve part-time AASB members. The part-time members of the AASB come from a variety of
backgrounds, including the private sector, government, academia, Big 4 accounting firms and independent consultancy.
Section 236B of the ASIC Act requires that a person may not be appointed a member of the AASB unless their ‘knowledge
of, or experience in, business, accounting, law or government qualifies them for appointment’. The full-time chairperson of
the AASB is appointed by the federal treasurer (by now it should be becoming clear how much control the government is
attempting to exert over accounting standard setting).
The structure of Australian accounting standard setting can be summarised diagrammatically, as in Figure 1.1
(overleaf).
Referring to the diagram overleaf, the ‘Minister for Superannuation and Corporate Law’ appoints the chairman of the
Australian Accounting Standards Board (AASB). The Chairman of the AASB is accountable to the Minister in respect of
the operations of the AASB and the Office of the AASB. The ‘Office of the AASB’ provides technical and administrative
services, information and advice to the AASB and is responsible to the ‘Minister for Superannuation and Corporate Law’
for financial management of the Office of the AASB. The Chairman of the AASB is also the chief executive officer of the
Office.
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•
•
•
develop a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating
accounting standards and international standards;
make accounting standards under section 334 of the Corporations Act for the purpose of the national scheme laws;
formulate accounting standards for other purposes; and
participate in and contribute to the development of a single set of accounting standards for world-wide use.
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Figure 1.1
Organisational Structure
Diagrammatic
representation of the
structure of Australian
accounting standard
setting
Minister for Superannuation and Corporate Law
Financial
Reporting
Council
Australian
Accounting
Standards Board
Office of the Australian
Accounting
Standards Board
Consultative group
Focus groups
Project advisory panels
Interpretation
advisory panels
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The above diagram also identifies ‘focus groups’ as part of the AASB structure. These focus groups are further divided
into:
• User Focus Group; and
• Not-for-Profit (Private Sector) Focus Group.
According to the AASB website, the ‘User Focus Group’ was established to increase participation by analysts in the
accounting standard-setting process in order to enhance feedback from the perspective of a significant group of users of
financial statements. The purpose of the User Focus Group is to assist the AASB in raising awareness of how investors and
investment professionals, equity and credit analysts, credit grantors and rating agencies use financial statements and of their
information needs.
The AASB’s Not-for-Profit (Private Sector) Focus Group is designed to increase participation by those involved with these
entities in the accounting standard-setting process and to enhance feedback from the perspective of a significant group of
preparers and users of financial statements. The Not-for-Profit Focus Group comprises members who have expertise in, and
are involved in, charitable and related organisations; these members are a key source of information in this area and provide
feedback to the AASB on selected projects.
As we can see from Figure 1.1, the AASB also has ‘project advisory panels’. Experts in a particular field or topic area are
invited to join an advisory panel to provide advice that will assist the AASB in progressing specific standard-setting projects.
Panels work with AASB staff to develop agenda materials for consideration by the Board.
Interpretations advisory panels are another important component of the AASB structure. The predecessor of these panels
was the Urgent Issues Group (UIG), which was established in 1995. The UIG was initially formed under the auspices of
the accounting profession (through the Australian Accounting Research Foundation), but in 2000 it came under the control
of the AASB. According to paragraph 2 of the UIG Charter (re-released in June 2004), the role of the UIG was to provide
timely guidance on urgent financial reporting issues. In providing such guidance, the UIG sought to avoid the development
of divergent or unsatisfactory financial reporting practices in areas not dealt with, or not dealt with specifically, in accounting
standards.
In June 2006 the UIG was disbanded and the AASB assumed responsibility for developing Interpretations. Interpretations
are required from time to time in respect of how particular accounting requirements are to be interpreted and applied in the
Australian context. As stated on the AASB website: ‘Interpretations are issued by the AASB to provide requirements concerning
urgent financial reporting issues.’ The UIG was disbanded out of concern that Australian Interpretations of particular reporting
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SOURCE: © Australian Accounting Standards Board (AASB) www.aasb.com.au
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requirements might not be consistent with those made at the international level. Further, the International Financial Reporting
Interpretations Committee (IFRIC)—which functions under the auspices of the IASB—was specifically established to provide
official Interpretations of the standards being released by the IASB and, therefore, being used within Australia. We discuss
IFRIC in greater depth later in this chapter.
According to the AASB website, one of the features of the new (post-2006) ‘Interpretations model’ is that the AASB
decides on a topic-by-topic basis whether to appoint an advisory panel, which would be constituted as a committee of the
AASB. The role of advisory panels is limited to preparing alternative views on an issue and, where appropriate, presenting
recommendations for consideration by the AASB.
Each Interpretations Advisory Panel normally includes between four and eight members, including the AASB chairman
and at least one other AASB member. Panel members are appointed on the basis of their professional competence and practical
experience in the topic area. Panels have a balanced composition to ensure that both depth of knowledge and breadth of
perspective are achieved. The AASB seeks to ensure that the perspectives represented include those of preparers, users,
auditors and regulators.
Where an Interpretations Advisory Panel makes a recommendation, the process would generally be as follows:
(a) If an issue proposal relates to an Australian equivalent to IFRS, the Panel will either:
• recommend that the AASB take no action and give reasons; or
• recommend to the AASB that the issue be referred to the International Financial Reporting Interpretations
Committee (IFRIC) for consideration for inclusion in its work program.
Decisions by the AASB in respect of all rejected issue proposals relating to Australian equivalents to IFRSs will be sent to
IFRIC for information and be published on the AASB website. Where the AASB refers an issue proposal to IFRIC:
(i) if IFRIC adds the issue to its work program, the AASB will adopt IFRIC decisions in respect of including the issue
in the IFRIC work program; and
(ii) if IFRIC does not add the issue to its work program, the AASB will assess the reasons for its rejection and,
depending on the significance of the issue in Australia and before publishing an agenda rejection statement on the
AASB website, decide whether further action, if any, should be taken by the AASB. The AASB may decide to add
the issue to its work program and establish an advisory panel. However, the AASB considers that a unique domestic
interpretation of an Australian equivalent to IASB requirements will be required only in rare and exceptional
circumstances.
(b) If the issue proposal relates to domestic requirements that relate only to not-for-profit entities in the public and/or private sectors,
the Panel will either:
• recommend that the AASB take no action and give reasons; or
• recommend that the issue be added to the work program and, if required, a panel be established to prepare
recommendations for consideration by the AASB.
The AASB website lists the various Interpretations on issue. Organisations that are required by law to follow AASB
Accounting Standards are also required to follow the Interpretations released by the AASB. This is made explicit in AASB 1048
Interpretation and Application of Standards. We will consider AASB 1048 again later in this chapter when we discuss IFRIC’s
functions more fully.
Having discussed the organisational structure of the AASB, we now turn our attention back to accounting standards.
Section 231 of the ASIC Act requires the AASB to carry out a cost–benefit analysis of the impact of a proposed accounting
standard before making or formulating that standard (to the extent ‘to which it is reasonably practicable to do so in the
circumstances’). Of course, working out the costs and benefits of an accounting standard can be a very difficult, and sometimes
political, exercise. Section 231 of the ASIC Act states that:
(1) The AASB must carry out a cost–benefit analysis of the impact of a proposed accounting standard before making
or formulating the standard. This does not apply where the standard is being made or formulated by issuing the
text of an international standard (whether or not modified to take account of the Australian legal or institutional
environment).
(2) The AASB must carry out a cost–benefit analysis of the impact of a proposed international accounting standard
before:
(a) providing comments on a draft of the standard; or
(b) proposing the standard for adoption as an international standard.
(3) The AASB has to comply with subsections (1) and (2) only to the extent to which it is reasonably practicable to do so
in the circumstances.
(4) The Minister may direct the AASB to give the Minister details of a cost–benefit analysis carried out under this
section. The AASB must comply with the direction.
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In the context of developing accounting standards, we are left in no doubt that the FRC’s views carry considerable weight in
the standard-setting process. Section 232 of the ASIC Act states that:
In performing its functions, the AASB must follow the broad strategic direction determined by the FRC under paragraph
225(2)(c). [emphasis added]
It is worth stressing that before 2000 no such body as the FRC existed to oversee the activities of the AASB or the AUASB.
Once the AASB makes an accounting standard, which as we know is generally the equivalent of a standard issued by the
IASB, it is the responsibility of the Commonwealth Parliament to either allow or disallow the standard. Before being approved by
parliament, standards released by the AASB are referred to as ‘pending’ accounting standards. The accounting standards themselves
will generally provide guidance on how a classification of items (for example, inventory) should be measured and disclosed.
Once a pending accounting standard is approved by parliament, directors are required to ensure that a company’s
financial statements comply with the standard. This is in terms of s. 296 of the Corporations Act, which requires a company’s
directors to ensure that the company’s financial statements for a financial year are made out in accordance with accounting
standards.
As already noted, from 2004 there is also a requirement within the Corporations Act for the chief executive officer and chief
financial officer of listed companies to provide a written declaration to the board of directors to the effect that the financial
statements comply with accounting standards.
Most ‘small’ proprietary companies, however, are exempted from complying with accounting standards released by
the AASB. Following amendments made in 2007, and pursuant to the Corporations Act, s. 45A, a proprietary company is
considered to be ‘small’ if it satisfies two of the following three tests:
1. Its gross operating revenue is less than $25 million.
2. Its gross assets are less than $12.5 million.
3. It has fewer than 50 employees.
Section 296 of the Corporations Act provides that:
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Effectively, a small proprietary company does not have to prepare formal accounts, apply accounting standards, or have
its financial statements audited unless ASIC requests the company to do so, or if shareholders holding at least 5 per cent of
the voting shares request the company to do so. If a proprietary company is not considered small, it is classified as large, and
large proprietary companies are subject to more stringent disclosure requirements.
Public companies and large proprietary companies will typically have to prepare financial statements that comply with
accounting standards, have their financial statements audited and send them to the members (shareholders) of the company
(or make them available on the corporation’s website if the shareholder has not made a specific request to receive a hard copy).
The existence of this differential reporting requirement for small and large proprietary companies is based on the assumption
that the limited number of parties with a material interest in ‘small’ companies would conceivably be able to request information
to satisfy their specific needs. However, it is assumed that the majority of shareholders in ‘large’ companies do not have this
ability. As organisations become larger there tends to be greater separation between ownership and management (or, as this is
often termed, between ownership and control) and owners tend to become more reliant on external reports in order to monitor
the progress of their investment. Further, as an entity increases in size, its economic and political importance increase, and in
general this increases the demand for financial information about the entity.
In relation to the issue of differential reporting, it should be noted that in February 2007 the IASB issued an Exposure
Draft (ED) entitled International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs). (The IASB
subsequently changed the name of the proposed standard to IFRS for Private Entities.)
The IASB started the differential reporting project because the full application of IFRSs was designed to meet the needs
of equity investors in companies in public capital markets: IFRSs cover a wide range of issues, contain a sizeable amount of
implementation guidance and include disclosures appropriate for public companies. Users of the financial statements of private
entities arguably do not have the same needs, but rather are more focused on assessing shorter-term cash flows, liquidity and
solvency. Also, many private entities say that full IFRSs impose a burden on them—a burden that has been growing as IFRSs
have become more detailed and more countries have begun to use them. Thus, in developing the proposed IFRS for Private
Entities, IASB’s twin goals were to meet user needs while balancing costs and benefits from a preparer perspective.
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The financial report for a financial year must comply with accounting standards. However, a small proprietary company’s
report does not have to comply with particular accounting standards if:
(a) the report is prepared in response to a shareholder direction under section 293 (which requires at least 5% of the
votes in a small proprietary company);
(b) the direction specifies that the report does not have to comply with those accounting standards.
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The objective of the project is to develop an IFRS expressly designed to meet the financial reporting needs of entities that
(a) do not have public accountability and (b) publish general purpose financial statements for external users. Examples of such
external users include owners who are not involved in managing the business, existing and potential creditors, and credit-rating
agencies. The IFRS for Private Entities will be derived from full IFRSs, with appropriate modifications based on the needs of
users of private entity financial statements and cost–benefit considerations. The standard is expected to be published some
time in late 2009. Hence, in future years we can expect to see the reporting burden for many unlisted companies eased to
some extent.
Throughout this book, we will be referring to specific accounting standards issued by the AASB. Some AASB accounting
standards are applicable only to specific classes of companies (for example, companies listed on the Australian Securities
Exchange). Occasionally, ASIC may, pursuant to the Corporations Act, release a Class Order that grants relief from certain
Corporations Act provisions, such as the requirement to comply with all accounting standards. As we have indicated in this
chapter, from 2000 the AASB has also been responsible for issuing standards applicable to reporting entities that are not
governed by the Corporations Act (for example, large partnerships and government departments).
As noted above, and pursuant to s. 285(2) of the Corporations Act, AASB standards can apply to some entities that are
not of a corporate form—for example, to ‘disclosing entities’. This has had the effect of increasing the ambit of accounting
standards so that all disclosing entities need to comply with the majority of AASB accounting standards. According to the
Corporations Act, disclosing entities include:
(a) entities which have securities that are quoted on a stock market of a securities exchange;
(b) entities which have securities (except debentures) that have been issued pursuant to a prospectus;
(c) entities which have securities (except debentures) that have been issued as consideration for the acquisition of shares
pursuant to a takeover scheme;
(d) entities which have securities that have been issued pursuant to a Part 5.1 compromise or arrangement; and
(e) borrowing corporations.
Disclosing entities are required to comply with AASB accounting standards, with only a limited number of exceptions.
Hence, many forms of organisations other than companies are now required by law to follow the majority of AASB accounting
standards. This is despite the specific wording of some AASB standards.
Before the release of AASB accounting standards, or the release of components of the conceptual framework (to be
discussed in more detail in Chapter 2), the contents of the proposed releases are subject to critical review. In the past, the
typical process involved when the AASB developed an accounting standard or a statement of accounting concept was that,
once a particular project was initiated, relevant informed individuals were commissioned to develop a discussion paper or
theory monograph. This was done within Australia. This paper was then released for public discussion to determine whether
key areas had been addressed, particularly as they relate to the Australian context. After further consideration by the regulatory
bodies, a draft exposure draft was developed for review by selected parties. Once it was established that the draft document
appropriately addressed the issue of concern, an exposure draft was released for public discussion. After considering public
comments, a draft standard may have been released or, alternatively, a revised exposure draft may have been developed. There
was then a further period for comment, following which an accounting standard or concept statement might finally have
been released. Exposure drafts do not have the force of an accounting standard, but they do provide an indication of future
reporting requirements.
