Twenty-Third Meeting
31 March 2004
Outcomes of the meeting held on 31 March 2004 at the Institute of Chartered Accountants Australia (ICAA) Offices, ICAA Function Centre, Level 10, 600 Bourke Street, Melbourne.
Attendance
FRC Members:
Mr Charles Macek (Chairman)
Ms Elizabeth Alexander, AM (Deputy Chairman)
Mr Don Challen
Ms Karen Hamilton
Mr Stephen Harrison AO (Alternate to Mr Lewis Ting)
Mr David Jackson
Mr John Langoulant
Mr Greg Larsen (Alternate to Mr Graeme McGregor, AO)
Mr Jim Murphy
Mr Greg Pound
Mr Brian Scullin
Ms Catherine Walter, AM
Mr Klaus Zimmermann
AASB:
Mr David Boymal (AASB Chair)
FRC secretariat:
Mr Jorge del Busto (FRC Secretary)
Ms Gala Poole
Mr Richard Scherlowski
Invitees:
Sir David Tweedie (IASB Chairman)
Mr Warren McGregor (IASB Board Member)
Ms Annette Kimmitt (Senior IASB Staff Member)
Mr John Stanhope (President of the G100, attended in place of Mr Tom Pockett,
an FRC Member)
Mr Steve Somogyi (Australian Prudential Regulation Authority)
Mr Rob Sharma (Australian Prudential Regulation Authority)
Mr Geoff Connor (Ministry of Economic Development, New Zealand)
Apologies:
FRC Members:
Mr Graeme McGregor, AO
Mr Tom Pocket
Mr Phillip Prior
Mr Lewis Ting
Agenda item 1: Introduction by FRC Chairman
The Chairman welcomed attendees to the 23rd meeting of the FRC.
The Chairman noted that long-serving FRC Member Mr Ken Spencer had resigned from the FRC due to health reasons.
The Chairman welcomed Richard Scherlowski from Treasury to the FRC Secretariat.
Ms Elizabeth Alexander AM declared a possible conflict of interest in regard to the APRA presentation as she is an independent Chair of the APRA Audit Committee.
The minutes of the meeting held on 27 February 2004 were approved with the clarification that the agreement on appointment of the board of the AUASB is an in-principle decision, to be confirmed once CLERP 9 becomes effective.
Agenda item 2: International developments (Secretariat paper)
The Secretariat paper in regard to international developments was tabled with one addition by the Chairman in regard to the Trustees of the IASC Foundation announcing a constitutional review on their website in November 2003 and the call for public submissions.
The Chairman outlined that the FRC had provided a submission and asserted that the IASC Foundation must have as its objective the development of the best international accounting standards possible and that standards should have the widest possible acceptance in order to make them relevant. The Chairman noted that it would be desirable to obtain an update of the process going forward on the review and on the key issues arising from the review.
The Chairman commented that the IASB had released a paper on 22 March identifying main issues for consideration. They include:
- The number of trustees and geographical/professional representation;
- The composition of the IASB;
- The appropriateness of the IASB’s liaison relationships;
- Consultative arrangements of the IASB;
- The composition, role and effectiveness of Standards Advisory Council (SAC);
- The funding structure of the IASC Foundation.
Agenda item 3: Address from IASB Chairman, Sir David Tweedie
The IASB Chairman, Sir David Tweedie, informed the meeting that originally the IASB inherited the function of reviewing 34 international accounting standards from the IASC and there has been widespread support for 32 of these 34 standards. Sir David indicated that this task was now complete. On 31 March 2004 the IASB had finalised the two most contentious standards, those being IAS 39 ‘Financial Instruments’ and IAS 32 ‘Insurance’ and he commented that the bulk of IAS 39 was in its final form and that any changes to the fair-value option in IAS 39 will be minor. Sir David encouraged Australia to put forward submissions on robust and reliable valuation techniques that should be retained.
Sir David noted that IAS 39 is primarily based on the existing US ‘Financial Instruments’ accounting standard and had underwent a 12 year drafting process. Sir David asserted that the European concerns largely revolve around cash flow hedging and on the appropriate way to account for gains and losses on derivatives in the balance sheet. Sir David commented that this issue is unique to Europe because of the vast differences in the accounting environments between Europe and Australia and other Anglo-American accounting environments.
