Australian Government, Financial Reporting Council

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Fifteenth Meeting
5 September 2002

Outcomes of meeting held on 5 September 2002 at the AASB offices, Australian Stock Exchange Boardroom, Level 3, 530 Collins Street, Melbourne.

Attendance

Members:

Mr Jeffrey Lucy, AM (Chairman)
Ms Elizabeth Alexander, AM
Mr David Jackson
Mr Charles Macek (participating by phone)
Mr Graeme McGregor, AO
Mr Doug Niven (informal nominee of the Australian Securities and Investments Commission)
Mr Robert Nottle, CBE
Mr Phillip Prior

AASB:

Mr Keith Alfredson (Chairman)

IASC Trustees:

Mr Ken Spencer

FRC secretariat:

Mr Michael Kooymans

Apologies:

Mr Don Challen
Mr Leigh Hall
Mr Jim Murphy (informal nominee of the Commonwealth)
Mr Tom Pockett (informal nominee of the Business Council of Australia)
Mr Rob Wylie (informal nominee of The Institute of Chartered Accountants in Australia)

Agenda item 1: Introduction by FRC Chairman

The proposed agenda was adopted.

The minutes of the meeting held on 28 June 2002 were confirmed without change. The minutes record under item 10, Other business, that it was agreed that a special meeting of the FRC would be convened in early August to further consider the question of AASB resourcing. It was noted that this meeting did not proceed.

There were no declarations of interest by members present.

The FRC Chairman reported on liaison meetings he had held with stakeholder organisations and others since the 28 June 2002 FRC meeting. These included the Parliamentary Secretary to the Treasurer, Senator the Hon Ian Campbell, the Shadow Minister for Finance, Small Business and Financial Services, Senator Stephen Conroy, the IASB Liaison Member for Australia, Mr Warren McGregor, and senior representatives of:

  • Telstra Corporation;
  • Coca-Cola Amatil;
  • Department of the Treasury;
  • Department of Finance and Administration; and
  • Auditors-General.

The Chairman also reported on the very successful visit to Australia of the Chairman of the IASB, Sir David Tweedie, in August 2002. The visit, made under the auspices of the FRC and AASB, followed the FRC's announcement on 3 July 2002 of Australia's adoption of IASB standards from 2005. The FRC Chairman noted that neither the FRC nor the AASB had received any communication from a constituent group or company expressing concern about the 2005 decision.

It was noted that the first report of the Australian Stock Exchange's Corporate Governance Council had supported the 2005 decision. A copy of the report is at Attachment A.

Agenda item 2: AASB broad strategic direction for 2002-03, including approach to public sector issues

The FRC approved a broad strategic direction for the AASB for 2002-03 in relation to the private sector. This is at Attachment B.

The FRC also discussed the broad strategic direction for the Board in relation to the public sector. It was noted that Commonwealth, State and Territory Heads of Treasuries support an approach in which IASB standards would be used for the Australian public sector except where they were inconsistent with Government Finance Statistics (GFS) in which case GFS would prevail.

The FRC acknowledged the need to understand the merits of alternative approaches in order to give strategic direction consistent with Government policy, and recognised that this may preclude an early decision.

It was agreed that:

  • the FRC, in consultation with the AASB Chairman and public sector stakeholders, would further examine the appropriate harmonisation target for public sector accounting standards, including the approach of comparable countries overseas; and
  • the AASB would, in the meantime, pursue the 2002-03 public sector work program endorsed by the FRC, and supported by the Commonwealth, State and Territory Treasuries, in June 2002.

Agenda item 3: Preparations for 2005

The FRC discussed the interaction between the AASB and IASB and the development of a FRC/AASB communications strategy to ensure Australian stakeholders are prepared for the adoption of IASB standards by 2005.