Central to the above process was that the development of the accounting standard was undertaken very much within the
Australian context, with due consideration given to international accounting standard developments. However, and as a result
of the decision made in 2002 by the FRC that Australia would adopt accounting standards developed by the International
Accounting Standards Board (such standards now being referred to as International Financial Reporting Standards or IFRSs),
the development of most accounting standards to be used within Australia is now not directly under the control of Australian
accounting standard setters (except to the extent that the accounting standard relates to domestic issues and there is no
equivalent IFRS). There are various costs and benefits associated with this delegation of responsibility to the IASB (try to think
of what some of these costs and benefits might be).
The true and fair view: further considerations
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Before the early 1990s, the directors of a company could elect not to comply with an accounting standard on the grounds that
applying the particular standard would cause the accounts not to present a true and fair view. The ‘old’ s. 298(2) provided
that:
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where a company’s financial statements for a financial year would not, if made out in accordance with a particular
applicable accounting standard, give a true and fair view of the matters with which this division requires the financial
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statements to deal, the directors need not ensure that the financial statements are made out in accordance with that
accounting standard.
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Sections of the accounting industry have expressed concern about
looming changes to the new Corporations Law, which will downgrade
the current overriding requirement that accounts present a ‘true and
fair’ picture of the company.
KPMG Peat Marwick partner, Mr John Richardson, has objected
to the change which will require all company reports to comply with
accounting standards, without exception.
In a detailed commentary on the proposed amendments, to be
debated in Federal Parliament later this month, Mr Richardson says
that no allowances would be made for circumstances in which the
standards did not give a true and fair view of the financial condition of
the company.
Instead, where directors thought the standards differed from the
true and fair view, they had to disclose their reservations, and the extra
information, in a note.
The change was wrong and would cause ‘dismay’, as the
accounting standards could not possibly cover all the different types
and combinations of business activity in Australia, Mr Richardson
said. Accounting authorities and other accountants contacted by
The Australian Financial Review disagreed with Mr Richardson, but
the proposed changes will certainly greatly increase the stakes in
the already fierce battles fought between various industries and the
Australian Accounting Standards Board (AASB).
Standards set by the AASB can drastically alter both the reported
profit levels and form in which the profits can be presented.
One example of these disagreements was a complaint by the NSW
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The Australian Financial Review, 24 May 1991
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Accounting rule change criticised
insurance office GIO, early this year, that the accounting standards
enforced by the NSW Auditor-General did not present a realistic
picture of the life division’s profit. (GIO’s version of the result showed a
substantial fall in profit.)
At present, company directors who disagree with the accounting
standards can override them by invoking the requirement that the
accounts present a ‘true and fair’ picture of the company. The true and
fair view is then used and the disagreement with the standard is put in
a footnote, as well as in the auditor’s report.
After planned amendments to The Corporations Law, that order
of precedence will be reversed so that all company reports must first
comply with the accounting standards. Should extra information be
required to ensure that shareholders also have a true and fair view of the
company, then that information must be added in a footnote.
Mr Richardson said that the true and fair requirement, which the
auditor was also required to follow, was both practical and powerful.
But it did not make sense to apply inappropriate standards or measures
of profit, and then try to correct the matter in footnotes.
Both the director of the Australian Accounting Research Foundation,
the research arm of the AASB, Mr Warren McGregor, and the national
director accounting and auditing standards for Ernst & Young, Mr David
Boymal, disagreed with Mr Richardson.
Mr McGregor said the true and fair concept had never been tested
in a court so no-one knew what the words meant, and the concept
allowed too much scope for ‘window dressing’.
He said company directors did not have to justify using the true and
fair override and the old National Companies and Securities Commission
(replaced by the ASC) had been reluctant to go to the cost and trouble
of finding out what the words meant in a court action.
The accounting standards had been developed to fit all reporting
entities and even if directors did not believe those standards applied to
their company, there was nothing to stop them adding information.
Mr Boymal said that it was necessary to stop directors from violating
accounting standards.
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1.2 Financial
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The above requirement, which allowed directors to elect not to comply with an accounting standard if non-compliance
was deemed necessary to create true and fair accounts, was referred to as the ‘true and fair override’. The perspective taken
was that in some isolated cases certain accounting standards might not be appropriate for a particular entity and application
of the standards might actually make the financial statements misleading. However, this view was abandoned some years later,
and the corporations law was amended and the override withdrawn such that Section 296 of the Corporations Act requires that
‘[t]he financial report for a financial year must comply with accounting standards’ (although, as we indicated earlier, there
is a ‘let-out’ for small proprietary companies). Following the amendment, directors were therefore required to comply with
applicable accounting standards. If, in their view, compliance did not generate a true and fair view, additional information had
to be presented in the notes to the financial statements. The article by Mark Lawson in Financial Accounting in the News 1.2,
entitled ‘Accounting rule change criticised’, provides an insight into the debate that surrounded the removal of the true and
fair override.
Numerous writers had argued that as the true and fair view requirement is not clearly defined, directors could invoke the
‘true and fair override’ to justify not complying with particular accounting standards. Without a clear definition of ‘true and
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fair’, it is difficult for ASIC or its predecessors, the ASC and the NCSC, to take action on the basis that the departure did not
enhance the truth and fairness of the accounts. As McGregor (1992, p. 70) stated:
The tendency of an increasing number of companies to seemingly avoid complying with approved Accounting Standards
at will has, in the past, been accompanied by an extreme reluctance on the part of the body responsible for enforcing the
law—in the main the National Companies and Securities Commission (NCSC)—to pursue transgressors through the
courts because of a perceived difficulty of successfully prosecuting the companies against the ‘true and fair defence’. Henry
Bosch, the former chairman of the NCSC, has said: ‘No, there were no prosecutions, for the reason I gave Mr Scholes earlier
on—that the true and fair overrides. I told you of a particular case where there was a flagrant breach of an Accounting
Standard—the goodwill standard. I was advised that I would not win. It was also put that if we took the case and lost, the
dam would burst and everybody would see that what we were saying could not be sustained in court. It seemed too risky to
go down that road.’
In 2003 the issue of the true and fair override was reignited when the Institute of Chartered Accountants in Australia
made calls for its reintroduction. The article by Tom Ravlic in Financial Accounting in the News 1.3 below, entitled
‘Top accountants oppose push for easing of standards’, provides details of the ICAA position. At present, it appears unlikely
that the true and fair override will be reintroduced.
The true and fair override has not been reintroduced, and directors must comply with accounting standards. Nevertheless,
if directors believe that particular accounting standards are not appropriate, they have the option of highlighting this fact and
explaining why. Specifically, paragraph 23 of AASB 101 Presentation of Financial Statements (reissued in September 2007 and
the reference to ‘the Framework’ below relates to The Framework for the Preparation and Presentation of Financial Statements)
states:
In the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian
Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in
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Two of Australia’s top accounting experts have slammed suggestions
that companies should be allowed to ignore accounting rules in certain
circumstances.
A taskforce set up by the Institute of Chartered Accountants in
Australia has urged the reintroduction of a ‘true and fair’ override,
which would allow companies to avoid accounting treatments that they
deemed harsh. The three-man taskforce said it would prefer companies
to comply with a general obligation for accounts to be true and fair
rather than comply strictly with accounting standards.
Under their proposal companies would outline the consequence
of breaching the standards in the notes that follow the main financial
statements dealing with financial position and profit and loss.
The taskforce believes the override would not subvert the accounting
rules.
Such an override existed in the 1980s and was removed by federal
parliament in the 1990s because high-profile companies used it to
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Tom Ravlic
The Age, 4 August 2003, p. 3
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Top accountants oppose push for
easing of standards
avoid the provisions of accounting standards they disliked.
The use of an override would create confusion in the marketplace,
Amcor’s general manager of finance, Peter Day, said.
‘It would make it extremely difficult for a corporate regulator to police
compliance with accounting pronouncements.’
The abuses of the 1980s could return if people were given an
opportunity to flout accounting standards at will, he said.
Mr Day, a former chairman of the Australian Accounting Standards
Board, said the current law provided investors with some certainty
about information and if companies disliked the effect of a particular
accounting standard they could detail their concerns in the notes to the
accounts or at the annual meeting.
‘Companies can also lobby accounting standard setters to change
an accounting standard over a period of time,’ said Mr Day, who is also
the Australian representative on the consultative group to the International
Accounting Standards Board.
‘From a personal standpoint, I would be reluctant to invest in
any company that did not follow the accounting standards.’ Wayne
Lonergan, the managing director of consultants Lonergan Edwards,
said a return to a true-and-fair override would be a retrograde step.
‘The override was so thoroughly abused that it had to be removed
from the marketplace,’ Mr Lonergan said.
‘There are simply no grounds for reintroducing it and thus facilitating
another round of abuse.’
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CHAPTER 1: AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT • 19
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the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the
maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:
(a) the title of the Australian Accounting Standard in question, the nature of the requirement, and the reason why
management has concluded that complying with that requirement is so misleading in the circumstances that it
conflicts with the objective of financial statements set out in the Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that management has concluded
would be necessary to achieve a fair presentation.
As we can see from the above, AASB 101 includes a rebuttable presumption that if other entities in similar circumstances
comply with the requirement, the entity’s compliance with the requirement would not be so misleading that it would conflict
with the objective of financial statements set out in the AASB Framework.
A current problem is that our qualitative requirement (defined below) of true and fair is very unclear. There is no legal
definition of ‘true and fair’. Even though the Corporations Act requires directors to make sufficient disclosures to ensure that
financial statements present a ‘true and fair’ view, it provides no definition of the concept. Nor has the Australian accounting
profession provided definitive guidelines relating to truth and fairness. The Directors’ Declaration of BHP Billiton, reproduced
earlier in Exhibit 1.2, shows how directors are required to state that the financial statements are true and fair. The auditors of a
company are also required to give an opinion on whether, in their opinion, the financial statements are true and fair. Exhibit 1.3
shows the opinion section of the auditor’s report from BHP Billiton’s 2008 annual report. Apart from the audit opinion section,
an audit report of a corporation also typically includes sections on scope, the respective responsibilities of directors and auditors
and the basis of audit opinions (these parts have not been included in Exhibit 1.3).
Exhibit 1.3
AUDIT OPINION OF KPMG TO THE MEMBERS OF BHP BILLITON LIMITED
Extract from the
independent audit
report in BHP Billiton’s
2008 annual report
In our opinion:
(a) the financial report of the Group is in accordance with the Australian Corporations Act 2001, including:
(i) giving a true and fair view of the Group’s financial position as at 30 June 2008 and of its performance for the
financial year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the
Australian Corporations Regulations 2001.
(b) the financial report of the Group also complies with International Financial Reporting Standards as disclosed in
note 1.
(c) the remuneration disclosures that are contained in the sections of the Directors’ Remuneration Report
described as being audited comply with Section 300A of the Australian Corporations Act 2001.
KPMG
Peter Nash
Partner
Melbourne
9 September 2008
20 • PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT
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Within the discussion paper, three alternative qualitative standards were proposed:
1. The first alternative was to retain the true and fair view requirement, but to provide a technical meaning by way of a
definition, thus providing a way to remove existing ambiguities relating to the meaning of the concept.
2. The second alternative was to amend the Corporations Act by replacing the true and fair view requirement with a
requirement that general purpose financial statements of companies comply with the explicit financial reporting
framework comprising statements of accounting concepts and accounting standards. This would allow a qualitative
standard to be incorporated within this framework.
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the basis for establishing a benchmark to regulate the overall quality of financial reports prepared under the relevant
financial reporting regime . . . the qualitative standard is concerned with prescribing a certain total or overall quality for the
information contained in the financial reports that will enhance their usefulness to users of those reports.
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In December 1993, the Legislation Review Board (LRB) released a discussion paper entitled ‘A Qualitative Standard for
General purpose Financial Reports: A Review’. The LRB comprised representatives from the accounting bodies, and reported
to the Australian Accounting Research Foundation. In the discussion paper (p. 7), qualitative standards (such as the true and
fair view requirement) are defined as:
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3. The third alternative was to require that general purpose financial statements be prepared in accordance with generally
accepted accounting procedures (GAAP).
The discussion paper did not support one alternative in preference to another, and at present the true and fair view
requirement is a very important part of Australian corporate reporting. Nevertheless, as there has been such debate on the
issue it is possible that the true and fair view requirement will be amended or removed in the future.
We will now further consider the organisation that oversees the activities of the AASB, this being the Financial Reporting
Council.
3. Financial Reporting Council
As noted previously in this chapter, the Financial Reporting Council (FRC) oversees the activities of the AASB.
Financial Reporting
There are 18 people on the FRC, who are nominated by a number of interest groups (stakeholders), as well as a
Council (FRC)
chairperson. The website of the FRC at (www.frc.gov.au) provides the names and occupations of those making
Body that oversees the
activities of the AASB and
up the membership of the FRC. Section 235(A)(1) of the Australian Securities and Investments Commission Act 2001
the AUASB.
(ASIC Act)—also available on the ComLaw website referred to earlier—provides that members of the FRC are either
appointed directly by the treasurer or, alternatively, the treasurer may specify an organisation or body to choose
someone to represent that organisation. In 2009, members of the FRC were nominated by the Australian Institute
of Company Directors, the Investment and Financial Services Association, heads of state and territory treasuries, the Australian
Shareholders’ Association, the Institute of Chartered Accountants in Australia, the National Institute of Accountants, the Securities
Institute of Australia, ASIC, CPA Australia, the Australian Securities Exchange, the federal government, the New Zealand Minister
of Finance, the Group of 100, the Australian Prudential Regulation Authority and the Business Council of Australia. (There is
an interesting absence of representation from groups that are not interested primarily in the financial performance of reporting
entities but might nevertheless be interested in other aspects of the entities’ performance. For example, social and environmental,
or employee, lobby groups are not represented, despite the fact that they would also have a legitimate interest in the financial
performance and position of various reporting entities. Do you, the reader, consider that the FRC is appropriately representative of
the information needs of the broader community?)
While we are concerned primarily here with financial accounting and not the auditing of financial accounts, it is worth
noting again that in 2003 the federal government decided to extend the responsibilities of the FRC to include overseeing the
activities of the Auditing and Assurance Standards Board (AUASB), which is responsible for developing auditing standards
within Australia. From July 2006, auditing standards have the force of law. The overall objective of the AUASB is to improve
the quality of auditing in Australia. In meeting this objective, the Board develops and promulgates auditing standards and
audit guidance releases. In carrying out its functions, the Board seeks to ensure that professional auditing guidance reflects
appropriate theory, practice and international developments, and meets reasonable community expectations. The AUASB has
full regard to developments occurring within the ambit of the International Auditing and Assurance Standards Board.
As we have noted, the oversight of the AUASB used to be the responsibility of the Australian Accounting Research Foundation
(AARF). As is the case with the AASB, the chairperson of the AUASB will be appointed under the auspices of the FRC.
