Twenty-Sixth Meeting
18 June 2004
Outcomes of the meeting held on 18 June 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 David Jackson (by Phone Hook-Up)
Mr Graeme McGregor, AO
Mr Jim Murphy
Mr Tom Pockett
Mr Greg Pound
Mr Phillip Prior (by Phone Hook-Up)
Ms Catherine Walter, AM
Mr Klaus Zimmermann
AASB:
Mr David Boymal (AASB Chairman)
FRC secretariat:
Mr Jorge del Busto (FRC Secretary)
Mr Richard Scherlowski
Invitees:
Mr Bill Edge (Auditing and Assurance Standards Board)
Mr Keith Houghton (AuASB, and Australian National University)
Mr Warwick Hunt (New Zealand Accounting Standards Review Board)
Mr Robert Lynn (FRC Consultant) (by Phone Hook-Up)
Mr Bill Palmer (ICAA)
Mr Mike Rawstron (Treasury) (by Phone Hook-Up)
Apologies, FRC Members:
Mr John Langoulant
Mr Warren McGregor
Mr Brian Scullin
Mr Lewis Ting
Agenda item 1: Introduction by FRC Chairman
The Chairman of the Financial Reporting Council (FRC), Mr Charles Macek, welcomed members to the 26th meeting of the FRC.
The minutes of the 25th FRC meeting, held on 19 May 2004, were approved as an accurate record of the meeting.
A range of FRC members declared a possible conflict of interest in regard to the MOUs: Ms Elizabeth Alexander AM as she is an independent Chair of the APRA Audit Committee, Ms Karen Hamilton as she was nominated to the FRC by the ASX, Ms Catherine Walter AM as she is a director of the ASX, Mr Greg Pound as he was nominated to the FRC by ASIC, Mr Klaus Zimmermann as he was nominated to the FRC by the NIA, and Mr Graeme McGregor as he was nominated to the FRC by CPA Australia. Mr Bill Palmer also noted his possible conflict of interest as he is an employee of the ICAA.
The FRC Chairman gave a concise briefing of his recent overseas trip with Mike Rawstron from Treasury to London, Brussels and Paris. He noted that subsequent to EFRAG’s preliminary endorsement of IAS 39, EFRAG members voted 6 to 5 against formally endorsing IAS 39. However, EFRAG rules state that it requires a two thirds majority to overturn endorsement of a particular standard. He noted the possibility of IAS 39, in a worst case scenario, not being mandatory within the European Union in 2005. The AASB Chairman noted that this standard was still subject to further changes. Following these discussions, the meeting confirmed the appropriateness of its decision to adopt in 2005 the full set of international accounting standards as issued by the IASB by 31 March 2004, including IAS 39, as this filled an important gap in Australian accounting standards and provided certainty to the business community.
The FRC Chairman invited FRC members and their stakeholders to provide comments on the draft FRC submission on the IASC Foundation’s Constitutional Review which the FRC Secretariat had prepared and circulated to all FRC members. The FRC Chairman also indicated his intention to attend the 13 July 2004 IASC Constitutional Review public hearings in Tokyo.
The FRC Chairman also noted his participation in the Committee for Economic Development of Australia (CEDA) forum on the adoption of international accounting standards on 28 May 2004.
Agenda item 2: Secretariat Paper on International Developments
The FRC Chairman noted the Secretariat Paper on International Developments which included material relevant to the international regulatory environment, particularly those issues dealing with accounting and auditing standards as well as auditor independence. In particular, the meeting noted that on 8 June 2004, an Australian, Ian Mackintosh, was appointed Chair of the United Kingdom Accounting Standards Board (ASB).
The Chairman urged FRC members to consult with their stakeholder groups to seek nominations for the position of Trustee of the IASC Foundation to fill the vacancy at the Board of Trustees left by the departure of Ken Spencer. The Chairman indicated that Australian nominations would receive the support of the FRC.
The Chairman also urged FRC members to consult with their stakeholder groups to seek nominations for members to the International Accounting Standards Board (IASB)/ Financial Accounting Standards Board (FASB)/ UK Accounting Standards Board (ASB) international advisory group on reporting financial performance/comprehensive income. The Chairman indicated that Australian nominations would receive the support of the FRC.
Agenda item 3: Report from Chair of the AASB
IASB/AASB Work Program Update
The AASB Chairman noted that pending Australian versions of all international accounting standards will be posted on the AASB website by 30 June 2004, and indicated that the entire suite of pending standards would be formally made at the July 2004 meeting of the AASB. The AASB Chairman noted that at its recent board meeting from 16 to 17 June 2004, the AASB agreed to provide optional relief from certain disclosure requirements contained in IAS 30 and IAS 32 to parent company accounts presented with consolidated financial institution accounts. He noted that as a result of this decision, parent company accounts that make use of this relief will not be in compliance with international accounting standards, which will be noted in their financial statements. However, the consolidated accounts will be in compliance with international accounting standards.