Mr Ken Spencer, a member of the IASC Board of Trustees, addressed the meeting under this agenda item. Mr Spencer said that the IASB very much welcomed the 2005 decision and noted that Australia would continue to have a strong voice at the IASB via the quality of its contribution. He noted that the IASC's education program relating to international accounting standards (including its accreditation of education providers) was currently focused on Europe but that its application in Australia would now be examined.

Agenda item 4: Funding of the standard setting process - progress report

The Chairman reported on the state of play concerning the FRC's approach to the top 100 listed companies in Australia for voluntary contributions to funding of the accounting standard setting process. It was noted that the response to date had been encouraging and that the Chairman would send follow-up letters to companies that had not yet responded.

Agenda item 5: AASB resourcing, workload and composition

Consideration of this item was deferred to a later date.

Agenda item 6: Report by Chairman of AASB

The FRC noted a comparison of the AASB's projected 2002 balance sheet and statement of financial performance for 2001-02 with the actual position.

The FRC approved revisions to the charter of the Urgent Issues Group (UIG) to take account of the convergence of AASB standards with those issued by the IASB. These are:

  • paragraph 34 of the Charter to include that, where an issue involves the interpretation of an International Financial Reporting Standard (IFRS), the UIG Agenda Committee will consider whether to recommend to the AASB that the issue be referred to the International Financial Reporting Interpretations Committee (IFRIC); and
  • paragraph 42 to include that the UIG will be responsible for monitoring the work of the IFRIC, making submissions on matters being considered by IFRIC, including exposure drafts, and reviewing IFRIC interpretations and determining whether they should apply in Australia. IFRIC interpretations of IFRSs that have been adopted by the AASB under its international convergence and harmonisation policy will be applicable in Australia and will be included in a UIG Abstract.

The FRC noted written reports by the AASB Chairman on: `face-to-face' liaison between AASB staff and constituents in the two months to 31 August 2002; and correspondence received from constituents in the period June 2000 to June 2002 concerning accounting standards and their application.

Agenda item 7: Report of FRC Audit Committee

The Audit Committee Chair, Ms Elizabeth Alexander, reported on a meeting of the Audit Committee held on 21 August 2002 at which the Committee approved the AASB financial statements for 2001-02 for signature by the AASB directors. The auditor (Mr Paul Hinchey of the Australian National Audit Office) had advised the Committee that he was prepared to issue an unqualified audit report.

The Committee had also considered the draft FRC/AASB Annual Report for 2001-02.

As agreed at the 28 June 2002 FRC meeting, the Committee considered the stock-take of FRC activities discussed at that meeting to ensure it fully addressed the FRC's responsibility to report on the exercise of its functions under the Australian Securities and Investments Commission Act 2001. The Committee had made some minor changes to the document. The amended document was endorsed by the FRC.

The FRC noted with concern a late revision to the AASB's financial result for 2001-02 due to a provision of $170,230 for the deficient asset position of the AASB Superannuation Plan at 30 June 2002. It was noted that the provision was based on actuarial advice and partly reflected the Fund's negative return for the year but also the effect of a higher average salary used in the vesting calculation (arising from the grossing up of FBT benefits on transfer of staff from AARF to the AASB). It was agreed that the FRC Audit Committee would examine the issue to see whether such large unanticipated impacts on the AASB's financial results can be reduced in the future.

The FRC agreed on amended wording for the AASB schedule of contingencies as at 30 June 2002 which acknowledges the possibility of a retrospective payment of remuneration for the FRC Chairman.

The FRC approved the AASB's financial statements for 2001-02 for signature by the Chairman and Deputy Chairman.

Agenda item 8: FRC/AASB Annual Report for 2001-02

The FRC approved the draft FRC/AASB Annual Report for 2001-02 with amendments.

Agenda item 9: Report by Chairman of Nominations Committee

The Committee Chairman, Mr Phillip Prior, reported on the status of the Committee's processes to recommend replacements for Dr Neil Conn, AO and Ms Suzanne Lloyd following their resignations from the AASB, and the re-appointment or replacement of three members (Mr George Carter, Ms Brigid Curran, and Mr Greg Ward) whose terms expire on 14 February 2003.