Section 225 of the ASIC Act details the functions and powers of the FRC. These include:
to provide broad oversight of the processes for setting accounting standards in Australia; and
to provide broad oversight of the processes for setting auditing standards in Australia; and
to monitor the effectiveness of auditor independence requirements in Australia; and
to give the Minister reports and advice about the matters referred to in paragraphs (a), (b) and (c); and
the functions specified in subsections (2) (specific accounting standards functions),
(2A) (specific auditing standards functions) and (2B) (specific auditor independence functions); and
(f) to establish appropriate consultative mechanisms; and
(g) to advance and promote the main objects of this Part; and
(h) any other functions that the Minister confers on the FRC by written notice to the FRC Chair.
With regard to what the FRC may not do, s. 225(5), (6), (7) and (8) explicitly states that:
•
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The FRC does not have power to direct the AASB in relation to the development, or making, of a particular standard.
The FRC does not have power to veto a standard formulated and recommended by the AASB (only Parliament can do this).
The FRC does not have power to direct the AUASB in relation to the development, or making, of a particular
auditing standard.
The FRC does not have power to veto a standard made, formulated or recommended by the AUASB.
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(a)
(b)
(c)
(d)
(e)
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The above provisions were introduced in an attempt to ensure the independence of both the AASB and the AUASB.
CHAPTER 1: AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT • 21
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4. Australian Securities Exchange
For those reporting entities that have securities listed on the Australian Securities Exchange (ASX), there are
further reporting requirements over and above those provided within accounting standards or in the Corporations
Act. As of 1 April 1987 there has been one nationally operated stock exchange in Australia. In November
1998 the ASX became a public company with shares listed on its own exchange. Therefore, while the ASX was
previously predominantly self-regulated, it now falls under the control of the Corporations Act, as well as its own
listing rules. That is, although the ASX develops and imposes regulations on other companies that are listed on
its exchange, it is ASIC that regulates the ASX.
The ASX has one set of listing rules for all trading floors in each capital city. These are known as the ASX
Listing Rules. Failure to comply with these rules may lead to removal from the Board.
The ASX disclosure requirements help to ensure that information about listed entities is disseminated in an efficient and
timely manner. They also reduce the likelihood of individuals prospering through access to privileged information.
The ASX Listing Rules are divided into 20 chapters (details of the listing rules are available on the ASX website at www.
asx.com.au). Of particular relevance to us are Chapters 3 and 4 of the Listing Rules, which relate to continuous disclosure
and periodic disclosure, respectively. You would do well to take the time to review the Listing Rules. Listing Rule 3.1 (relating
to continuous disclosure) provides the general principle that:
Australian Securities
Exchange (ASX)
A company incorporated
on 1 April 1987. The ASX
sets uniform trading rules,
ethical standards and
listing requirements.
Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a
material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.
One recent and noteworthy development in relation to ASX-required disclosures is the establishment of the ASX
Corporate Governance Council. In 2003 the ASX Corporate Governance Council released its Principles of Good Corporate
Governance and Best Practice Recommendations. The principles were revised and reissued in August 2007 (effective from 2008)
under the revised title of Corporate Governance Principles and Recommendations. They can be accessed on the ASX website. As
indicated in the principles document (p. 3):
Corporate governance is the framework of rules, relationships, systems and processes within and by which authority is
exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are
held to account.
The basis of the ASX corporate governance disclosure recommendations is that to assess the risk of an organisation it is
essential to know about the policies and procedures in place that govern how the organisation is run (that is, to know about
the organisation’s corporate governance policies). As stated in the recommendations (p. 5), pursuant to ASX Listing Rule 4.10
companies are required to provide a statement in their annual report disclosing the extent to which they have followed the
Corporate Governance Principles and Recommendations in the reporting period. Where companies have not followed all of the
recommendations, they must identify the recommendations that have not been followed, and give reasons for not following
them. Therefore, the ASX principles do not compel organisations to change their governance systems, but rather rely upon
‘market forces’ to encourage adoption of best practice.
Within the Corporate Governance Principles and Recommendations the Corporate Governance Council has proposed eight
essential principles of corporate governance. They are summarised in Exhibit 1.4 opposite.
Disclosure pertaining to the eight essential principles must be made in the annual report in a dedicated corporate
governance section.
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1.4 The process of Australia adopting accounting standards
issued by the International Accounting Standards Board
22 • PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT
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As already indicated, in 2002 the Financial Reporting Council (FRC), which we now know oversees the AASB, decided
to commit Australia effectively to adopting accounting standards issued by the International Accounting Standards
Board (IASB). Such standards are referred to as International Financial Reporting Standards (IFRSs). When they were
previously released by the International Accounting Standards Committee (the IASB’s predecessor), they were referred to
as International Accounting Standards (IASs). It would appear that the catalyst for the FRC’s directive was a decision by
the European Union that all listed companies within the European Union should adopt IASB standards by 1 January 2005
for the purposes of preparing consolidated financial statements. This was to support the ‘single market objective’ that has
been embraced within the European Union. The intention was for the European Union to adopt International Financial
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Exhibit 1.4
CORPORATE GOVERNANCE PRINCIPLES AND RECOMMENDATIONS
A company should:
1. Lay solid foundations for management and oversight
Recognise and publish the respective roles and responsibilities of board and management.
2. Structure the board to add value
Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and
duties.
3. Promote ethical and responsible decision making
Actively promote ethical and responsible decision making.
4. Safeguard integrity in financial reporting
Have a structure to independently verify and safeguard the integrity of the company’s financial reporting.
5. Make timely and balanced disclosure
Promote timely and balanced disclosure of all material matters concerning the company.
6. Respect the rights of shareholders
Respect the rights of shareholders and facilitate the effective exercise of those rights.
7. Recognise and manage risk
Establish a sound system of risk oversight and management and internal control.
8. Remunerate fairly and responsibly
Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that
its relationship to performance is clear.
The eight essential
corporate governance
principles identified by
the ASX
SOURCE: ASX Corporate Governance Council, Good Corporate Principles and Recommendations, ASX, Sydney, August 2007.
Reporting Standards directly without modification. This can be contrasted with the Australian situation, where IFRSs are
being turned into Australian (AASB) Accounting Standards, each bearing the prefix AASB.
In relation to the adoption of IASB standards, Ruth Picker (former deputy chairperson of the AASB) made the following
comments (Picker, 2003):
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Within Australia the ‘new’ standards will still be referred to as Australian Accounting Standards (with the AASB prefix, as
previously indicated), and they might have some minor differences from the equivalent International Accounting Standards
(for example, they might include more explanatory material and make reference, where necessary, to the Corporations Act
2001)—but essentially they will be the same as the International Accounting Standards (which, as we have already indicated,
are referred to as IFRSs). IFRSs are developed for the ‘for-profit’ sector (for example, for profit-seeking companies). Within
Australia, however, AASB standards have general applicability to the not-for-profit and local government sectors (that is,
they are sector-neutral). Hence, material will need to be added by the AASB that describes the scope and applicability of the
standards in the Australian context. Table 1.1 (overleaf) shows the accounting standards in place within Australia as at mid
2009, with reference to the equivalent IASs/IFRSs. Remember that until recently the standards issued by the IASB (and its
predecessor, the IASC) were referred to as International Accounting Standards. It is only recently that IASB-released accounting
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Within a very short period of time, all Australian reporting entities, whether listed, unlisted, public or private will be required
to prepare financial statements in accordance with international accounting standards. The enormity of this requirement
and its impact on financial reporting in Australia cannot be overstated.
The announcement in July 2002 by the Financial Reporting Council (FRC) that all entities reporting under the
Corporations Act would be required to comply with IASs, now referred to as International Financial Reporting Standards
(IFRSs), with effect from 1 January 2005, has turned the corporate accounting world on its head.
The ambit of the requirement for reporting under IASs is extremely wide as it applies to all reporting entities under
the Corporations Act, both listed and unlisted, private and public. This is in contrast to the situation in Europe where
compliance with IASs by 1 January 2005 will only be mandatory for listed entities.
Furthermore, because the Australian Accounting Standards Board only produces one set of accounting standards for
reporting entities, the IASs will effectively apply also to reporting entities that are not Corporations Act entities.
The preparation of the opening IAS balance sheet will require adjustments to amounts that were reported previously
for the same date using Australian GAAP (generally accepted accounting principles). These adjustments must be
recognised directly in equity and not through profit and loss. Therefore, to the extent that the adjustments relate to
amounts that would otherwise have been recognised in profit or loss, they would be adjusted against the opening balance
of retained earnings.
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Equivalent IFRS/IAS
First-time Adoption of Australian Equivalents to International Financial
Reporting Standards
IFRS 1
2
Share-based Payment
IFRS 2
3
Business Combinations
IFRS 3
4
Insurance Contracts
IFRS 4
5
Non-current Assets Held for Sale and Discontinued Operations
IFRS 5
6
Exploration for and Evaluation of Mineral Resources
IFRS 5
7
Financial Instruments: Disclosures
IFRS 7
8
Operating Segments
IFRS 8
101
Presentation of Financial Statements
IAS 1
102
Inventories
IAS 2
107
Statement of Cash Flows
IAS 7
108
Accounting Policies, Changes in Accounting Estimates and Errors
IAS 8
110
Events after the Reporting Period
IAS 10
111
Construction Contracts
IAS 11
112
Income Taxes
IAS 12
116
Property, Plant and Equipment
IAS 16
117
Leases
IAS 17
118
Revenue
IAS 18
119
Employee Benefits
IAS 19
120
Accounting for Government Grants and Disclosure of Government
Assistance
IAS 20
121
The Effects of Changes in Foreign Exchange Rates
IAS 21
123
Borrowing Costs
IAS 23
124
Related Party Disclosures
IAS 24
127
Consolidated and Separate Financial Statements
IAS 27
128
Investments in Associates
IAS 28
129
Financial Reporting in Hyperinflationary Economies
IAS 29
131
Interests in Joint Ventures
IAS 31
132
Financial Instruments: Presentation
IAS 32
133
Earnings per Share
IAS 33
134
Interim Financial Reporting
IAS 34
136
Impairment of Assets
IAS 36
137
Provisions, Contingent Liabilities and Contingent Assets
IAS 37
138
Intangible Assets
IAS 38
139
Financial Instruments: Recognition and Measurement
IAS 39
140
Investment Property
IAS 40
141
Agriculture
IAS 41
1004
Contributions
–
1023
General Insurance Contracts
–
1031
Materiality
–
1038
Life Insurance Contracts
–
1039
Concise Financial Reports
–
1048
Interpretation and Application of Standards
–
1049
Whole of Government and General Government Sector Financial Reporting
–
1050
Administered Items
–
1051
Land Under Roads
–
1052
Disaggregated Items
–
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standards, with details
of equivalent
IASs/IFRSs
AASB No.
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standards have been referred to as IFRSs. At this stage you should review Table 1.1 to gain an understanding of the many and
varied issues addressed by our accounting standards. Appreciate, however, that even all these accounting standards do not
cover every conceivable transaction or event, which is why Australia retains the overriding qualitative reporting requirement
that corporations must prepare ‘true and fair’ financial statements. Many of the accounting standards listed below will be
covered in depth in other chapters of this text. While Table 1.1 provides a list of the standards in place as at mid 2009, it
should be appreciated that new standards will be added, and particular accounting standards might be withdrawn, over time.
This means that such lists of accounting standards do not remain current for long. Further, the wording and requirements
incorporated within particular accounting standards will often change, so interested parties (such as practitioners, students
and researchers) should always check the websites of standard-setters for the latest versions of accounting standards. Print
copies, which are often made available on an annual basis, will go out of date when the amendments to accounting standards
are issued, so the websites of bodies such as the AASB and IASB become increasingly relevant.
Standards issued by the IASB often include a number of options within the standard (for example, the choice to expense
or capitalise a particular item of expenditure). In recent times the AASB has been reluctant to include alternative options
within accounting standards. That is, it has attempted to restrict the ability of organisations to select accounting policies based
on management’s preference. In the Australian context the number of options within the IFRS-adopted accounting standards
are expected to be restricted. Hence, some AASB standards will have fewer options than are available in the equivalent IFRSs.
Nevertheless, compliance with the AASB standard would still mean compliance with the IASB standard. The AASB standards
might also require additional disclosures, particularly if pre-existing AASB standards already have more detailed disclosure
requirements. Any changes to the relevant IFRS will be readily identified within the final AASB accounting standard (relevant
amended paragraphs will have the prefix Aus). The AASB will issue future IASB standards in Australia at about the same time
the standards concerned are issued by the IASB.
From time to time the IASB will amend existing IFRSs. This is done by way of what is referred to as ‘omnibus’ standards
that explain the changes to particular accounting standards. Following this process the AASB incorporates the changes into
what are now referred to as ‘compiled’ standards. That is, ‘compiled standards’ represent the original standard, with the
subsequent amendments. A review of the AASB website will reveal numerous ‘compiled standards’.
While the AASB will be issuing standards (with slight changes, as noted above) to match those being issued by the IASB,
from time to time the AASB might issue standards to cover areas not addressed by the IASB. That is, the AASB will develop
additional standards to cater for issues of a domestic nature, and will also issue standards that are specific to the not-forprofit sector and public sector. The AASB will also advise the IASB of issues that it believes should be covered within IASB
standards.
The decision by the FRC that Australia would adopt IFRSs from 2005 produced a sweep of changes in Australian
accounting standards that has been unparalleled in Australian financial reporting history. The decision required reporting
entities to prepare financial statements in accordance with IFRSs for accounting periods beginning on or after 1 January 2005.
Given the significance of the FRC’s decision, we have reproduced in Exhibit 1.5 (overleaf) the bulletin that was released by
the FRC in July 2002 outlining the FRC’s strategic direction.
What was apparent at the time was that the FRC’s decision to adopt IFRSs was effectively presented to the AASB as
an accomplished fact. We would really have expected more debate on the issue, rather than what amounted to a unilateral
decision. Further, we can question whether the FRC went beyond what had been construed as its ‘proper role’ in the
standard-setting process. As stated earlier in this chapter, s. 225 of the ASIC Act details the functions and powers of the FRC.
These include providing broad oversight of the process for setting accounting standards in Australia; appointing members
of the AASB; approving and monitoring the AASB’s priorities, business plan, budget and staffing arrangements; and giving
the AASB directions, advice and feedback on matters of general policy. Section 225(5) and (6) explicitly states that the FRC
does not have the power to direct the AASB in relation to the development, or making, of a particular standard. These appear
to be solid grounds for contending that the FRC went beyond its purview. However, the reality is that the FRC’s decision
generated a great deal of work for accountants within Australia as they got familiar with a new set of accounting standards. It
would be an interesting exercise to try to quantify the costs (and benefits) associated with the FRC’s decision that Australia
would adopt IFRSs. Financial Accounting in the News 1.4, ‘Accountant queries standards move’ (see page 27), discusses
some views provided by Keith Alfredson, chairperson of the AASB at the time the FRC made the decision that Australia would
adopt IFRSs.
