Thirtieth Meeting
4 April 2005
Outcomes of the meeting held on 4 April 2005 at the Australian Accounting Standards Board, Level 4, 530 Collins Street, Melbourne.
Attendance
FRC Members:
Mr Charles Macek (Chairman)
Mr Don Challen
Mr Roger Cotton (alternate to Mr Zimmermann)
Mr Richard Humphry, AO (by Phone Hook-Up)
Mr Warwick Hunt
Mr David Jackson
Mr Graeme McGregor, AO
Mr Jim Murphy
Mr Tom Pockett
Mr Greg Pound
Mr Phillip Prior (by Phone Hook-Up)
Mr Brian Scullin
Mrs Catherine Walter, AM
Ms Jan West
AASB:
Mr David Boymal (AASB Chairman)
AUASB:
Ms Merran Kelsall (AUASB Chairman)
FRC Secretariat:
Mr Jorge del Busto (FRC Secretary)
Mr Peter Taft
Invitees:
Mr Warren McGregor (International Accounting Standards Board)
Mr Paul Phenix (Australian Stock Exchange)
Mr William Bartlett (Consultant to the FRC on auditor independence – Item 4 only)
Mr Steve Somogyi (Australian Prudential Regulatory Authority (APRA) – Items 1 to 3 only)
Apologies, FRC Members:
Ms Elizabeth Alexander, AM
Mr Klaus Zimmermann
Agenda item 1: Introduction by FRC Chairman
The FRC Chairman, Mr Charles Macek, welcomed members to the 30th meeting of the FRC. The minutes of the 29th FRC meeting held on 21 February 2005 were approved. The meeting agreed that the next FRC meeting would be held on Friday 1 July 2005, with the ‘reserve date’ of 9 May 2005 not being required.
FRC Membership
The FRC Chairman welcomed Ms Jan West to her first meeting of the FRC, and also Mr Warwick Hunt, who was attending his first meeting in person since being appointed.
The FRC Chairman advised that since the last meeting, he had been appointed to New Zealand’s Accounting Standards Review Board, thus completing the ‘cross appointments’ involving the Chairmen of the FRC and the Accounting Standards Review Board.
Matters Arising from the Previous Meeting
It was agreed at the meeting on 21 February 2005 that FRC members would conduct a peer review. The FRC Chairman asked the Nominations Committee to bring forward an appropriate ‘template’ to be used to conduct the review.
The Council also noted legal advice received from the Australian Government Solicitor on the role of the chief executive or chairman of the AASB and AUASB.
Declarations of Interest
It was noted that two members of the FRC, Mr Brian Scullin and Ms Elizabeth Alexander, were directors of listed property trusts, accounting standards for which were discussed as part of the AASB Chairman’s report.
Update on meetings
The FRC Chairman reported on the Trans Tasman Accounting Standards Advisory Group, whose recent activities included preparing a submission to New Zealand’s review of its Financial Reporting Act, and organising a regional forum on International Financial Reporting Standards (IFRS) to be held in October.
The FRC Chairman and Mr Hunt were speakers at the Third New Zealand IFRS Summit held on 16-17 March in Auckland.
Members of the Auditor Independence Subcommittee met with Ms Rhonda Schnare (Special Counsel, International Affairs) and Ms Kelly Josiah (Senior Accounting Research Analyst) from the United States’ Public Company Accounting Oversight Board (PCAOB) in early March. Representatives from the Australian Securities and Investment Commission (ASIC) and the AUASB were also present at the meeting. The main issues of discussion were the auditing standard setting function of the PCAOB, the inspection of auditors, and the respective roles to be undertaken by the PCAOB, ASIC and the FRC in relation to the inspection of auditors and monitoring of auditor independence.
Mr Warren McGregor of the International Accounting Standards Board (IASB) updated the FRC on the recent activities of the IASB, including meetings with countries in the Asian region and developments in IFRS convergence with US GAAP, Japanese, and Canadian accounting standards. The IASB is heartened by the endeavours of countries in the Asian region to align with IFRS.