Mr Prior noted that the Committee proposed to approach the market via a press advertisement. He also noted that the AASB Chairman had commenced AASB member evaluations for the period October 2001 to August 2002 and that these would provide an input to the Committee's process.

It was agreed that a formal advisory opinion would be sought from the Remuneration Tribunal on the appropriate level of sitting fees for part-time AASB members.

The FRC agreed to appoint Mr Charles Macek and Mr Rob Wylie as members of the Nominations Committee (Mr Wylie had previously participated in the work of the Committee on an informal basis).

Agenda item 10: FRC Deputy Chairman

The FRC elected Mr Charles Macek as Deputy Chairman to replace Mr Michael Ullmer who resigned from the FRC in May 2002.

Agenda item 11: Other business

The Chairman noted that he had discussed with the Parliamentary Secretary to the Treasurer the status of appointments to the FRC given:

  • the resignations of members nominated by the Business Council of Australia, the Australian Securities and Investments Commission, and the Commonwealth (Treasury);
  • the vacancy created by the appointment of the Chairman who had previously been nominated by The Institute of Chartered Accountants in Australia; and
  • the expiry of the initial terms of appointment of seven members on 31 December 2002.

The Chairman said that he was aware of one member in the last category who did not plan to seek re-appointment and asked that any other members in this position let him and their stakeholder bodies know as soon as possible.

The Chairman confirmed that he would undertake an overseas visit in October, accompanied by the FRC Secretary, to hold discussions with counterparts in London and New York, to attend a high-level conference in Brussels on the European Single Capital Market, and to meet with the IMF, World Bank, and UK and US Treasuries on issues relating to public sector accounting standard setting. The FRC and Parliamentary Secretary to the Treasurer had previously approved the visit.

It was noted that Mr Peter Day, an Australian appointed to the Standards Advisory Council of the IASB, would attend the 12 December 2002 FRC meeting to brief FRC members on the work of the Council.

It was agreed that the 12 December FRC meeting would be held in Sydney.

Following the meeting, the FRC met with the Parliamentary Secretary to the Treasurer to discuss the work of the FRC and AASB and the Government's CLERP 9 paper, "Corporate Disclosure: Strengthening the Financial Reporting Framework", which was to be released later in September. Senator Campbell was accompanied by two members of his staff, Mr Colin Edwardes and Ms Melissa Baldwin.

ATTACHMENT A

Thursday, August 15, 2002

Corporate Governance Council
Statement by participants

The Corporate Governance Council held its first meeting today at the Sydney offices of Australian Stock Exchange (ASX).

The meeting was convened by ASX, and attended by representatives of Association of Superannuation Funds of Australia Limited, Australasian Investor Relations Association, Australian Chamber of Commerce and Industry, Australian Institute of Company Directors, Australian Institute of Superannuation Trustees, Australian Shareholders Association, Business Council of Australia, CPA Australia, Chartered Secretaries Australia, Institute of Chartered Accountants in Australia, Investment and Financial Services Association, Group of 100, and Securities Institute of Australia.

The meeting was opened by ASX Managing Director and CEO, Mr Richard Humphry and chaired by ASX Executive General Manager, Issuers and Market Integrity, Ms Karen Hamilton.

Immediate Priorities: Annual Reports to Shareholders 2001-02

The Council noted that Australian listed companies are currently preparing their annual reports to shareholders - including reporting, in line with ASX Listing Rules, on their main corporate governance practices. In these circumstances, the Council decided to issue an initial statement today, to provide immediate guidance on a number of current governance issues. The Council urged that companies pay special attention to the following issues in reporting to their shareholders on the current (2001-02) reporting season. Where companies are unable to comply, the Council requested that they provide shareholders with a full explanation of the reasons for this inability.

Share and Options Schemes

The Council urged companies to voluntarily and fully disclose the existence and conditions of all share and options schemes currently in operation, together with details of performance hurdles.