Sir David asserted that he expected the EU will adopt all IASB issued standards in 2004 and that with the exception of IAS 32 and IAS 39 they are legislatively bound to adopt EU endorsed accounting standards issued by the IASB under a directive issued by the European Commission. If they wanted to amend such legislation it would take approximately two years to do so.
Sir David noted that the IASB and US FASB are undertaking a convergence program to more closer align US GAAP with accounting standards issued by the IASB. Overall, Sir David urged Australia to continue to endorse the existing 2005 timetable.
Agenda item 4: Address from APRA board member, Mr Steve Somogyi
Mr Somogyi advised the FRC that APRA had been invited to the meeting to comment on the issues arising in the banking and insurance industries as a result of the introduction of IFRS.
Mr Somogyi outlined APRA’s support for the principle of adoption of international accounting standards and commented that APRA is forming its views with regard to the prudential response to IFRS in part through consultation with international regulators such as the FSA in the UK.
Mr Somogyi outlined that in order to establish sound prudential standards APRA requires a stable and certain platform of accounting standards. Mr Somogyi indicated that devising appropriate prudential standards is a lengthy process and that APRA would require a sufficient amount of time between the release of the final Australian set of international accounting standards and the application of prudential standards within Australia.
Mr Somogyi indicated that there are capital adequacy implications and other operational risk issues to be considered in regard to the interrelationship between accounting and prudential standards. Mr Somogyi commented that if the AASB issued new Australian standards with an early timeline then APRA would need to issue a prudential response including corresponding prudential policies and standards to facilitate the transition to IFRS by APRA regulated entities.
Agenda item 5: Report from Chair of the AASB
The AASB Chairman advised the meeting that the AASB will continue with preparations for 2005 in accordance with the strategic direction issued by the FRC. In this respect, it will continue working towards adoption of the complete and stable set of IASB standards that have been issued by 31 March 2004 including the current, available version of IAS 39.
The AASB Chairman noted that after the adoption of the existing body of international accounting standards, the decision to adopt any further changes to IAS 39 or to any other IASB standard, and the decision on timing for implementation of such changes in Australia will be taken by the AASB in due course, in accordance with the strategic direction issued by the FRC.
Agenda item 6: Transition to 2005
The FRC was advised of the position of a number of stakeholder groups including the G100, the Australian Bankers Association, Securities Institute of Australia, Institute of Actuaries of Australia, the Life Insurance International Financial Reporting Standards Working Group and the State and Territory Treasurers. These views were carefully considered by the FRC as was the advice from Sir David Tweedie, APRA and the AASB Chair.
The FRC reiterated its support for the adoption by Australia of international accounting standards issued by the International Accounting Standards Board (IASB). While noting that Australia has been a world leader in accounting standards for some years, the FRC noted that there are currently some significant gaps in Australia’s set of accounting standards that will be filled by the adoption of international accounting standards issued by the IASB.
It was the general understanding of the FRC that the AASB will provide an appropriate period between the completion of a new standard or amendment to an existing standard and its implementation date. In assessing any changes, consideration will be given to the effects on Australian companies and the practical issues involved with their preparation of financial reports.
The FRC noted that despite the broad acknowledgement in Australia that the adoption of IASB standards is in Australia’s best interests, some stakeholders are concerned about the time pressures of adopting IASB standards for reporting periods beginning on or after 1 January 2005.
The FRC came to unanimous in-principle agreement to proceed with the current Australian timetable for adoption of international accounting standards from 1 January 2005. However this is subject to receiving assurance from the AASB that the set of international accounting standards issued by the IASB is complete and meets the requirements of the Australian market place and that the AASB will be able to make available on its website the corresponding versions of Australian standards by 30 June 2004. This will provide a complete, robust and stable set of financial reporting standards in Australia, which are compliant with IASB standards. The Council has taken this decision conscious of the need to provide Australian companies with more certainty for their short term planning needs.
On the basis of the expected advice from the AASB, the Council will meet again on 23 April to consider confirmation of its in-principle decision. This will allow FRC members time to update their respective stakeholders on recent developments, including Sir David Tweedie’s assessment that agreement on the full set of international accounting standards is expected from Europe in 2004. In this respect John Stanhope, National President of the G100, who attended the meeting as an observer and expressed the G100 view that a deferral was preferable given the amount of uncertainty around IAS 32 and IAS 39, also undertook to provide his constituents with an update of recent developments following the meeting.
Other agenda items were postponed until the next meeting on 23 April 2004.