Nineteenth Meeting
12 September 2003
Outcomes of the meeting held on 12 September 2003 at the Australian Accounting Standards Board Offices, Australian Stock Exchange Boardroom, Level 3, 530 Collins Street, Melbourne.
Attendance
Members:
Mr Charles Macek (Chairman)
Ms Elizabeth Alexander, AM
Mr Don Challen
Mr David Jackson
Mr John Langoulant
Mr Greg Larsen (Alternate to Mr Graeme McGregor, AO)
Mr Jim Murphy
Mr Paul Phenix (Alternate to Ms Karen Hamilton)
Mr Tom Pocket, participating by phone
Mr Greg Pound
Mr Phillip Prior
Mr Brian Scullin
Mr Lewis Ting
Ms Catherine Walter, AM
Mr Klaus Zimmermann
AASB:
Mr Angus Thomson (Alternate to Ms Ruth Picker)
Invitees:
Mr Geoff Connor (New Zealand Ministry of Economic Development)
FRC secretariat:
Ms Karen Gilmour
Mr Jorge del Busto
Treasury:
Ms Kerstin Wijeyewardene
ANAO:
Mr Paul Hinchey (Agenda items 9 and 10 only, by phone)
Apologies:
FRC Members:
Ms Karen Hamilton
Graeme McGregor, AO
Mr Ken Spencer
Invitees:
Ms Ruth Picker (Acting AASB Chair).
Agenda item 1: Introduction by FRC Chairman
The Chairman welcomed Mr Paul Phenix, alternate for Ms Karen Hamilton, and Mr Greg Larsen, alternate for Mr Graeme McGregor, AO. He also welcomed Mr Tom Pockett, who was attending via a phone hook-up, Mr Geoff Connor, invitee from the New Zealand Ministry of Economic Development and Mr Jorge del Busto, from Treasury, who will be taking up the FRC Secretariat from Monday 15 September 2003.
The Chair asked members if there were any declarations of interest. Mr Tom Pocket mentioned that he is a member of the Implementation Review Group appointed by the Australian Stock Exchange.
The minutes of the meeting held on 26 June 2003 were approved with no changes.
The Chair noted the report prepared by the Secretariat on Sir David Tweedie's visit to Australia and its recommendation for the FRC to consider any follow-up action in relation to his visit. The Chairman mentioned that Sir David was very complimentary of Australia's role in the standard setting process and provided encouragement for continuing involvement in the work of the IASB.
The FRC agreed to include a new standing agenda item on stakeholder issues. Under this item, the Chair asked for members to provide feedback to the Government, through the FRC, on their contacts with stakeholders.
The Chair noted that he had already started informal discussions with a number of stakeholders. These included meetings with Ken Spencer, a Trustee at the International Accounting Standards Committee Foundation; the three professional accounting bodies; the big four accounting firms; the Institute of Actuaries; Coca-Cola; and with Senator Conroy's policy advisers. He also noted he had a scheduled meeting with Senator Campbell for 15 September. The four main issues raised by stakeholders were:
- funding for the FRC/AASB;
- AASB Chair appointment;
- The role of the AASB post 2005, and how Australia will maintain its influence within the IASB; and
- Specific issues, such as the IAS standards on intangibles and insurance.
Other topics noted by the FRC were the ongoing discussions in Europe regarding their adoption of the financial instruments standard and, as discussed with Sir David Tweedie in his visit to Australia, the need to avoid "cherry-picking" between existing national standards and international accounting standards. Such "cherry-picking" would negate the benefit of adopting the IAS as the standards would still be viewed as national standards.
Agenda item 2: AASB/FRC strategy for influencing the international accounting standard setting process
The Chair noted the paper prepared by the Secretariat regarding means for Australia to maintain its influence in the international accounting standard setting process. He noted in particular the need for Australia to keep abreast of developments and to communicate more effectively with Australians who are members of relevant international organisations. He invited further views from FRC members.