The Council noted that Section 300 of the Corporations Act requires the disclosure of options offered to directors and the five most highly remunerated officers, along with disclosure of the valuation basis underpinning these offers The Council was pleased to note further that the International Accounting Standards Board (IASB) has indicated its intention to release an exposure draft in October that will, among other issues, address the question of valuation and detailed disclosure of share and options schemes. The Council recognised that these standards will however take time to be implemented.

Audit Committees

The Council expressed strong support for the establishment of audit committees with appropriate expertise.

Listed companies are currently required under Listing Rules to report if they operate an audit committee and, if not, why not. The Council recognises that audit committees in no way diminish the responsibilities of all directors under the Corporations Act. The Council also recognised that further consideration will be given to audit committees within the framework of the CLERP paper to be issued by the Commonwealth Treasury. This will in turn draw upon the comprehensive discussion of Professor Ian Ramsay's Report on Independence of Australian Company Auditors.

Recognising the need to evaluate costs and benefits in individual circumstances, the Council expressed the belief that audit committees make a particularly appropriate contribution to larger companies and those with greater likelihood of attracting retail investors. Accordingly the Council strongly recommended that audit committees be established by at least the top 500 listed companies (that is, those that compose the All Ordinaries index).

As minimum requirements, audit committees should be composed of a majority of independent directors; should be chaired by an independent director who is not the chairman of the board; should not include management representatives as members; and should operate under a charter. The charter should address the key responsibilities, accountabilities and entitlements of the audit committee, including responsibility for proposing appointment of external auditors; should be reviewed annually; and should be made available to shareholders.

External Auditors

The Council called on companies to disclose a full analysis of the total fees paid to external auditors, including a break down of fees for non-audit activities - noting that Australian Accounting Standard Board (AASB) 1034 already requires disclosure of total non-audit fees.

The Council also called on companies to disclose when the audit firm was last appointed and the dates of rotation of the audit engagement partners. The Council believed external auditors should meet at least twice yearly with the audit committee and the full board without management in attendance, to ensure full and frank discussion of audit issues.

Accounting Standards

The Council called for greater voluntary disclosure by companies and meaningful management discussion and analysis in financial reports.

The Council noted with approval the decision of the Financial Reporting Council (FRC) to support the adoption by Australia of international accounting standards by 1 January 2005. This will represent a significant step towards international consistency, thereby removing impediments to the transparent understanding of Australian companies by international investors.

The Council noted that Australia is making a substantial financial contribution through the FRC to this effort. These funds are derived from Commonwealth, State and Territory Governments, the three accounting bodies, the ASX and the Financial Industry Development Account of the ASX. The Council urged the business community to fully support this initiative.

The Council particularly recommended greater disclosure by companies of their capitalisation policies and practices. This includes greater clarity by companies about the circumstances in which costs are capitalised against future income streams.

The Council also called on companies to disclose the extent of any contractual arrangements they have entered into, such as leases, which carry financial obligations for future years.

Shareholder Empowerment

The Council called on companies to disclose the measures they have in place to ensure provision of equal access to material information through the Continuous Disclosure regime.

The Council expressed the view that an essential criterion to assess the validity of Corporate Governance reforms should be whether they empower the shareholder, particularly through the provision of material information both within the company itself and via the marketplace as a whole.

Recognising the essential nature of equal investor access to material information, the Council agreed that Continuous Disclosure had made a core contribution to standards of Corporate Governance in Australia to date. The Council noted the ASX paper on Enhanced Disclosure issued on 19th July 2002, which proposed a number of changes to both the continuous and periodic financial disclosure regimes designed to enhance the provision of timely and relevant information for the benefit of all investors. The Council noted that at ASX's suggestion, the World Federation of Exchanges' Annual Meeting in Amsterdam in October will be debating continuous corporate disclosure as the best protection of investors. The Council fully supported this initiative.