Mr McGregor also noted that Australia had been well-represented at recent discussions held in relation to IAS 39 on financial instruments. The IASB is now waiting for written support from stakeholders on proposed amendments to IAS 39, so that the matter can be finalised by mid-2005.
Mr Humphry reported that the International Accounting Standards Committee Foundation (IASCF) was giving further consideration to the review of its Constitution, following the recent consultation period. Key issues to be resolved include the relative weighting of regions on the Board of Trustees, and the extent of involvement in setting standards for small and medium enterprises. He noted that Australia and New Zealand were held up as good examples in relation to the support they provided for activity related to the development of international standards.
Agenda item 2: Report from the Chairman of the AASB
The FRC noted an update on AASB issues provided by the AASB Chairman including the outcomes of the Board’s strategy meeting, which considered, among other things, interaction with the IASB, communication with stakeholders, the Board’s role in interpretations, and the Board’s policy of issuing standards that were largely sector neutral. The FRC also noted and endorsed the revised AASB Board Governance Guidelines.
The AASB Chairman advised that the Board and APRA had some concerns over the proposed amendments to IAS 39, which would require the AASB to amend two local insurance standards. There will be further dialogue between the AASB and APRA with the objective of dealing with this issue in a manner which maintains IFRS compliance. The Council noted that as per the wording of the proposed amendments to IAS 39, it may not be possible for the AASB to require the use of the fair value option in respect of all contracts written by insurers and this would constitute a step backward for Australian financial reporting. It was agreed that the FRC Chairman would formally raise the issue with the IASB in light of previous undertakings by the IASB to address the AASB’s concerns.
The Board had also considered interpreting the international standard on financial instruments as requiring the ownership interests of limited-life listed property trusts to be treated as equity, and had written to the IASB seeking their views on this issue. Depending on the response received from the IASB, the standard could end up not being IFRS compliant, and the matter is to be referred to the FRC for consideration as to any implications on the AASB's compliance with the FRC strategic direction on IFRS convergence.
The AASB Chairman sought direction from the FRC on the keeping of certain administrative records. The FRC requested that details of these records be forwarded to the FRC’s Finance Committee, which would determine whether the AASB should keep producing them.
The FRC concluded that it was time for it to issue the AASB with an updated strategic direction on standards for the private sector given that the previous one concerning IFRS implementation had largely been fulfilled. This matter will be progressed later in 2005.
Agenda item 3: Report from the Chairman of the AUASB
The AUASB Chairman reported that the Board had held its second meeting for the year on 1 March. Matters discussed included feedback from the International Auditing and Assurance Standards Board (IAASB) / National Auditing Standards Setters meeting in London, and the AUASB strategic direction, strategic action plan and governance guidelines.
The FRC considered in detail a proposed strategic direction for the AUASB in relation to its work programme and in particular, its approach to the setting of Australian auditing standards (AUSs). The AUASB Chairman noted the problems arising from the need to issue AUSs ahead of the re-write of International Standards on Auditing (ISAs) by the International Auditing and Assurance Standards Board (IAASB) under the clarity project, which has a substantial impact on the AUASB’s preferred direction.
Following considerable discussion, the FRC resolved that the following strategic direction should be given to the AUASB via a letter from the FRC Chairman:
- The AUASB should develop AUSs that have a clear public interest focus and are of the highest quality.
- The AUASB should use, as appropriate, the International Standards on Auditing of the International Auditing and Assurance Standards Board as a base from which to develop AUSs.
- The AUASB should make such amendments to ISAs as necessary to accommodate and ensure that AUSs both exhibit and conform with the Australian regulatory environment and statutory requirements, including amendments as necessary for AUSs to have the force of law and be capable of enforcement under the requirements of the Corporations Act 2001 by 30 June 2006.