Prior to the formalisation of the FRC’s strategic direction supporting adoption of IFRSs, Australia had, since 1995,
been involved in a process that would harmonise Australian Accounting Standards with their international equivalents.
The ‘harmonisation process’ required Australian Accounting Standards to be as compatible as possible with International
Accounting Standards, but still allowed some divergence where the Australian treatment was construed to be more
appropriate. The majority of Australian Accounting Standards were changed as a result of the harmonisation process. Once
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Exhibit 1.5
FRC bulletin on the
Council’s strategic
direction
BULLETIN OF THE FINANCIAL REPORTING COUNCIL
2002/4—3 July 2002
Adoption of international accounting standards by 2005
The Chairman of the Financial Reporting Council (FRC), Mr Jeffrey Lucy, AM, today announced that the FRC has
formalised its support for the adoption by Australia of international accounting standards by 1 January 2005.
Subject to the Government’s support at the appropriate time for any necessary amendments of the Corporations
Act, this will mean that, from 1 January 2005, the accounting standards applicable to reporting entities under the
Act will be the standards issued by the International Accounting Standards Board (IASB). After that date, audit
reports will refer to companies’ compliance with IASB standards.
The FRC considered the issue at its meeting on 28 June and formally endorsed the 2005 objective, in line with
statements made recently by the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell. Mr Lucy
paid tribute to the Government’s strong leadership over the last five years in pressing for the international convergence
of accounting standards. This objective is reflected in the Government’s 1997 Corporate Law Economic Reform
Program initiative (CLERP 1) and amendments made in 1999 to the Australian Securities and Investments Commission
Act 2001.
The FRC fully supports the Government’s view that a single set of high quality accounting standards which are
accepted in major international capital markets will greatly facilitate cross-border comparisons by investors, reduce
the cost of capital, and assist Australian companies wishing to raise capital or list overseas.
Mr Lucy said he understood that the 1 January 2005 timing is somewhat later than the Government would have
liked. However, it is determined by the decision of the European Union to require EU listed companies to prepare
their consolidated accounts in accordance with IASB standards from that date, in support of the EU single market
objective. Australia certainly cannot afford to lag [behind] Europe in this regard, Mr Lucy said. He also expressed his
support for efforts to encourage the United States to further converge its standards with IASB standards with a view
to eventual adoption.
Mr Lucy was pleased to note that the Chairman of the IASB, Sir David Tweedie, had issued a statement in London
welcoming the FRC’s decision. Sir David said that the FRC’s announcement demonstrates growing support for the
development and implementation of a single set of high quality global accounting standards by 2005.
‘This vote of confidence is a reflection of the leadership role that Australia continues to play in standard-setting,
and will increase momentum for convergence towards high quality international standards. The input and active
participation of interested parties in Australia and the Australian Accounting Standards Board (AASB), under the
leadership of Keith Alfredson, are and will remain a vital element in ensuring the IASB’s success. It is through
national standard-setters, such as the AASB, and the members of our various committees that we are able
jointly to develop high quality solutions to accounting issues, leverage resources to research topics not yet on
the international agenda so as to expedite conclusions, reach interested parties throughout the world and better
understand differences in operating environments, thus fulfilling our role as a global standard-setter.’
The full statement is available on the IASB website at www.iasb.org.uk.
While there will be a need for business and the accounting profession to adapt to significant changes in some
standards, and to some complex new standards, the AASB has been harmonising its standards with those of the
IASB for some years, resulting in substantial synergies between the two.
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Mr Lucy noted that implementation issues would also need to be considered by the FRC (to the extent they did not
involve the content of particular standards) and the AASB between now and 2005. These could relate, for example,
to the timing of introduction of particular IASB standards in Australia before 1 January 2005 (which would be AASB
standards until that date), as well as to issues of interpretation.
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Nevertheless, Mr Lucy urged the accounting bodies to prepare for the changeover through their programs of
professional development and their influence on accounting education. He also urged the business community to
participate fully in commenting on exposure drafts of IASB standards issued in Australia in the period ahead.
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The FRC and AASB will be doing everything they can to keep constituents informed about these issues and to
communicate an overall strategy for adoption, Mr Lucy said.
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Mr Lucy also confirmed that Australia would be making a substantial financial contribution, through the FRC, to the
International Accounting Standards Committee (IASC) Foundation in 2002–03. This contribution will be sourced
from funds available to the FRC for the standard setting process contributed by the Commonwealth, State and
2/9/09 11:08:44 AM
Exhibit 1.5
Territory governments, the three accounting bodies, the Australian Stock Exchange, and from the Financial Industry
Development Account (as announced by Senator Campbell on 12 June).
continued
Among the FRC’s functions are to further the development of a single set of accounting standards for world-wide
use and to promote the adoption of international best practice accounting standards in Australia if doing so would
be in the best interests of both the private and public sectors in the Australian economy.
The IASB, which is based in London, is committed to developing, in the public interest, a single set of high quality,
global accounting standards that require transparent and comparable information in financial statements. In pursuit
of this objective, the IASB cooperates with national standard setters, including the AASB, to achieve convergence in
accounting standards around the world.
The AASB has been harmonising its standards with IASB standards for a number of years and is now working in
close partnership with the IASB as a liaison standard setter, aligning its work program with that of the IASB and
standing ready to allocate resources to lead or support projects on the IASB agenda. Recently, the AASB issued to
its Australian constituents invitations to comment on a number of exposure drafts of IASB standards.
Australians are actively involved in the work of the IASB. Mr Ken Spencer is a member of the oversight body for
the IASB, the IASC Foundation Trustees (and Chairman of the Foundation’s Nominating Committee). Mr Warren
McGregor is a member of the IASB, also designated the Liaison Member for Australia and New Zealand. Mr Kevin
Stevenson, a former director of the Australian Accounting Research Foundation, is the IASB’s Director of Technical
Activities. Australians are also on the IASB’s Standards Advisory Council (Mr Peter Day and Mr Ian Mackintosh) and
its Interpretations Committee (Mr Wayne Lonergan).
SOURCE: Copyright Commonwealth of Australia. Reproduced by permission.
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The Financial Reporting Council should have consulted the community
more before it decided to adopt international accounting standards,
according to the outgoing chairman of the Australian Accounting
Standards Board.
The FRC is responsible for setting strategic directions for the AASB.
Members of the FRC decided on June 28 last year to support the
adoption of standards issued by the International Accounting Standards
Board for use by Australian companies from January 1, 2005.
Companies need to review their systems over the next 12 months
to prepare for the implementation of the framework for reporting
their performance and financial position to shareholders, creditors,
investment analysts and other stakeholders.
AASB chairman Keith Alfredson told The Age the decision to adopt
international accounting standards might have been made by FRC
members who wanted to have comparable financial statements without
thinking about whether high-quality financial reporting would result.
‘When they made their strategy it was like signing a blank cheque,’ he
said. ‘They didn’t know what standards were going to exist in 2005.’
‘The strategy wasn’t to tell the board to make a decision on whether
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The Age, 5 May 2003, p. 3
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Accountant queries standards move
the standards were high quality or whether transparent financial
reporting would result. The strategy was “adopt these standards” on
the assumption high-quality financial reporting would result.’
Mr Alfredson said the FRC should be required to detail in a formal
manner why it had made a particular strategic decision.
‘I think there was not a sufficient review of the costs and benefits
of going to international accounting standards,’ he said. ‘There was no
regulatory impact statement.’
‘If the AASB has to do up regulatory impact statements, the FRC
should also do a regulatory impact statement that looks at all of the
options, costs and benefits when they set strategy.’
Mr Alfredson said the same problem was inherent in the decision
made by the FRC on public-sector accounting because the council had
issued a strategic direction that specified technical content—something
that is prohibited by the legislation that gives the council its enabling
powers.
That matter was the subject of vigorous debate between the then
council chairman Jeff Lucy and Labor Senator Stephen Conroy during
a Senate Estimates committee hearing in February.
The FRC has since amended the strategy on government financial
reporting so paragraphs breaching the spirit of the law were removed.
Mr Alfredson said wording of the legislation made it difficult for the
council to set strategy without interfering in technical content.
‘Every board can set strategies in conjunction with management
and it drives the direction of the company,’ Mr Alfredson said. ‘I think
you inevitably end up having tensions because I fail to see how the FRC
can set strategy and not have an impact on technical content.’
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Accounting
in the News
1.4 Financial
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the harmonisation process was almost complete it was decided that harmonisation was not sufficient and that Australia should
adopt the standards being issued by the IASB. This meant that many of the standards that went through the harmonisation
process were changed yet again to converge them with their international equivalents (that is, to remove any of the minor
differences that survived the harmonisation process). This ‘second round’ of changes within such a short time was a source
of frustration for both readers and preparers of financial statements (not to mention authors of textbooks!).
Australia was one of the first major accounting standard setters to embark on a program that sought to harmonise its
accounting standards with those of the IASB (or, as it was then known, the IASC). The harmonisation of Australian Accounting
Standards with their international equivalents was justified on the basis that if Australia elected to retain accounting standards
that were unique, this would restrict the flow of foreign investment into Australia. (Do you, the reader, think this is a realistic
perspective?) This view was promoted within the federal government’s Corporate Law Economic Reform Program. CLERP’s
1997 document Accounting Standards: Building International Opportunities for Australian Business states (p. 15):
There is no benefit in Australia having unique domestic Accounting Standards which, because of their unfamiliarity, would
not be understood by the rest of the world. Even if these standards were considered to represent best practice, Australia
would not necessarily be able to attract capital because foreign corporations and investors would not be able to make sensible
assessments, especially on a comparative basis, of the value of Australian enterprises. The need for common accounting
language to facilitate investor evaluation of domestic and foreign corporations and to avoid potentially costly accounting
conversions by foreign listed companies are powerful arguments against the retention of purely domestic financial reporting
regimes.
The above view is consistent with that provided in Policy Statement 4, ‘International Convergence and Harmonisation
Policy’ (issued in April 2002 by the AASB), which emphasised the need for international comparability of financial statements.
As the policy statement notes in paragraph 2:
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The implication of the harmonisation project (which, as we have stated, came before the decision ultimately to adopt
IFRSs) was that there were numerous changes to Australian Accounting Standards throughout the late 1990s and early 2000s.
This, in itself, required professional accountants to spend much time familiarising themselves with the new and changed
requirements. Having gone through all this change, as noted previously our accounting standards were changed yet again to
make them effectively the same as IFRSs. That is, we moved from harmonisation to standardisation. Obviously, the FRC must
have believed that the harmonisation process was not sufficient to ensure that capital inflows are not constrained because of
differences between Australian and International Accounting Standards. In some respects it is a shame that this opinion was
not formed earlier.
While the FRC’s 2002 directive was for Australia to adopt IFRSs, because of the requirements of the Corporations Act,
the standards had to be released by the AASB (which can be contrasted with the situation within the European Union where
IFRSs are being used without any changes). Specifically, the Corporations Act requires, pursuant to s. 296, that financial reports
must comply with ‘accounting standards’. Section 334 further states that ‘the AASB may make accounting standards for the
purposes of this Act. The standards must be in writing and must not be inconsistent with this Act or the regulations’. Hence,
rather than simply embracing IFRSs without change, the standards needed to be issued by the AASB and to be ‘re-badged’
as AASB standards.
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There is considerable divergence between standards issued by national and international standard-setting bodies. The
globalisation of economic activity has resulted in an increased demand for high quality, internationally comparable financial
information. The AASB believes that it should facilitate the provision of this information by pursuing a policy of international
convergence and international harmonisation of Australian accounting standards. In this context, ‘international convergence’
means working with other standard-setting bodies to develop new or revised standards that will contribute to the development
of a single set of accounting standards for world-wide use. ‘International harmonisation’ of Australian accounting standards
refers to a process which leads to these standards being made compatible with the standards of international standard-setting
bodies to the extent that this would result in high quality standards. Both processes are intended to assist in the development
of a single set of accounting standards for world-wide use.
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The impact of adopting IFRSS
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The process of adopting IFRSs led to significant changes in some standards and minor changes in others. Areas where
significant changes occurred include (and this is by no means a comprehensive list) the following:
• The treatment of intangible assets changed dramatically with the adoption of IFRSs. For example, such things as the
costs of research, mastheads and brand names must now be expensed as incurred. Prior to 2005, such costs could be
capitalised and included within the balance sheet (statement of financial position) to the extent that certain deferral
2/9/09 11:08:44 AM
tests were satisfied. The implication of such changes was that some companies were required to remove hundreds of
millions of dollars of assets from their balance sheets on the adoption of IFRSs.
• The revaluation of intangible assets is greatly restricted under IFRSs compared with the former position under Australian
Accounting Standards. Under IFRSs intangible assets may be revalued to fair value to the extent that there is an active
market for such assets and that the associated prices are publicly available. However, for many intangible assets there is
no ‘active market’.
• Prior to 2005 within Australia, goodwill (also an intangible asset) was required to be systematically amortised over
a period not in excess of 20 years. Under IFRSs systematic amortisation of goodwill is abolished and replaced by a
requirement that annual tests be undertaken to determine whether the value of goodwill is impaired (impairment
testing).
• Under Australian Accounting Standards the revaluation of property, plant and equipment was to be done by class of
assets. Under IFRSs, such revaluations are to be done on an asset-by-asset basis (however, the not-for-profit sector will
still be permitted to undertake revaluations by class of asset).
• The classification of ‘revenues’ is to be restricted to inflows that relate to the ordinary activities of the organisation, with
sales of assets other than inventory to be classified as ‘gains’ or ‘losses’ to be shown in the statement of comprehensive
income (previously to be included in the income statement). Prior to IFRSs all such inflows were treated as revenues.
• Within Australia, when prior period errors were discovered in a subsequent accounting period adjustments would be
recognised in the period in which the error was discovered (by recognising an expense or revenue in the subsequent
period). By contrast, under IFRSs the financial statements are adjusted as if the error had never occurred—this means
that opening balances are now amended in a retrospective manner.
• Under IFRSs the tests for classifying items as equity as opposed to liabilities are more stringent, meaning that a number
of items that were disclosed as equity were subsequently required to be disclosed as liabilities.
For some reporting entities the impact of adopting IFRSs in place of the previous accounting standards was quite
significant. Some organisations had their reported profits severely reduced and the assets greatly written down as a result of
applying IFRSs. This, in turn, impacted on such things as gearing ratios (which might be utilised within borrowing agreements
with banks), and such things as profit-based bonuses that might be paid to employees. Earnings per share and other indicators
of performance were also affected.