The Council expressed the hope that individual shareholders would further participate in the debate about corporate governance practices in Australia. To this end, the Council accepted the offer of ASX to set up an email and fax hotline to receive and record comments and opinions of shareholders on corporate governance issues. Contributions forwarded by email to corporate.governance@asx.com.au and by fax to 02 9227 0885 will be passed on to the Council.

Role and Purpose of the Corporate Governance Council

The Council sees its role as a collaborative, industry-based body leading the adoption by Australian companies of corporate governance practices which reflect international best practice and which enhance the reputation of Australia's capital markets and Australian companies. The Council endorsed the view that corporate governance practices are evolutionary and must be regularly reviewed.

To this end, the Council agreed that good corporate governance must protect the rights of shareholders, recognise the interests of the general public, and ensure timely and accurate disclosure is made of all material matters regarding the corporation. Good corporate governance should also provide an appropriate framework for board and management to pursue objectives that are in the interests of the shareholders and the company, encourage the productive and efficient use of corporate resources and provide transparency and accountability in relation to the use of those resources.

In pursuit of these goals, the Council will undertake a wide-ranging work program including the following activities:

  • Review, and where necessary suggest input into, published guidance recommendations for Corporate Governance practice in Australia, also having regard where relevant to international models;
  • Assist ASX in building understanding about best practice on the part of listed companies including, where appropriate, formulating suggestions as to any necessary amendments to Listing Rules and guidance notes;
  • Recommend to regulators and Government where legislative amendment may be necessary;
  • Provide information related to corporate governance to investors and the wider community;
  • Regularly review compliance with best practice.

In particular, emerging from this work program, the Council reaffirmed the intention to issue statements of best practice Corporate Governance principles. The Council expressed the belief that these principles will carry a strong endorsement of expected practice by Australian companies. These will be well in place for companies reporting on their activities in the 2002-03 financial year, and will be regularly reviewed and updated in the future.

The Council agreed to meet again in September.

ATTACHMENT B

Broad strategic direction provided by the Financial Reporting Council to the Australian Accounting Standards Board for 2002-03 in respect of the private sector

In accordance with paragraph 225(2)(d) of the Australian Securities and Investments Commission Act 2001, the FRC sets the following broad strategic direction for the AASB for 2002-03 in respect of the private sector:

  1. The Board's strategy and activities should be consistent with the objectives of accounting standard setting set out in section 224 of the Act, in relation to the characteristics of the financial information to be required by accounting standards, facilitation of the Australian economy and maintenance of investor confidence.
  2. The AASB should strike an appropriate balance in allocating resources to the development of accounting standards for the private, public and not-for-profit sectors.
    • The AASB should advise the FRC promptly of any resource constraints on the Board's ability to fulfil its responsibilities.
  3. The AASB should follow its stated objective of pursuing, through participation in the activities of the IASB, the development of an internationally accepted single set of accounting standards. In working towards this objective, the AASB should:
    • work towards the adoption in Australia of accounting standards that are the same as those issued by the IASB - and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) - to ensure their applicability to Corporations Act entities for accounting periods beginning on or after 1 January 2005;
    • continue to work closely with the IASB and align its work program with that of the IASB;
    • continue its present harmonisation program, working towards the adoption of accounting standards in Australia that harmonise with standards issued by the IASB, unless such standards are considered not to be in the best interests of the Australian public and private sectors;
    • promptly issue IASB exposure drafts in Australia for comment by constituents, and limit the need for subsequent issue of an AASB exposure draft to cases justified by the newness and complexity of a standard;
    • continue to remove non-conformities between existing Australian and IASB standards on a planned basis;
    • address, on a transparent basis, any transitional issues falling within the Board's mandate that may arise for Australian reporting entities, having regard to the cost of capital objective of the Act;
    • ensure, as far as possible, that the work of the Urgent Issues Group has close regard to IFRIC pronouncements;
    • in consultation with the FRC, communicate to constituents an overall strategy for adoption of IASB standards from 1 January 2005 to facilitate constituents' knowledge of and preparedness for the change.