A number of suggestions to influence the IASB were made, including working with other countries, such as New Zealand, as agreed by Ministers in a joint statement on 28 August 2003. Members also noted the need to identify potential risks, such as Australia losing influence to other regional countries with more resources. The FRC agreed that the key to Australia maintaining its influence was through the high-quality of its intellectual contribution. There was a need also for Australia to show its tangible support, with funding to IASB needing to move to a firm footing rather than being a variable item in the AASB budget.
Members noted that while Australians participate in international accounting bodies in their own capacity, they should be aware of the Australian policy position. The representative from the AASB noted that they are working at developing and formalising their links with key representatives on international bodies.
The Chair noted that the paper prepared by the Secretariat was a useful start and invited FRC members to consult with their stakeholders on their own views on ways for Australia to maintain its influence internationally and in the Asian region. This would include also suggestions on detailed planning to achieve the objective. The Chair asked for views on this topic to be conveyed to the Secretariat, for inclusion in a paper for the December meeting.
Agenda item 3: FRC/AASB strategy for adoption of International Accounting Standards Board (IASB) Standards
The Chair noted that there was a role for the FRC in raising early awareness on the adoption of international accounting standards by Australia and invited comments from FRC members on the draft information paper prepared by the Secretariat for publication on the FRC website and distribution to relevant stakeholders.
A number of related comments were provided, including on the need to raise awareness of the impact of international accounting standards among board directors and middle sized companies, not just among finance officers and large companies. It was also noted that the Australian Stock Exchange and the AASB are running seminars in the lead up to the 2005 adoption target date and that the Australian Institute of Company Directors is raising awareness through its journal. It was proposed that stakeholders provide the Secretariat with a list of all their related educational activities, as this could assist the knowledge base to inform the Government.
More detailed comments were also provided to enhance the usefulness of the information paper prepared by the Secretariat, including references to public sector stakeholders and to critical deadlines, such as the need to have comparative financial statements under international standards from June 2004. The use of more headings/sign posts to make the paper more user friendly was also suggested.
The Chair concluded that in view of the comments received, more work needed to be done on the paper, but also that all FRC members shared responsibility for its content.
Agenda item 4: FRC's role in providing advice to Government on the policy implications of adoption of IAS
The FRC considered a Secretariat paper on the FRC's role in providing advice to Government on the policy implications of adopting the IAS and its expected impact on Australian companies.
In line with the recommendations of the paper, the Chair asked for FRC members to provide comments on the paper to the FRC Secretariat by early October, including on means to receive input from stakeholders on their education/communication efforts to ensure a smooth transition to IAS.
The meeting concurred that in view of the current timetable set by the IASB, only standards issued by March 2004 will be included in the 2005 adoption target, it would be useful to do a stocktake in March / April 2004.
Agenda item 5: Copyright in international accounting standards - update
The FRC noted the paper prepared by the Secretariat, which provided an update on developments of issues surrounding copyright in international standards since the FRC meeting in June 2003.
Treasury informed of its participation with the AASB at a recent meeting with representatives of the IASB and IASC foundation. At that meeting it was agreed that (1) the AASB could release the bare standards free of charge in their website, subject to a waiver agreement; and (2) the basis for conclusions and the implementation guidelines would be available at a cost and with royalty payments.
Following a brief discussion on the topic, the Chair concluded that this was still work in progress, that there was now an outline of the likely process, and encouraged the FRC Secretariat and the AASB to continue negotiations and keep informed the FRC.
Agenda item 6: First CLERP 9 Taskforce meeting and CLERP 9 update
The Chair reported on the first meeting of the taskforce. Three issues were identified by the taskforce for further discussion: (a) making operational CLERP 9; (b) the force of law for auditing standards; and (c) the structure of the FRC.
- The Chair made two broad observations. Firstly, that the majority of stakeholders opposed auditing standards having the force of law. Secondly, as the Government had already taken this decision, it would be more productive for the FRC to focus on how to implement it. The two principal issues of concern raised by stakeholders are prescription and international harmonisation.