Given the magnitude of the impact of adopting IFRSs on corporate financial statements, it would have been useful for
reporting entities to tell financial statement readers, in advance, about the consequences of adopting IFRSs for subsequent
corporate financial performance and financial position reporting. This would have reduced the ‘shocks’ that were felt when
the IFRS-compatible financial statements were first applied. To this end, the AASB issued an exposure draft in December
2003 entitled ED 129 ‘Disclosing the Impacts of Adopting Australian Equivalents to IASB Standards’. This exposure draft
culminated in the release of AASB 1047 in April 2004. The accounting standard required the reporting entity to provide,
in advance, an explanation of the impacts of the adoption of IFRSs on the financial statements of the reporting entity. The
standard ceased to operate following first-time adoption of IFRSs. Within the accounting standard, which has since been
withdrawn, it was stated:
Adoption of IASB Standards in 2005 may have significant impacts on the accounting policies of Australian reporting entities
and their reported financial position and financial performance. The aim of this Standard is to provide users of financial
reports with relevant and reliable information in the period leading up to 2005 about the impacts of changes in accounting
policies resulting from implementing Australian equivalents to International Financial Reporting Standards (IFRSs), that
is, AASB equivalents to IASB Standards.
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An entity shall explain how the transition from previous GAAP to Australian equivalents to IFRSs affected its reported
financial position, financial performance and cash flows.
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Subsequent to the release and subsequent withdrawal of AASB 1047, the AASB released AASB 1 First Time Adoption of
Australian Equivalents to International Financial Reporting Standards. This standard, which applied to the first reports released
after the initial adoption of IFRSs, required (par. 38) that:
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While a number of countries throughout the world are now adopting IFRSs, there are still differences between United States
generally accepted accounting principles (GAAP) and IFRSs, and these differences are expected to continue for some time.
However, there is a joint project between the IASB and the US Financial Accounting Standards Board (FASB), which is aiming
at converging IFRSs and FASB standards, meaning that further changes in IFRSs and FASB standards are to be expected (and
any changes to IFRSs will flow through to Australia). There is an expectation that the US will ultimately adopt IFRS, and the
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aim of the convergence project is to work towards the time when a ‘true’ international standardisation of accounting will
become a reality. According to the IASB website:
On 2 October 2003 the IASB and the US Financial Accounting Standards Board (FASB) decided to pursue a high level
convergence program designed to bring a number of short-term fixes between the two sets of accounting standards. The IASB
and the FASB have acknowledged that the convergence of IFRS and US GAAP is a primary objective of both Boards. In
recent years, some progress has been made in reducing key differences between the two sets of standards. A formal liaison
relationship, monitoring relationships for major projects, and the undertaking of joint projects have all contributed to the
reduction of differences; however substantial differences will remain. On 2 October the IASB and FASB both added a shortterm international convergence project to their agenda to address differences between IASB GAAP and US GAAP. The
objective is to analyse each of the differences within the scope, and either amend applicable US GAAP to reduce or eliminate
the difference, or communicate to the IASB the FASB’s rationale for electing not to change US GAAP. Concurrently, the
IASB will review IFRS and make similar determinations on whether to amend applicable IFRS or communicate its rationale
to the FASB for electing not to change IASB GAAP.
During 2004 and 2005 the IASB and the FASB held several meetings and commenced a number of projects, including a
review of requirements relating to business combinations, revenue recognition, performance reporting, and a new conceptual
framework. A joint Memorandum of Understanding was published in 2006, which identified their intention by 2008 to
implement actions to identify and remove major accounting differences in specific areas.
While there appears to be a long-term aim that ultimately there will be one set of standards used internationally, including
within the US, the timing as to when the US will adopt IFRS (and some people still question if it will) is far from certain. Obviously,
for the IASB to achieve its aim of developing ‘a single set of high-quality, understandable and international financial reporting
standards (IFRSs) for general purpose financial statements’ (as stated on the IASB website), it will need to encourage the US to
adopt its standards. As indicated above, currently the IASB and the FASB are jointly undertaking a process (called the ‘Convergence
Project’) that seeks to converge the two sets of standards, thereby paving the way for the US ultimately to switch to IFRS.
However, at this point it should be noted that the US adoption of IFRS for use by US companies appears to be a number
of years away. Ultimately, whether the US adopts IFRS will be contingent on whether the US Securities Exchange Commission
(SEC) and FASB are satisfied with the results generated by the IASB/FASB Convergence Project. The view that the US adoption
of IFRS is still a number of years away is best summed up by a submission made by the US Financial Accounting Foundation
(FAF) in 2007. The Financial Accounting Foundation was established in 1972 as an independent, private-sector organisation
with responsibility for the oversight, administration and finances of the FASB. It also selects the members of the FASB. The
FAF made the submission to the SEC in response to a Concept Release issued by the SEC which called for opinions about
the US ultimately adopting IFRS. The FAF stated:
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Hence, while the FAF considered it to be a sound idea that IFRS should ultimately be adopted within the US, it should
not, in their opinion, be adopted for a number of years in order to give enough time for IFRS to be further improved and for
US reporting systems to be properly prepared for the transition to IFRS.
Hence, subsequent to the adoption of IFRSs in 2005, we might expect many more changes in accounting standards
as part of the process of harmonising IFRSs and standards issued by the FASB (which means yet more ‘new’ and revised
accounting standards for accountants to learn).
Because of the major changes brought about in 2005 as a result of many countries adopting IFRS, the IASB did make
a commitment that no more significant changes would be made in reporting requirements for a significant period of time.
Specifically, the IASB committed to a ‘stable platform’ of accounting standards until 2009. That is, while there have been a
number of revisions made to accounting standards since 2005, many changes did not have to be applied until 2009 (although
for a number of changes, early adoption was allowed, and was at the option of the reporting entity). The following paragraph
is an extract from a media release issued by the IASB in late July 2006.
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The Concept Release asks, ‘could commenters foresee a scenario under which it would be appropriate for the Securities Exchange
Commission to call for all remaining U.S. [non-governmental] issuers to move their financial reporting to IFRS’. We believe
the answer to that question is ‘yes.’ In our view, now is the time to develop a plan for moving all U.S. public companies to an
improved version of IFRS. We are not recommending immediate adoption of existing IFRS because various elements of the
U.S. financial reporting system need to change before moving to IFRS, and those changes will take several years to complete. In
addition, further improvements to IFRS are needed before U.S. public companies transition to IFRS. (FAF, 2007, p. 5.)
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No new major standards to be effective before 2009
The IASB will not require the application of new IFRSs under development or major amendments to existing standards
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before 1 January 2009. The establishment of 2009 as the first date of required implementation of new standards will also
provide countries yet to adopt IFRSs with a clear target date for adoption. By refraining from requiring new standards to
be applied before 2009, the IASB will also be providing four years of stability in the IFRS platform of standards for those
companies that adopted IFRSs in 2005. The establishment of this approach does not preclude the publication of new
standards before that date, and companies would be permitted to adopt a new standard on a voluntary basis before its
effective date. Interpretations and minor amendments to deal with potential issues identified during implementation would
not be subject to this approach.
Hence, from 2009, in countries that have adopted IFRS, it was necessary to apply a number of new accounting
requirements over and above those that were initially implemented in 2005. The chapters that follow incorporate the changes
to accounting standards that have occurred since 2005. What we can expect is that the ongoing work being undertaken jointly
by the IASB and the US FASB will lead to many changes in reporting requirements in the coming years. Financial accountants
will continue to work in an environment with evolving requirements, and they will need to keep abreast of the numerous
ongoing changes that are likely to occur. As accountants, we need to appreciate that the accounting standards we learn in any
given year are always subject to change in future years.
What benefits can we expect from all this international
standardisation?
As indicated earlier in this chapter, the Australian government decided that Australia would adopt IFRSs because of perceived
benefits. The benefits that have been promoted by the FRC include an increased ability for Australian entities to access capital
from international sources and, somewhat relatedly, an increased ability of investors to compare the results of Australian entities
with those of overseas entities. There is also the expectation that it will be more efficient for international companies operating
in Australia to prepare financial statements internationally on the basis of the same set of accounting standards. In the past,
companies that are listed in more than one jurisdiction had to bear the costs of preparing financial statements under more than
one accounting system.
All convergence and standardisation benefits will come at a cost. Such costs include the costs of educating accountants
to adopt a new set of accounting standards and the costs associated with changing data-collection and reporting systems.
Such costs will be borne by large listed companies, as well as large proprietary companies, not-for-profit entities and local
governments. These last three categories of reporting entities are relatively unlikely to benefit from such things as increased
capital inflows. Yet they will still incur significant costs.
Some of the perceived benefits of harmonisation were discussed in paragraph 7 of Policy Statement 4 ‘International
Harmonisation and Convergence Policy’. The main benefits of international harmonisation identified in this document included:
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In relation to the issue of being better able to compare the financial performance of entities from different countries,
it is argued that while there are still differences in the accounting standards issued by different countries, the difficulties in
comparing the financial performance of reporting entities from different countries will persist. The differences in accounting
rules can have significant implications for profit comparisons. Consider the following statement from an article in The
Australian Financial Review (25 November 1998):
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(a) increasing the comparability of financial reports prepared in different countries and providing participants in
international capital markets with better quality information on which to base investment and credit decisions. It
will also reduce financial analysis costs through analysts not having to recast information on a common basis and
requiring knowledge of only one set of financial reporting standards rather than several;
(b) removing barriers to international capital flows by reducing differences in financial reporting requirements for
participants in international capital markets and by increasing the understanding by foreign investors of Australian
financial reports;
(c) reducing financial reporting costs for Australian multinational companies and foreign companies operating in
Australia and reporting elsewhere;
(d) facilitating more meaningful comparisons of the financial performance and financial position of Australian and
foreign public sector reporting entities; and
(e) improving the quality of financial reporting in Australia to best international practice.
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From time to time, the fundamental differences in accounting and reporting standards among the various countries of the
western world hit the headlines. This was never more dramatically demonstrated than when Daimler-Benz achieved a listing
on the New York Stock Exchange (the first German company to do so) in October 1993.
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When the group accounts were converted from German accounting rules to US GAAP (generally accepted accounting
practice), a DM168 million profit for the first half year became a staggering DM949 loss.
More recently, German conglomerate Hoechst, which had adopted international accounting standards (IAS) in 1994,
also listed in New York. In the process of reconciling its accounts with US GAAP an IAS profit of DM1.7 billion became a
loss of DM57 million.
The article by Finola Burke in Financial Accounting in the News 1.5 entitled ‘News learns wealthy lesson: don’t move to
US’ illustrates how a large accounting profit, according to Australian Accounting Standards, became a significant loss for the
Australian company News Corporation Ltd once US standards were applied.
News learns wealthy lesson:
Don’t move to US
Finola Burke
The Australian, 15 November 2000, p. 32
US accounting principles have turned The News Corporation Ltd’s
$1.92 billion net profit in fiscal 2000 into a $329 million loss, according
to documents filed with the US Securities and Exchange Commission.
While the US loss does not change the profit reported by News at
the end of last financial year, it does demonstrate how different News’s
accounts would look if it moved its headquarters to the US.
The net difference before minority interests to the way in which News
reported its income last year was a $2.4 billion loss.
Under US Generally Accepted Accounting Principles (US GAAP),
companies are not allowed to capitalise start-ups, book abnormal losses
or gains, or revalue mastheads or television licenses. Depreciation is
also treated differently.
US GAAP would have had News making a loss rather than its near
$2 billion profit and shaved its operating income back to $1.5 billion
from the reported $2.74 billion the company made under Australian
accounting rules.
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Having considered how different countries’ accounting rules can generate significantly different profits or losses, we should
perhaps consider whether such differences are a justification for all the activity that is taking place to standardise accounting
standards internationally. What do you think? Certainly, this justification has been used by Australian accounting standard setters.
The view that harmonisation and subsequent adoption of IFRSs will lead to cost reductions in Australia, as well as
capital inflows, is not a view that is necessarily supported (or refuted) by any empirical data, but the ASX nevertheless holds
the view that general compliance with IASB standards will lead to significant additional inflows of foreign investment. In
this regard, IOSCO (the International Organisation of Securities Organisations) has contributed funds to the development
of a set of international standards for international stock exchange listing. In May 2000, IOSCO announced that it would
recommend adoption of IASC/IASB standards as a permissible basis for the preparation of financial statements to member
exchanges throughout the world. The actions of IOSCO reinforce the position of the IASB as a global accounting standard
setter. Such a move means that an organisation whose reports already accord with IASB standards and is seeking listing in
another country would not need to adjust its reports to comply with particular national requirements. More details about
IOSCO can be found on its website at www.iosco.org. It should also be noted that from late 2007 the Securities Exchange
Commission (SEC) in the US adopted rules that permitted foreign private issuers (but not US domestic companies) to lodge,
with the SEC, their financial statements prepared in accordance with IFRS without the need to provide a reconciliation to
generally accepted accounting principles (GAAP) as used in the United States. That is, foreign companies that are listed across
a number of stock exchanges internationally, including within the US, can now lodge their reports in the US even though
the reports have not been prepared in accordance with US accounting standards and do not provide a reconciliation to US
GAAP. The ruling of the SEC requires that foreign private issuers that take advantage of this option must state explicitly and
unreservedly in the notes to their financial statements that such financial statements are in compliance with IFRS as issued
by the IASB (without modifications), and they must also provide an unqualified auditor’s report that explicitly provides an
opinion that the financial statements have been compiled in accordance with IFRS as issued by the IASB. In explaining the
basis for their decision to provide this concession to foreign companies, the SEC stated (2007, p. 16):
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As discussed in the Proposing Release, continued progress towards convergence between U.S. GAAP and IFRS as issued by
the IASB is another consideration in our acceptance of IFRS financial statements without a U.S. GAAP reconciliation. We
believe that investors can understand and work with both IFRS and U.S. GAAP and that these two systems can co-exist in
the U.S. public capital markets in the manner described in this rule making, even though convergence between IFRS and
U.S. GAAP is not complete and there are differences between reported results under IFRS and U.S. GAAP.
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Hence, effectively there are two types of financial statements being lodged within the US (as is the case in many
other countries). Foreign companies can lodge their reports within the US in accordance with IFRS, whereas domestic US
companies must lodge their reports in accordance with US GAAP.