- The process of developing AUSs should include monitoring and reviewing auditing and assurance standards issued by other standard setting bodies in other national jurisdictions and considering other matters relevant to achieving the objectives of Part 12 of the ASIC Act. Consequently, where appropriate and considered to be in the public interest and necessary to producing standards of the highest quality, the AUASB should incorporate additional requirements in its AUSs.
- The AUASB should continue to develop auditing and assurance standards other than for historical financial information as well as developing and issuing other guidance on auditing and assurance matters, and may participate in audit research that is conducive to, and which significantly benefits, the standard-setting activities of the AUASB.
In addition, the FRC agreed that the AUASB should have regard to any programme initiated by the IAASB for the revision and enhancement of ISAs and make appropriate consequential amendments to AUSs.
The AUASB Chairman advised that a new staff member had commenced and that three additional staff members would be commencing during April 2005.
Agenda item 4: Report from the Chairman of the Audit Independence Subcommittee
Mr William Bartlett, who is assisting the Council on its audit independence functions, provided an update of the Subcommittee’s work, including meetings with key stakeholder bodies. The meeting between Mr Bartlett, members of the subcommittee and representatives from the PCAOB in early March is reported under Agenda item 1. There was a substantial amount of work to be done in the current financial year to meet the FRC’s reporting requirements on auditor independence.
The Subcommittee is meeting with all the parties with which the FRC has entered into Memoranda of Understanding. In this respect, upcoming meetings with APRA and ASIC were noted. The Subcommittee also intends to meet with the ‘Big Four’ accounting firms and some mid-tier accounting firms.
The Subcommittee will endeavour to bring a detailed report to the FRC meeting in July, so that it can be refined and included in the FRC Annual Report to be forwarded to the Government in September.
The FRC Chairman advised that Mr Greg Pound had resigned from the Audit Independence Subcommittee, and that Mr Brian Scullin and Mr David Jackson had agreed to join it.
Agenda item 5: Report from the Chairman of the Finance Committee
The FRC noted the updated 2004-05 cash budget for the FRC, the AASB and the AUASB and approved the accrual budgets for the FRC and the two Boards it oversees for 2004-05, subject to the AUASB accrual budget being finalised following financial settlement.
The Council also agreed to the 2004-05 contribution to the IASC being increased from $0.8 million to $1 million, with an immediate payment of $0.5 million, and the balance being paid by 30 June 2005, with authority for the payment being delegated by the FRC to the FRC Finance Committee in consultation with the FRC Chairman.
It was noted that the FRC has received a letter from the professional accounting bodies setting out their proposed future funding for standards setting. The Council agreed to consider updated 2005-06 budgets for the FRC, AASB, and AUASB at its next meeting on 1 July 2005, following a review and recommendations by the FRC Finance Committee.
The Finance Committee was also requested to give further consideration to options for a memorial to Mr Ken Spencer. In addition to this, the FRC agreed that the Boardroom at the AASB would be named in Mr Spencer’s honour.
Agenda item 6: Sector Neutral Accounting Standards
The position of consultant to the FRC on sector neutral accounting standards was discussed.
The FRC agreed that the committee considering applications for the position should continue its work and seek approval to make an appointment via circular resolution of FRC members before the next FRC meeting.
Agenda item 7: FRC Functions Charter
The FRC considered a Functions Charter outlining how the FRC addresses its statutory functions. Members of the FRC will provide feedback to the FRC Secretariat with a view to finalising the charter at the next FRC meeting.
Agenda item 8: International developments
A paper on the work of relevant international organisations and national standard setting bodies, and other material relevant to the international regulatory environment, was circulated for the interest of members.
Agenda item 9: Other business
Correspondence was noted.
It was noted that Mr Wayne Cameron, Auditor General of Victoria, would conclude his term on the AASB on 6 June 2005. At the recommendation of the Nominations Committee, which met immediately prior to the FRC meeting, the FRC agreed to appoint Mr Des Pearson, the Auditor General of Western Australia, to the AASB for a three-year term commencing on 7 June 2005.