- With respect to operational matters, there was a need for the FRC to clearly define its functions and responsibility with respect to the monitoring and oversight of auditing standards, ensuring proper accountability and avoiding duplication of functions with other bodies.
· The taskforce had also questioned whether in the light of the increased responsibility and changed role of the FRC, consideration should be given to restructuring the FRC. One issue is whether it should be a smaller, more focussed body, rather than a representative body. A second issue is whether the Secretariat should be located outside Treasury to ensure its independence in line with good governance principles.
The meeting agreed that the taskforce would meet in the week starting on 13 October to undertake a review of the CLERP 9 draft legislation - expected to be released in early October, and will report to the next FRC meeting on 5 November. At that meeting, the FRC would formulate its views and provide its comments to the Government.
The Chair invited feedback on the matters being considered by the taskforce from all FRC members, including views from their stakeholders. This feedback should include detailed information on relevant operational issues from stakeholders, such as on their audit quality assurance plans and programs in place and on their established processes for assessment of auditor independence. The requested feedback is to be provided to the FRC Secretariat in the lead-up to the next task force meeting, so that the Secretariat could prepare a condensed information paper for that meeting. Treasury will provide also for the next taskforce meeting a paper on implementing legal backing to audit standards.
Agenda item 7: Funding of AASB and IASB operations - update
The Chairman referred to the need to find a robust funding mechanism, possibly through an automatic levy, to address the shortfall in contributions from business to fund the work of the accounting standard setting. He mentioned that a number of options are being considered, all being work in progress, and that the Government had just announced a $2 million injection of funds into the FRC as an interim measure to ensure adequate funding in 2003-04 and to contribute to the establishment of the Audit and Assurance Standard Board in 2004-05. This additional funding should be seen as a strong demonstration of the Government's commitment to ensure that the FRC is appropriately funded.
The representative from the States and Territories reaffirmed their commitment to continue to provide funding for the FRC under the agreed tripartite funding arrangement. The representatives from the three accounting bodies also reaffirmed their commitment to continue to provide funding for the FRC under the agreed tripartite funding arrangement. Clarification on the impact of the expanded FRC functions under CLERP 9 legislation would be needed to allow an assessment of the magnitude of the appropriate level of financial support. The Chairman indicated that as the increased FRC responsibilities under CLERP 9 are yet to be confirmed by legislation and will not be in effect until July 2004, his intention was to seek now from the accounting bodies and the States and Territories an extension of their current financial commitments until the end of the present financial year. This would enable the FRC to complete the Budget approval process.
Agenda item 8: Report by the Acting Chairman of the AASB
The AASB Technical Director, Mr Angus Thomson, referred to two recent papers that had been posted in the AASB website, related to strategic directions given by the FRC to the AASB: a paper dealing with the AASB plans for adopting IASB standards by 2005 and another one dealing with issues associated with the convergence of GFS and GAAP. He summarised the main projects that AABS was currently working on in the lead up to the 2005 target and noted three main projects that would continue beyond 2005, with potential to assist work by the IASB. These were in the areas of extractive industries, intangibles and joint ventures. He estimated that at least 20 per cent of the AASB time will be dedicated to GFS issues over the next two months. In responding to a question, Mr Thomson noted that the AASB was not having problems in recruiting and retaining staff of high calibre.
The meeting discussed the AASB's approach to the adoption of IASB standards, including its intention to restrict the number of options made available in IASB standards in certain cases. The meeting discussed whether that approach would be consistent with the strategic direction given by the FRC to the AASB regarding the adoption of IASB standards. The meeting agreed that as part of its role, the FRC needed to understand the ramifications of restricting the availability of options available in IASB standards and welcomed the proposal by the representative from ASIC to prepare a paper on this topic for consideration by the FRC.
Agenda item 9: Report of the FRC Audit Committee
Ms Elizabeth Alexander, AM, Chair of the Audit Committee, reported upon the activities of the Commitee.