Numbering system to be used for AASB standards
The changes that have been made to Australian Accounting Standards since the 1990s have obvious implications for the
numbering of accounting standards within the Australian context. Most standards will have changes made to their reference
numbers. As we can see from Table 1.1 provided earlier in this chapter, there are three different numbering systems being
applied by the AASB. The AASB has devised a policy for numbering according to which the numbering system will be:
1. AASB Standards 1–99 Series
Where a new IFRS is issued by the IASB its number as determined by the IASB will be used by the AASB. For example,
IFRS 1 will become AASB 1.
2. AASB Standards 100–999 Series
Where a standard equivalent to an existing or improved IAS is issued, it will be given a number from 100 on. For
example, AASB 101 would correspond to IAS 1 (standards issued by the IASB now are referred to as International
Financial Reporting Standards and have the prefix IFRS; prior to 2003 they were referred to as International Accounting
Standards and bore the prefix IAS).
3. AASB Standards 1000 + Series
A further numbering system for standards specifically relating to the public or not-for-profit sectors or for areas of
domestic application only. Also to be used for those AASB standards that are to be maintained as part of the post-2005
standards. This numbering system is for standards that do not have an international equivalent.
Because of the central relevance of the IASB to Australian financial reporting we will now describe the structure of the IASB.
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Because the accounting standards being used within Australia emanate overwhelmingly from the IASB it would be useful to
understand the structure of the IASB, and its predecessor, the IASC.
The International Accounting Standards Committee (IASC) was established in 1973 with the aim of bringing together
parties from throughout the world to develop accounting standards that apply internationally. In April 2001 the IASC was
replaced by the IASB. The IASB is now responsible for releasing International Accounting Standards or, as they have now
become known, International Financial Reporting Standards (IFRSs).
Until recently, standards issued by the IASC, and subsequently by the IASB, were not of direct importance to countries
that had their own standard-setting processes in place. They would, however, typically be referred to for an indication of
possible best practice when accounting standards were being developed within these countries. They were also deemed to
provide useful guidance when no domestic standard related to a particular accounting issue. Countries that did not have their
own accounting standards in place have been known to adopt directly the standards developed by the IASC and later the IASB.
This has been the case especially in developing countries. In more recent times, however, some developed countries have
established programs either to adopt IFRSs or to harmonise their domestic standards with IFRSs. This is being done because
of the perceived benefits associated with having globally consistent accounting standards.
As noted above, there has been a change in the parties responsible for developing International Accounting Standards. In
essence, with the establishment of the IASB, the standard-setting structure of the IASB became very similar to the accounting
standard-setting structure recently established in Australia. There is a group of trustees who comprise the IASC Foundation (similar
to the FRC in Australia) made up of 22 individuals, and these trustees are responsible for the appointment of IASB members as well
as the members of the International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council
(SAC). The trustees also exercise oversight over the IASB and are involved in raising the funds needed by the IASB. The trustees
come from a number of different countries, with six from North America, six from Europe, six from the Asia–Oceana region, and
four others from any region. The former chairperson of the AASB, Mr Ken Spencer, was nominated one of the inaugural members.
In 2009 the IASB was made up of 14 individuals, 12 of whom were full-time, and two part-time. According to the Revised
Constitution of the IASB (as issued in February 2009), the membership of the IASB shall increase to 16 by no later than 1 July
2012, of which up to three members may be part-time. Members of the IASB shall be appointed for a term of up to five years,
renewable once. The website of the IASB explains how accounting standards are issued within the IASB:
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•
•
•
•
during the early stages of a project, the IASB may establish an Advisory Committee to give advice on the issues
arising in the project. Consultation with the Advisory Committee and the Standards Advisory Council (also part of
the IASB) occurs throughout the project;
the IASB may then develop and publish Discussion Documents for public comment;
following the receipt and review of comments, the IASB could then develop and publish an Exposure Draft for public
comment; and
following the receipt and review of comments, the IASB would issue a final International Financial Reporting
Standard.
Each IASB member has one vote on technical and other matters. In relation to how many votes are required for an IFRS or
exposure draft to be approved, paragraph 36 of the International Accounting Standards Committee Foundation Revised Constitution
(as released in February 2009) states:
The publication of an exposure draft, or an International Financial Reporting Standard (including an International
Accounting Standard or an Interpretation of the International Financial Reporting Interpretations Committee) shall require
approval by nine members of the IASB, if there are fewer than 16 members, or by ten members if there are 16 members.
Other decisions of the IASB, including the publication of a discussion paper, shall require a simple majority of the members
of the IASB present at a meeting that is attended by at least 60 per cent of the members of the IASB, in person or by
telecommunications.
The IASB has full control over its technical agenda. When the IASB publishes a standard, it also publishes a Basis for
Conclusions to explain publicly how it reached its conclusions and to give background information that might help users of
standards to apply them in practice. These Basis for Conclusions documents are publicly available (you will see them when you
look for accounting standards on the AASB website). The IASB would also publish dissenting opinions.
The IASB website explains how the Board coordinates its activities with national standard setters, such as the AASB.
The Board believes that close co-ordination between the IASB’s due process and the due process of national standard setters
is important to the success of the IASB’s mission. Further, according to the IASB website, the IASB is exploring ways to
integrate its due process more closely with that of its members. Such integration might grow as the relationship between the
IASB and national standard setters evolves. In particular, the IASB is exploring the following procedure for projects that have
international implications:
• IASB and national standard setters (such as the AASB) would coordinate their work plans so that when the IASB
starts a project, national standard setters would also add it to their own work plans so that they can play a full part
in developing international consensus. Similarly, where national standard setters start projects, the IASB would
consider whether it needs to develop new standards or revise its existing standards. Over a reasonable period, the IASB
and national standard setters should aim to review all standards where there are currently significant differences, giving
priority to areas where the differences are greatest.
• National standard setters would publish their own exposure documents at approximately the same time as IASB
exposure drafts are published and would seek specific comments on any significant divergences between the two
exposure documents. In some instances, national standard setters might include in their exposure documents specific
comments on issues of particular relevance to their country or include more detailed guidance than is included in the
corresponding IASB document.
• National standard setters would follow fully their own due process, which they would, ideally, choose to integrate
with the IASB’s due process. Such integration would avoid unnecessary delays in completing standards and would also
minimise the likelihood of unnecessary differences between the standards that result.
34 • PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT
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The IASB has a committee known as the International Financial Reporting Interpretations Committee, which is the official
‘interpretative arm’ of the IASB. The IASB website states that the International Financial Reporting Interpretations Committee
(IFRIC), which was reconstituted in December 2001, reviews, on a timely basis within the context of existing International
Accounting Standards and the IASB Framework, accounting issues that are likely to receive divergent or unacceptable treatment
in the absence of authoritative guidance, with a view to reaching consensus on the appropriate accounting treatment. While
IFRIC provides guidance on issues not specifically addressed in IFRS, it also provides Interpretations of requirements existing
within IFRS. In developing Interpretations, IFRIC works closely with similar national committees and meets about every six to
eight weeks. All technical decisions are taken at sessions that are open to public scrutiny. IFRIC addresses issues of reasonably
widespread importance, and not issues of concern only to a small set of enterprises. The Interpretations cover both:
• newly identified financial reporting issues not specifically addressed in IFRSs; and
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• issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of
authoritative guidance, with a view to reaching consensus on the appropriate treatment.
Given that so many countries have now adopted IFRS, a central objective of IFRIC is to achieve consistent Interpretations of
IFRS by IFRS-adopters internationally. If IFRS were interpreted differently within each country, the purpose and benefits of
promoting one set of global accounting standards would be diminished. Indeed, the aim of global uniformity in interpreting
financial reporting requirements has meant that many national standard-setters have disbanded their own domestic
Interpretations committees. For example, within Australia, and as indicated earlier in this chapter, the AASB disbanded the
Urgent Issues Group (which was formerly the Australian equivalent of IFRIC) because the AASB considered that disbanding
the UIG helped to ensure that IFRS are being adopted consistently on a worldwide basis.
According to its website, the primary responsibility for identifying issues to be considered by the IFRIC is that of its
members and appointed observers. Preparers, auditors and others with an interest in financial reporting are encouraged to
refer issues to the IFRIC when they believe that divergent practices have emerged regarding the accounting for particular
transactions or circumstances or when there is doubt about the appropriate accounting treatment and it is important that a
standard treatment is established. An issue may be put forward by any individual or organisation. The source of a suggested
agenda item is not revealed to the IFRIC or to others.
The majority of issues raised with IFRIC are not placed on its agenda (anyone can submit an issue to IFRIC for
consideration). Where issues are not accepted for consideration, IFRIC issues a rejection notice, which is published on the
IASB website. The rejection notice sets out the reasons why IFRIC did not place the issue on its agenda, the typical reason
provided being that the answer to the issue raised is already available from existing accounting standards and therefore there
is no need to issue an Interpretation. IFRIC interpretations are subject to IASB approval and have the same authority as a
standard issue by the IASB.
Within Australia, Interpretations issued by IFRIC and by the AASB are given the same authoritative status as accounting
standards by virtue of AASB 1048 Interpretation and Application of Standards, issued by the AASB.
AASB 1048 clarifies that all Australian Interpretations have the same authoritative status. Australian Interpretations
comprise those issued by IFRIC as well as those issued by the AASB, together with those that were issued by the Urgent Issues
Group (a former committee of the AASB, which has been disbanded) and that have been retained for use.
For Interpretations to be mandatory within the Australian context they need to be listed within tables included within
AASB 1048. AASB 1048 will be reissued as and when necessary to keep the Tables up to date and to give force to newly
released Interpretations.
The Interpretations can be found on the websites of the IASB and AASB. More information about the IASB and IFRIC
can be found on the IASB website at www.iasb.org.
As indicated above, the activities of national standard setters, such as the AASB, can impact on the activities of the IASB.
For example, apart from changing Australian Accounting Standards, the adoption of IFRSs in Australia is also expected to
impact on the development of IASB standards. Parker (1997, p. 45) states (and note that he made these comments before the
IASB took over the functions of the IASC):
The Australian representatives to the IASC will raise issues at the IASC meetings and formal submissions will be made to the
IASC which would identify ‘improvements’ in the IASC Standards themselves as a result of the Australian/IASC Harmonisation
Program. This may lead to the eventual revision of the IASC Standards as a result of the Australian feedback.
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1.6 International cultural differences and the harmonisation
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As CLERP (1997, p. 17) notes, the AASB could still need to issue domestic exposure drafts and standards on topics not
covered by the IASB; however, this would only be in isolated circumstances. It would be desirable for the Australian standardsetting body, when seeking to develop a standard not already covered by the IASB, to offer to develop the standard on behalf
of the IASB.
At this point it should be noted that the IASB is also responsible for developing a conceptual framework—a framework
that is used in developing accounting standards. Chapter 2 provides an in-depth review of the IASB Framework.
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As we have emphasised in this chapter, globally countries are moving to adopt International Financial Reporting Standards
rather than accounting standards developed domestically. We now consider some factors that might impact negatively on global
harmonisation or convergence of accounting standards. Paragraph 4.1 of Policy Statement 6 addressed some of the perceived
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barriers to harmonisation in ‘the short to medium term’. According to the statement ‘these barriers include the effects on standard
setting of different business environments, legal systems, cultures and political environments in different countries’.
One of these ‘barriers’, which we will consider briefly, is cultural differences. ‘Culture’ itself is described by Gray (1988,
p. 4) as a system of societal or collectively held values, where values are defined as a broad tendency to prefer certain states of
affairs over others. Perera (1989, p. 43) describes culture as an expression of norms, values and customs, which reflect typical
behavioural characteristics. There are many accounting researchers (for example, Gray 1988; Perera 1989; Fechner & Kilgore
1994; Eddie 1996; Chand & White 2007) who argue that the accounting policies and practices adopted within particular
countries are to some extent a direct reflection of the cultural and individual values and beliefs in those countries. That is, the
values in the accounting subculture are directly influenced by society-wide values. Perera (1989, p. 43) argues that culture
is a powerful environmental factor affecting the accounting system of a country and, therefore, that accounting cannot be
considered to be ‘culture free’. In the same vein, Gray (1988, p. 5) states:
the value systems of accountants may be expected to be related to and derived from societal values with special reference to
work related values. Accounting ‘values’ will, in turn, impact on accounting systems.
For example, if a country is deemed to be basically conservative, the argument is that the accounting policies
of that country will tend towards conservatism. Conservative accounting policies would rely on traditional
measurement practices (such as historical cost) and would be more likely to be used in countries in which the society
is generally classified as seeking to minimise uncertainty (Perera 1989). Gray (1988, p. 10) argues that the degree of
conservatism varies by country, ranging from a strongly conservative approach in the Continental European countries,
such as France and Germany, to a much less conservative approach in the USA and the United Kingdom.
Countries might have cultural attributes that suggest they tend more towards secrecy than transparency, and
their accounting disclosure requirements might reflect this cultural bias. As with degrees of conservatism, Gray
(1988, p. 11) argues that the extent of secrecy seems to vary between countries, with lower levels of disclosure—
implying greater secrecy—including instances of secret reserves, evident in the Continental European countries
for example, compared with higher levels of disclosure in the USA and the United Kingdom.
Eddie (1996) investigated the association of particular national cultural values (identified by Hofstede 1991) with
consolidation disclosures made by particular entities within a number of different countries. Consolidation practices are
covered in a later chapter of this text; however, at this stage consolidation can be defined simply as the practice of combining
the financial statements of various entities within a group to form one set of consolidated financial statements. Eddie found
that particular cultural values or attributes—which had been identified and measured in previous research—are significantly
associated with the extent of consolidation disclosure and the degree of variation in the extent of consolidation disclosures.
If national culture has impacted on the approaches and decisions taken by accounting practitioners and accounting standard
setters within their own particular countries, is it appropriate to expect different countries, with varying cultural values, to adopt
internationally uniform accounting practices? Perera (1989, p. 52) considers the potential success of transferring accounting skills
from Anglo-American countries to developing countries. He notes: ‘The skills so transferred from Anglo-American countries may
not work because they are culturally irrelevant or dysfunctional in the receiving countries’ context’.
Following from the above discussion, the issue of ‘culture’ and international cultural differences might have some bearing
on whether the harmonisation or adoption of accounting standards on a worldwide basis is a realistic and achievable goal.
Gray (1988, p. 2) states that ‘fundamentally different accounting patterns exist as a result of environmental differences and
that international classification differences may have significant implications for international harmonisation’.
Perera (1989) argues that International Accounting Standards themselves are strongly influenced by Anglo-American
accounting models and, as such, International Accounting Standards tend to reflect the circumstances and patterns of
thinking in a particular group of countries. He argues therefore that International Accounting Standards are likely to
encounter problems of relevance in countries with different cultural environments from those found in Anglo-American
countries.
Perhaps it could be argued that with the increasing globalisation of business, international cultural differences will be
reduced. Further consideration of this issue is really beyond the ambit of this book but it is nevertheless an interesting one.