Extractive Industries
The AASB Chairman noted that the international extractive industries accounting standard is not expected to be issued before the fourth quarter of 2004, and may not be applicable until 2006. In the absence of an international extractive industries standard for 2005, exploration costs would not be able to be capitalised on adoption of international accounting standards and would need to be removed from the balance sheet of all extractive industry companies. The AASB Chairman noted his intention to write to the IASB expressing the Board’s concerns and the need to give the issue urgent attention.
Small and Medium Sized Entities
With respect to small and medium sized entities, the AASB Chairman noted that they have less complex financial reporting issues and therefore the 2005 set of international accounting standards will impact on them to a lesser extent than larger entities.
Agenda Item 4: Update on AUASB 2004-05 Strategic Direction Taskforce Meeting
The Council noted a paper dealing with the strategic direction of the AUASB, which had been considered by the AUASB 2004-05 Strategic Direction Taskforce meeting held on 4 June 2004, and which will be revisited once CLERP 9 becomes operational.
Agenda Item 5: Report from Audit Committee Chair.
Following a report from the FRC Audit Committee Chair in regard to the Audit Committee meeting held on 7 June 2004, the FRC agreed to: (a) note the indicative 2004-05 AUASB budget and business plan, (b) approve in principle the 2004-05 AASB budget and business plan, subject to confirmation of the requested contribution from the professional accounting bodies, (c) approve the 2004-05 FRC budget, and (d) agree on the proposed allocation of 2004-05 funds between the FRC and its constituent bodies, subject to confirmation that the professional accounting bodies will be contributing the requested amounts as indicated in the FRC Chairman’s letters of 28 May 2004. It was also agreed that further contributions to the IASC Foundation would be considered at the next FRC meeting on 20 September 2004.
The meeting noted that the current Audit Committee Chair, Ms Elizabeth Alexander AM, had voluntarily relinquished her Chairmanship and the meeting subsequently agreed to appoint Mr Graeme McGregor, AO as the new Audit Committee Chair. The meeting also agreed, subsequent to discussions between the FRC Chairman and Mr Scullin, that Mr Brian Scullin would be appointed as a new member of the FRC Audit Committee.
Agenda Item 6: Update on FRC’s auditor independence functions under CLERP 9.
The meeting had the opportunity to hear comments from Mr Robert Lynn and Professor Keith Houghton on aspects related to the FRC’s expanded functions with respect to auditor independence. Both guests concurred that the auditing profession was in need of a more robust and transparent oversight system. Mr Robert Lynn provided additional comments on the rationale of the proposals in his consultancy report to the FRC in regard to its auditor independence functions. Professor Keith Houghton also provided insights in regard to the potential information asymmetry associated with reporting to the market only company breaches of corporate law requirements, including in regard to auditor independence, while positive aspects of a company’s compliance with corporate law requirements are often not being informed to the market and therefore cannot be used as an incentive for accountable and transparent accounting and auditing practices.
The meeting agreed with the proposed scope of work for the FRC as outlined in the background paper prepared by Treasury, whereby the FRC would obtain high level information from the parties with which it has entered into MOU’s and would conduct tests through selective contacts with individual audit firms. It also agreed with the proposed establishment of an FRC subcommittee on auditor independence to supersede the CLERP 9 taskforce and to engage an advisor on auditor independence matters. The engagement of the consultant will occur following preliminary discussions with ASIC, once CLERP 9 becomes operational. The meeting agreed to appoint Ms Elizabeth Alexander AM as Chair of the subcommittee on auditor independence, with Mr Greg Pound, Ms Karen Hamilton, and Ms Catherine Walter AM also agreeing to be members of the subcommittee.
Agenda Item 7: Update on MOU’s
The meeting approved individual MOU’s, as agreed by the corresponding parties, and agreed that the MOU’s should be signed by the FRC Chairman and other relevant parties following the commencement of CLERP 9 legislation. As a matter of transparency, it was also agreed that the MOU’s should be posted on the FRC website, subject to the agreement of the corresponding parties. The meeting also agreed that there would be minor editing to the ICAA MOU to ensure consistency between the three major professional accounting bodies MOUs.
Agenda Item 8: FRC’s Review of Operations
The meeting agreed that it was appropriate to begin reviewing aspects of the FRC structure and functions at its September 2004 meeting. At this meeting the FRC will consider how to conduct the review, including issues to be addressed. The appropriateness of opening the FRC’s meetings to the public will also be considered at the September 2004 meeting. It was agreed that as part of the review process the FRC would invite key stakeholders to provide comments on areas of the review.
Agenda Item 9: Other business
The FRC noted copies of relevant correspondence since the last FRC meeting.