Ms Alexander noted that the Audit Committee met on 22 August to review the FRC/AASB's draft financial statements for 2002-03. This included reviewing whether the liabilities on superannuation were properly reflected in the accounts and also the management representation letter to be given to the ANAO. The ANAO had indicated that they were prepared to issue an unqualified audit report. On the basis of its review, the Audit Committee was in a position to recommend to the FRC the signing of the management representation letter.
The Chair asked Mr Paul Hinchey whether there was any difference in opinion between management and the Audit office and how it was resolved. Mr Hinchey noted that the justification of contracts for employee expenses was the only issue raised and that ANAO had accepted the explanation from management
Agenda item 10: FRC/AASB draft annual report for 2002-03
The Chair noted that the draft annual report had already been distributed to members for comments and asked whether there were any further comments. Following a brief discussion, the FRC/AASB draft annual report for 2002-03 was approved, subject to the introduction of agreed drafting amendments on the sections on appointments to the AASB (page 12), and copyright (page 16). While there was some discussion on the drafting on the last paragraph on the regulatory risk section (page 16), the FRC agreed that the paragraph was consistent with the provisions of existing legislation. The Chair thanked Mr Hinchey for his participation in the meeting.
Agenda item 11: Report by the Chairman of the Nominations Committee
Mr Phillip Prior, Chair of the Nominations Committee, reported that the Acting Chair of the AASB had confirmed that the appointment of an additional member to the Board was still sought due to the heavy workload faced by the AASB in the lead up to 2005. In considering this topic, there were two issues: (a) the need to ensure a quorum at the AASB and (b) the need to have members with technical expertise on the Board. The meeting concurred that the need for technical expertise was the key requirement and supported the recommendation that the Nominations Committee should make a recommendation to FRC members for appointment of an additional member to the AASB by circular resolution.
Agenda item 12: International issues
The Chairman noted the briefing paper prepared by the Secretariat and its recommendation for the meeting to agree to FRC members participating in a small joint working group with New Zealand and Australian officials to prepare a paper for discussion next year.
The Chairman invited Mr Geoff Connor, of the New Zealand Ministry of Economic Development (MED), to provide further background on the working group. Mr Connor referred that discussions had already started with Treasury officials. MED was planning to prepare a draft issues paper to be sent at the end of September / early October to Treasury for its comments.
The meeting agreed that it would be desirable for a couple of FRC members to participate in the working group and to advise the Secretariat of their interest. Messrs Charles Macek, Greg Larsen and Lewis Ting expressed an interest in participating in the working group.
On other issues, FRC members commented that a letter to listed companies had been sent recently by the FSA in the UK, reminding them of the implications of the move to IFRSs in 2005 and the need to ensure compliance.
Agenda item 13: Other business
FRC Deputy Chair
The meeting agreed unanimously to the appointment of Ms Elizabeth Alexander to the position of Deputy Chair of the FRC.
Stock-take against FRC functions
The meeting agreed to the preparation by the Secretariat of a stock-take paper against FRC functions, and that following its review and approval by the FRC Audit Committee, that the paper should be sent to FRC members to obtain their agreement by circular resolution.
Tabling of policy documents relating to the FRC functions
The meeting agreed that the Audit and Nominations Committees should review their charters and report to the FRC, including a listing of member affiliations. It also agreed that circular resolutions should be approved unanimously by all members participating and this will be incorporated into the review of the FRC's Rules of Procedure.
Next FRC meetings
The meeting agreed for the FRC to meet in Melbourne on 5 November to consider its response to the Government on the draft CLERP 9 legislation, and the 2003-04 Budget. Further, it was agreed that the FRC would hold its last regular meeting for the current year in Sydney on 5 December. The meeting also agreed to a proposal by the AASB to go ahead with a capital expenditure of $30,000 for the replacement of computers, which would be in line with the interim 2003-04 Budget which is expected to be ratified by the FRC at its next meeting.
Correspondence for noting
The FRC noted the copies of recent FRC related correspondence.