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conservative
accounting policies
Policies that tend to
understate the value of an
entity’s net assets. A bias
towards understating the
carrying value of assets
and overstating the
carrying value of liabilities.
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As we have discussed many of the reporting requirements for general purpose financial statements (GPFSs), it would be
useful also to consider briefly the use and role of another report that typically appears in corporate annual reports—the audit
report.
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An audit is the independent examination of financial information of any entity—whether profit-oriented or not and
irrespective of its size or legal form—where such an examination is conducted with a view to expressing an opinion on that
financial information. The audit opinion is the output of the audit process and is provided in the audit report. The auditor’s
opinion helps to establish the credibility and reliability of the financial information. The user of this information, however,
should not assume that the auditor’s opinion is an assurance of the future viability of the entity, or of the efficiency or
effectiveness with which management has conducted the affairs of the entity—it is simply an opinion. Also, it cannot be
considered with absolute certainty that all transactions have been correctly recorded, even when the auditor provides an
unqualified opinion. The auditor does not test/check all transactions; hence there is always the possibility that the financial
statements might be materially misstated. It is to be hoped, however, that the probability of material misstatement is kept to
a low level. Exhibit 1.6 provides an example of an audit report.
In the private sector, decisions relating to the internal affairs of an enterprise, as well as lending and investment decisions
of creditors and investors, must be made daily. In the public sector, interested parties must decide whether managers are
complying with the controls placed upon them and whether the entity is operating efficiently and effectively. Therefore,
Exhibit 1.6
I have audited the accompanying financial report of the Institute of Chartered Accountants in Australia (the Institute),
which comprises the balance sheet as at 30 June 2008, and the income statement, statement of recognised
income and expense and cash flow statement for the year ended on that date, a summary of significant accounting
policies, other explanatory notes and the Directors’ declaration.
Independent audit report
to members of the
Institute of Chartered
Accountants in Australia
Directors’ responsibility for the financial report
The directors of the Institute are responsible for the preparation and fair presentation of the financial report
in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations)
and in accordance with the by-laws of the Institute. This responsibility includes establishing and maintaining
internal controls relevant to the preparation and fair presentation of the financial report that is free from material
misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making
accounting estimates that are reasonable in the circumstances. In Note 2, the directors also state that the financial
report, comprising the financial statements and notes, complies with Australian Accounting Standards.
Audit responsibility
My responsibility is to express an opinion on the financial report based on my audit. I conducted my audit in
accordance with Australian Auditing Standards. These Auditing Standards require that I comply with relevant ethical
requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether
the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial report. The procedures selected depend on my judgment, including the assessment of the risks of material
misstatement of the financial report, whether due to fraud or error. In making those risk assessments, I consider
internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the
overall presentation of the financial report.
I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
Independence
In conducting my audit I have met the independence requirements of the Australian professional accounting bodies.
In addition to my audit of the financial report, I was engaged to undertake the services disclosed in the notes to the
financial statements. The provision of these services has not impaired my independence.
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In my opinion:
1 The financial report presents fairly, in all material respects, the financial position of the Institute of Chartered
Accountants in Australia as of 30 June 2008, and of its financial performance and cash flows for the year then
ended in accordance with Australian Accounting Standards; and
2 The financial report also complies with Australian Accounting Standards.
Sean Van Gorp FCA
Auditor
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managers must collect and report financial information about the entity that summarises and communicates the results of
their activities to interested groups. To do this, they must identify user needs for the purpose of establishing the nature of the
data to be communicated—that is, decisions must be made as to what is material.
It should be remembered that the auditor is not responsible for the preparation of the financial information; that
responsibility rests with management. The auditor’s responsibility is to form and express an opinion on the financial
information. Arguably, the auditor’s report is the first item a reader should review when looking at an annual report. A review
of the audit report might indicate that the financial statements have not been properly prepared and, perhaps, that they should
not be relied upon for making resource-allocation decisions.
Preparers of financial information include the financial managers of enterprises, each of whom might, at times, place
primary importance on maximising their own welfare. This frequently results in the goals of the persons preparing the financial
information being different from the goals of those using it. This conflict, which will be further considered in Chapter 3,
might cause the preparers of financial information to intentionally or unintentionally introduce misstatements (or bias) into
the financial data. Because of the potential bias of management in identifying and presenting such information, there is a need
for independent verification of the financial data to assure fairness of presentation.
The users of financial statements need their information to be unbiased in order to reduce the information risk they face—
that is, the risk of using materially misstated information—when making economic decisions. An independent auditor’s task is to
reduce the potential bias and error that the preparers of financial statements might introduce. The reduction (or elimination) of
bias makes it a ‘fairer game’ for investors and creditors. When using unbiased financial information, users are given a fairer chance
of earning reasonable returns on their investment. With biased information, they might be forced into making inappropriate
investment decisions.
To lessen this risk, users of financial statements are willing to incur an audit fee in return for some assurance that
financial statements are fairly presented. The managers of business entities are also generally prepared to subject their financial
operations to an audit. Potential investors are thus able to monitor past and future performance in a more reliable manner and
this might motivate them to invest more funds at a lower required rate of return than would otherwise be required. Of course,
the value of the independent audit will be tied to the reputation of the firm performing the audit.
Audits are typically required for all public companies, large proprietary companies and a limited number of small
proprietary companies, as defined earlier in this chapter. Small proprietary companies will be required to have their financial
statements audited if they are controlled by a foreign company or if shareholders holding more than 5 per cent of the voting
shares request that the reports be audited. From time to time, ASIC may also request that a small proprietary company
have its financial statements audited. Commonwealth and state government departments, statutory authorities, government
companies and business undertakings and municipalities also typically have their financial statements audited.
In 2003 the federal government announced its intention to give legal backing to auditing standards in the same way that
accounting standards have legal backing. This culminated in legally backed auditing standards being issued from 2006.
As preceding sections of this chapter have discussed, financial accounting is fairly heavily regulated within Australia. There are
numerous Corporations Act requirements, and there are many accounting standards, with additional standards being issued
fairly frequently. The ASX also provides extensive regulation for listed entities. But is all this regulation really necessary? What
if we had no accounting standards, and reporting entities could report whatever information they wanted in whatever format
they considered appropriate?
Opinions on the need for regulation vary, and range from the ‘free-market’ perspective to the ‘pro-regulation’ perspective.
We will now briefly consider some arguments for and against regulation—for a more detailed discussion, refer to a text
dedicated to financial accounting theory.
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1.8 All this regulation—is it really necessary?
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Proponents of a free-market perspective on accounting regulation often believe that accounting information should be treated
like other goods, with demand and supply forces being allowed to operate to generate an optimal supply of information about
an entity. In support of their claims, a number of arguments are provided. One argument, based on the work of authors such
as Jensen and Meckling (1976), Watts and Zimmerman (1978), Smith and Warner (1979) and Smith and Watts (1982), is
that even in the absence of regulation, there are private economics-based incentives for the organisation to provide credible
information about its operations and performance to certain parties outside the organisation, otherwise the costs of the
organisation’s operations would rise. This view is based on a perspective that the provision of credible information allows other
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Managers may incur reputational costs if they fail to disclose bad news in a timely manner. Money managers, stockholders,
security analysts, and other investors dislike adverse earnings surprises, and may impose costs on firms whose managers are
less than candid about potential earnings problems. For example, money managers may choose not to hold the stocks of firms
whose managers have a reputation for withholding bad news and analysts may choose not to follow these firms’ stocks . . .
Articles in the financial press suggest that professional money managers, security analysts, and other investors impose costs
on firms when their managers appear to delay bad news disclosures. These articles claim that firms whose managers acquire
a reputation for failing to disclose bad news are less likely to be followed by analysts and money managers, thus reducing the
price and/or liquidity of their firms’ stocks.
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parties to monitor the activities of the organisation. Being able to monitor the activities of an entity reduces the risk associated
with investing in the entity, and this in turn should lead to a reduction in the cost of attracting capital to the organisation.
It has also been argued that there will often be conflicts between various parties with an interest in an organisation, and
accounting information will be produced, even in the absence of regulation, to reduce the effects of this conflict. For example, if
an owner appoints a manager, the owner might be concerned that the manager will not serve the interests of the owner. To align
the interests of both parties, the manager might be provided with a share of profits, meaning that the manager will work hard to
increase profits, with higher profitability also being in the interests of the owners. To determine profits, accounting reports will be
produced, and the owners will demand that these reports be produced in an unbiased manner. As will be discussed in Chapter 3,
there is also an argument that accounting reports can be used to reduce the conflict that might arise between managers and the
providers of loans (debt holders). This is consistent with the usual notion of ‘stewardship’, according to which management is
expected to provide an account of how it has utilised the funds that it has been provided with. If an entity that borrows funds
also agrees to provide regular financial statements to the providers of the debt capital (the debtholders), this ability to monitor
the financial performance and position of the borrower will reduce the risks of the lender. This should translate to lower costs
of interest being charged and hence provide an incentive for the borrower to provide financial statements even in the absence of
regulation.
Further, depending on the parties involved and the types of assets in place, it has been argued that managers of the
organisation will be best placed to determine what information should be produced to increase the confidence of external
stakeholders (thereby decreasing the organisation’s cost of attracting capital). Regulation that restricts the available set of
accounting methods (for example, banning a particular method of amortisation that was used previously by some organisations)
will decrease the efficiency with which information will be provided. It has also been argued that certain mandated disclosures
will be costly to the organisation if they enable competitors to take advantage of certain proprietary information. Hakansson
(1977) used this argument to explain costs that would be imposed as a result of mandating segment disclosures.
While this discussion is about providing financial statements, a related issue is that of external auditing of such reports. It has
been argued that even in the absence of regulation, external parties would demand that financial statement audits be undertaken.
If such audits are not undertaken, financial statements would not be deemed to have the same credibility and, consequently, less
reliance would be placed on them. If reliable information is not available, the risk associated with investing in an organisation
might be perceived to be higher, and this could lead to increases in the cost of attracting funds to the organisation. It has
therefore been argued that managers would have their reports audited even in the absence of regulation (Watts 1977; Watts
and Zimmerman 1983; Francis and Wilson 1988). That is, financial statement audits can be expected to be undertaken even
in the absence of regulation, and evidence indicates that many organisations did have their financial statements audited prior to
any legislative requirements to do so (Morris 1984). However, as Cooper and Keim (1983, p. 199) indicate, for auditing to be
an effective strategy for reducing the costs of attracting funds, ‘the auditor must be perceived to be truly independent and the
accounting methods employed and the statements’ prescribed content must be sufficiently well-defined’.
There is also a perspective that even in the absence of regulation, organisations would still be motivated to disclose both
good and bad news about an entity’s financial position and performance. Such a perspective is often referred to as the ‘market
for lemons’ perspective (Akerlof 1970), the view being that in the absence of disclosure the capital market will assume that the
organisation is a ‘lemon’. (Something is a lemon if it initially appears or is assumed, perhaps owing to insufficient information,
to be of a quality comparable to other products, but later turns out to be inferior. Acquiring the ‘lemon’ will be the result of
information asymmetry in favour of the seller.) That is, no information is viewed in the same light as bad information. Hence, even
though the firm might be worried about disclosing bad news, it is assumed that the market might make an assessment that
silence implies that the organisation has very bad news to disclose (otherwise, it would disclose it). This ‘market for lemons’
perspective provides an incentive for managers to release information in the absence of regulation, as failure to do so will have its
own implications for the organisation. That is, ‘non-lemon owners have an incentive to communicate’ (Spence 1974, p. 93).
Drawing upon arguments such as the lemons argument above and applying them to preliminary profit announcements,
Skinner (1994, p. 39) states:
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Reviewing previous studies, Skinner (1994, p. 44) notes that there is evidence that managers disclose both good and
bad news forecasts voluntarily. These findings are supported by his own empirical research, which shows that when firms are
performing well, managers make ‘good news disclosures’ to distinguish their firms from those doing less well, and when firms are
not doing well, managers make pre-emptive bad news disclosures consistent with ‘reputational effects’ arguments (p. 58).
Arguments that the market will penalise organisations for failure to disclose information (which might or might not be bad)
of course assume that the market knows that the manager has particular information to disclose. This expectation might not
always be that realistic, as the market will not always know that there is information available to disclose. That is, in the presence
of information asymmetry (which means that information is not equally available to all—for example, a manager might have
access to information that is not available to others), a manager might know of some bad news, but the market might not expect
any information disclosures at that time. However, if it does subsequently come to light that news was available that was not
disclosed, we could perhaps expect the market to react (and in the presence of regulation, we could expect regulators to react, as
failure to disclose information in a timely manner might be in contravention of particular laws). Also, at certain times, withholding
information (particularly of a proprietary nature) could be in the interests of the organisation. For example, the organisation might
not want to disclose information about certain market opportunities for fear of competitors utilising such information.
So, in summary of this point, there are various arguments or mechanisms in favour of reducing accounting regulation,
as even in the absence of regulation, firms have incentives to make disclosures. We will now give some consideration to
alternative arguments in favour of regulating the practice of financial accounting.
The ‘pro-regulation’ perspective
In the above discussion we considered a number of reasons that have been proffered in favour of reducing or eliminating
regulation. One of the most simple of arguments is that if somebody really desired information about an organisation, they
would be prepared to pay for it (perhaps in the form of reducing their required rate of return) and the forces of supply and
demand should operate to ensure an optimal amount of information is produced. Another perspective is that if information
is not produced, there will be greater uncertainty about the performance of the entity and this will translate into increased
costs for the organisation. With this in mind, organisations would, it is argued, elect to produce information to reduce costs.
However, arguments in favour of a ‘free market’ rely on users paying for the goods or services that are being produced and
consumed. Such arguments can break down when we consider the consumption of ‘free’ or ‘public’ goods.
Accounting information is a public good: once it is available, people can use it without paying and can pass it on to
others. Parties that use goods or services without incurring some of the associated production costs are referred to as ‘freeriders’. In the presence of free-riders, true demand is understated because people know they can get the goods or services
without paying for them. Few will have any incentive to pay for the goods or services, as they can be relatively confident of
being able to act as free-riders. This dilemma, it is argued, is a disincentive for producers of the particular good or service,
which in turn leads to an underproduction of information. As Cooper and Keim (1983, p. 190) state:
Market failure occurs in the case of a public good because, since other individuals (without paying) can receive the good, the
price system cannot function. Public goods lack the exclusion attribute, i.e. the price system cannot function properly if it is
not possible to exclude non-purchasers (those who will not pay the asked price) from consuming the good in question.
To alleviate this underproduction, regulation is argued to be necessary to reduce the impacts of market failure. In relation to
the production of information, Demski and Feltham (1976, p. 209) state:
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Unlike pretzels and automobiles, [information] is not necessarily destroyed or even altered through private consumption by
one individual . . . This characteristic may induce market failure.
In particular, if those who do not pay for information cannot be excluded from using it and if the information is valuable
to these ‘free riders’, then information is a public good. That is, under these circumstances, production of information by
any single individual or firm will costlessly make that information available to all . . . Hence, a more collective approach to
production may be desirable.
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While proponents of a free-market approach argue that the market, on average, is efficient, it can also be argued that such
‘on-average’ arguments tend to ignore the rights of individual investors, some of whom might lose their savings as a result of
relying upon unregulated disclosures.
In addition, whether an individual is able to obtain information about an entity might depend on the individual’s control
of scarce resources required by the entity. Although an individual might be affected by the activities of an organisation, without
regulation and without control of significant resources, the individual might be unable to obtain the required information.
Regulators often use the ‘level playing field’ argument to justify putting legislation in place. From a financial accounting
perspective, everybody should (on the grounds of fairness) have access to the same information. This is the basis of laws that
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prohibit insider trading and that rely upon an acceptance of the view that there will not be, or perhaps should not be, transfers of wealth
between parties that have access to information and those that do not. There is also a view (Ronen 1977) that extensive insider trading
will erode investor confidence to such an extent that market efficiency will be impaired. Putting in place greater disclosure regulations will
make external stakeholders more confident that they are on a ‘level playing field’. If the community has confidence in the capital markets,
regulation is often deemed to be in ‘the public interest’. However, we will always be left with the question of what is the socially right level
of regulation. Such a question cannot be answered with any degree of certainty. Regulation might also lead to uniform accounting methods
being adopted by different entities, and this in itself will enhance comparability of organisational performance.
While we have provided only a fairly brief overview of the free-market versus regulation arguments, it should perhaps be stressed that
this debate is ongoing with respect to many activities and industries, with various vested interests putting forward many different and
often conflicting arguments for or against regulation. The subject often gives rise to heated debate within many economics and accounting
departments throughout the world. What do you, the reader, think? Should financial accounting be regulated and, if so, how much
regulation should there be?
While we can argue about the merits or otherwise of accounting regulation, the current extent of regulation can reasonably be expected
to be at least maintained and probably increased in the future.
Summary
This chapter provides an overview of the sources of regulation and guidelines relating to financial reporting within Australia. As has been indicated,
recent years have seen major changes in the accounting standards being used within Australia, and further changes are to be expected in
forthcoming years. While we did have a system where accounting standards were predominantly developed within Australia, as from 2005 we have
a system under which Australian Accounting Standards will predominantly be the standards developed by the International Accounting Standards
Board. Hence, the relevance of the International Accounting Standards Board to Australian financial reporting has greatly increased in recent years.
There are numerous rules relating to external reporting. The body of rules is frequently amended, and therefore accountants in practice (and
academia) must continually update their knowledge of the rules. The Australian accounting profession, which is dominated by three bodies—the
Institute of Chartered Accountants in Australia, the National Institute of Accountants and CPA Australia—requires its members to undertake
continuing professional education throughout the period of their professional membership.
Key terms
Australian Accounting Standards
Board (AASB)
Australian Securities and Investments
Commission (ASIC)
12
Australian Securities Exchange (ASX)
conservative accounting policy
Financial Reporting Council (FRC)
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21
general purpose financial statement
special purpose financial statement
5
5
7
End-of-chapter exercise
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At the end of each chapter of this book, an exercise will be set that addresses particular issues raised within the chapter. Generally, these exercises
will be of a practical nature requiring calculations. However, in some chapters, such as this one, a number of questions of a more theoretical nature
will be posed and no answers will be provided. In fact, for some questions there is no single right answer, as any response will be dependent on
subjective judgments and personal opinion. The reader is encouraged to contemplate, independently, the various factors that should be considered
in answering the questions. As a result of reading this chapter you should be able to provide answers to the following questions.
1 What is a general purpose financial statement, and who are the users of such statements?
2 Are some users of general purpose financial statements more important than others? How would you make such an assessment?
3 What are the various sources of financial accounting regulation? Would you consider that financial accounting is overregulated, or
underregulated? Why?
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4
5
6
From the accountant’s perspective, what does ‘true and fair’ mean? In your opinion, is the true and fair requirement useful, or necessary?
How does the conceptual framework of accounting contribute to the practice of financial accounting?
Australia has adopted IFRSs. As a result, does the Australian Accounting Standards Board still have much relevance, and if so, why? What
are some arguments for and against Australia adopting IFRSs?
Review questions
1 Describe the roles of ASIC, the AASB, the ASX and the FRC and the relationships between these regulatory bodies.
2 What is the IASB and how does it affect financial reporting regulation in Australia?
3 What is the role of the independent auditor, and why would the manager or the users of financial statements be prepared to pay for the
auditor’s services?
4 With all the regulations that companies must follow, fulfilling the requirement for corporate reporting is an additional expensive activity. What
are some possible arguments for and against disclosure regulation?
5 Provide a justification as to why large companies should have to produce financial statements that comply with accounting standards but
small companies should not have to do this.
6 Define ‘generally accepted accounting procedures’.
7 What is included within a directors’ declaration, and what are the implications if a director signs the declaration and the organisation
subsequently fails, owing millions of dollars which it cannot repay?
8 What does it mean to say that some financial statements are ‘true and fair’? How would a director try to ensure that the financial
statements are true and fair before he or she signs a directors’ declaration?
9 How are International Financial Reporting Standards developed and revised? Explain the role of the AASB in that process.
10 What is the relevance to Australia of Interpretations issued by the International Financial Reporting Interpretations Committee?
11 What authority do Interpretations issued by the IASB and AASB have in the Australian financial reporting context? If they do have authority,
from where does this authority emanate?
12 What are the functions of the IASB?
13 Refer to the article in Financial Accounting in the News 1.3, entitled ‘Top accountants oppose push for easing of standards’ (p. 19). Outline
some of the advantages and disadvantages of the position being favoured by the Institute of Chartered Accountants in Australia.
14 What are some of the possible cultural impediments to the international standardisation of accounting standards?
15 Why has the FRC decided that Australian Accounting Standards should be consistent with those being issued by the International
Accounting Standards Board?
16 Identify major changes to financial reporting practice and financial reporting regulation that resulted following the adoption of International
Financial Reporting Standards.
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The Directors’ report, Directors’ statement and profit and loss account include reference to the Directors’ view that the results for the
year using Paragraph 23 of AASB 1023 are misleading and that the accounts only show a true and fair view by virtue of the inclusion
of an alternative profit and loss account using the seven year spread basis of accounting for realised gains on equities and properties.
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17 Because they disagreed with AASB 1023 Financial Reporting of General Insurance Activities (the standard applicable for years ending on
or after 30 June 1992), two companies, QBE Insurance and NRMA, elected in 1992 to present two sets of results: one using the rules
prescribed by AASB 1023; and the other using their own preferred approach. To justify the additional disclosures, the companies referred
to the need for the accounts to be true and fair and argued that without the additional disclosures the accounts might be misleading. As
QBE’s Managing Director’s Review stated (at p. 12 of the 1992 annual accounts):
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QBE’s directors elected to emphasise the company’s result by providing an entire income statement calculated under their preferred
approach. Although the directors justified their approach on the basis of the true and fair view, it is obviously not clear whether other factors
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might have motivated the disclosure policy. In 1992 another company, W.H. Soul Pattinson and Co., provided an additional column within
the profit and loss account on the basis of a disagreement relating to the application of AASB 1024. One column was headed ‘True and fair
profit’, and the other column, ‘Accounting standards profit’.
It may be argued that the approach adopted by QBE is tantamount to evoking a true and fair override. The approach did not escape
mention in the Legislation Review Board’s discussion paper. According to the Board, a resolution should be reached that:
does not allow preparers to present additional or alternative information in a way that detracts from the information that is to be
presented under prescriptive requirements. It may be that using a ‘third column’ approach or preparing two complete sets of
accounts will inevitably result in an inappropriate emphasis being given to the additional information, if so, it may be appropriate
for section 299 of the Corporations Law to be amended to prevent the disclosure of additional information by way of a third
column or a second complete set of accounts (p. 56).
Required
(a)
Provide a list of possible motivations for directors to adopt a ‘third column’ approach.
(b)
Is the approach adopted by QBE in contravention of the Corporations Act?
18 The article in Financial Accounting in the News 1.6 by Nick Tabakoff, entitled ‘AARF’s cautionary note’, discusses how, at the end of 1994,
the ASC was considering taking Pacific Dunlop Ltd to court over its use of a particular accounting method. Why would it be difficult for the
ASC/ASIC to prove that Pacific Dunlop Ltd’s accounts were not true and fair?
Accounting
in the News
1.6 Financial
AARF’s cautionary note
Nick Tabakoff
The Australian Financial Review, 17 August 1994,
p. 24
The Australian Securities Commission’s warning of legal action against
Pacific Dunlop Ltd over the issue of goodwill has attracted a cautionary note from the Australian Accounting Research Foundation (AARF)
which says that any such claim may be difficult to prove in the courts.
PacDun is continuing to stand firm on its use of the controversial
‘inverted sum of the digits’ (ISOTD) method of amortising goodwill,
despite the threat of court proceedings hanging over it.
The company’s managing director, Mr Philip Brass, has claimed that
directors were being forced to sign off on accounts ‘without their own
input as to the value of goodwill’.
Mr Warren Macgregor, the executive director of AARF—which puts
together information that forms the basis of Accounting Standards—
said last night that he supported the principle of the ASC’s stance
against PacDun: ‘From an intuitive position, legal action would appear
to be an appropriate move for the ASC to make’. But he expressed
doubts as to how the ASC would prove the case.
The legal action alternative examined by the ASC is understood to be
based on whether the company’s accounts represent a ‘true and fair view’
of its financial position, and if the use of the ISOTD method breaches the
Accounting Standard AASB 1013.
However, proving that accounts are not true and fair has in the past
been a difficult task for corporate regulators.
In 1979, directors of Mineral Securities were charged by the then
Corporate Affairs Commission, with—among other claims—publishing
a false statement of profit in the company’s accounts in the early
1970s.
But the judge in the case directed the jury to find the directors not
guilty because the Commission failed to produce ‘a true statement of
profits’ for the period concerned.
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19 Visit the website of a company listed on the ASX. (Hint: some corporate website addresses are provided in this chapter.) Review
the company’s corporate governance disclosures and determine whether the company complies with the ‘Eight Essential Principles
of Corporate Governance’ identified by the ASX. If the company discloses non-compliance, evaluate the reasons provided for noncompliance.
20 Has Australian financial reporting regulation moved away from a self-regulatory model dominated by the accounting profession towards a
government-regulated model? In explaining your answer, provide arguments to support your views on the financial reporting regime as it
was before and after the CLERP 1 reforms.
21 Identify the types of entities that are, or are likely to be, required to prepare financial statements in accordance with International Financial
Reporting Standards (their Australian equivalents) after 1 January 2005. For each type of reporting entity consider whether the benefits of
convergence with International Financial Reporting Standards, as stated in AASB Policy Statement 4, are likely to materialise.
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22 Globally, there are variations in business laws, criminal laws, and so forth. Such international variations in laws will be a result of differences
in history, cultures, religions, and so forth. While we are apparently prepared to accept international differences in various laws, groups such
as the IASB expect there to be global uniformity in regulations relating to accounting disclosure—that is, uniformity in accounting standards.
Does this make sense?
23 It is argued by some researchers that even in the absence of regulation, organisations will have an incentive to provide credible information
about their operations and performance to certain parties outside the organisation; otherwise, the costs of the organisation’s operations will
rise. What is the basis of this belief?
24 Any efforts towards standardising accounting practices on an international basis imply a belief that a ‘one-size-fits-all’ approach is
appropriate at the international level. Is this a naive perspective? Explain your answer.
25 Provide some arguments for, and some arguments against, the international standardisation of financial reporting. Which arguments do you
consider to be more compelling? (In other words, are you more inclined to be ‘for’ or ‘against’ the international standardisation of financial
reporting?)
26 Review a number of accounting standards and then discuss how accounting standards are structured.
27 The newspaper article written by Keith Alfredson, former chairperson of the AASB, and reproduced in Financial Accounting in the News 1.7
makes a number of criticisms of the FRC’s decision to require Australia to adopt IFRSs.
Simple solution for standard problem
Keith Alfredson
The Australian Financial Review, 7 November 2003,
p. 79
year of adoption (for a December balance, on the report for the year
commencing 1 January 2005).
This would be consistent with past practice in Australia, which has
never required the restatement of comparative financial reports when
new standards have been adopted.
I challenge anyone to prepare a cost/benefit analysis that will
support that it is imperative that the 2004 accounts of Australian entities
(2004/2005 in the case of a 30 June balance) be restated.
I have no doubt that restatement is not essential for a ‘true and fair
view’.
The accounts for the financial year commencing on or after
January 1, 2005 could be stated to be compliant with international
standards, except for the non-restatement of the comparative accounts.
The report for the next year would of course be fully compliant.
In any case, the IASB has tentatively decided that the comparative
accounts need not be restated for the impacts of adopting IAS 32
and 39 (disclosure and recognition and measurement of financial
instruments). As these standards are likely to cause considerable
change to Australian financial reporting, especially for companies
involved in hedging, securitisation and other financial engineering,
the likely mandated restated comparative accounts are going to be
somewhat ‘half-baked’ and not a true reflection of the full adoption of
international standards.
This in itself gives ample justification for the adoption of my
recommended approach.
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So a large number of Australian boards and chief financial officers
are unprepared for the adoption of the new International Accounting
Standards in 2005 (‘Boards ignore new standards’, AFR, October 30).
This is hardly surprising since only one new standard is available.
Many boards would undoubtedly prefer and are waiting to deal with
actual standards, rather than speculation from exposure drafts and
subsequent tentative decisions of the IASB.
Given the now tight timetable to 2005, surely it is time for the Financial
Reporting Council, the AASB and the government to re-consider the
process for adopting international standards in Australia, for when the
FRC set the strategy in June 2002 for their adoption from 2005, it was
akin to signing a blank cheque—none of the significant details relating
to new or revised standards were available. Indeed the same is still the
case, though the eventual likely details are becoming clearer.
There is a simple solution. The AASB should exert its authority and
resolve to retain the 2005 timetable for the adoption of international
standards, but without the requirement to retrospectively restate the
comparative report (in the case of a December balance date, the report
for the year starting January 1, 2004).
Rather it should require entities to report the estimated impact of
the change to international standards in the financial report in their first
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1.7
Financial Accounting
in the News
Required
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Identify Keith Alfredson’s arguments and evaluate their respective merits.
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