The past year will be remembered as the year where accounting standards were in the global spotlight, both politically and through enormous media coverage. Most of the focus was directed to the US following several high profile corporate failures that were largely caused by fraud and a failure to present financial accounts in a manner that provided reliable financial information.
This very intense focus on corporate accounting and reporting in Australia has created an environment where more reform has been achieved than otherwise might have been possible.
During the last 12 months and to the date of this report, the FRC has recorded a number of very significant milestones:
- Providing the strategic direction to the AASB indicating that Australia will adopt International Accounting Standards issued by the International Accounting Standards Board (IASB) from 1 January 2005.
- Consulting widely with key constituent, regulatory and professional groups in Australia, North America, the UK and European Union.
- Obtaining a significant financial commitment to funding over the next two years provided by the Australian Stock Exchange under the Financial Industry Development Account (FIDA) program, subject to certain conditions being met, complemented by a direct approach to Australia's top 100 listed corporations seeking voluntary contributions for funding over the next 3 years.
- Participating in the decision to provide significant funding to the IASB Foundation to be applied towards the costs of the IASB.
- Being involved in a visit to Australia by Sir David Tweedie, the Chairman of the IASB, and his participation in a number of events and meetings with business and professional leaders, and with senior parliamentary and regulatory heads. Discussions centered on how the IASB was progressing and how he viewed the establishment of a single set of global high quality accounting standards. The areas canvassed included implementation, interpretation and enforcement issues.
These achievements are consistent with Government policies seeking a global framework for the preparation of financial accounts - a framework allowing Australian companies to prepare financial reports using accounting standards that will enable them to be more readily understood and accepted by the major international financial markets. These achievements are also consistent with the objectives of Part 12 of the ASIC Act.
The workload of the FRC and the AASB has been very significant, and members of both organizations have responded exceptionally well to the challenges that the last year has provided. We have been very well supported by our Secretariat within Treasury, and the staff of the AASB.
The FRC's formal support for Australia adopting IASB standards from 1 January 2005 was based on the following principal considerations:
- While the existing Australian standards are well regarded (and have proven themselves well during the last 12 months) they are not understood in the major capital markets, particularly the US. This has a direct and negative impact on Australian corporations who access capital internationally.
- The political and community commitment in the EU to the adoption of IASB standards from 1 January 2005 is real and unequivocal. This has also been supported by a number of east European countries, and several key Asian countries are also likely to follow.
- The IASB has achieved the international respect of key constituent groups for its leadership and there is a global level of confidence that they will produce the necessary high quality standards. This has allowed the EU and Australia to set the 2005 date.
- Australia has been on a path towards harmonization with IASB standards; however, there are still significant variances. To delay further any commitment to IASB would not provide corporate Australia the necessary time to prepare for the 2005 date.
- Australia is a liaison partner on the IASB, with representation on both the Board and the Council of Trustees. Our ability to influence debate and outcomes at the IASB is only restricted by our ability to present reasoned argument and debate. The AASB and its wide consultative process has given our representatives the tools they need to get the best possible outcome.
There is no doubt that the decision to adopt IASB standards will present a number of issues that will require careful management to ensure a smooth transition. While the business and professional community are broadly supportive of this decision, we have also been provided with high quality commentaries identifying matters that require ongoing review and management. Realistically there are important matters to be addressed and communicated to our constituents in a timely manner.
I was provided the opportunity of travelling to the US, Canada, UK and Brussels to meet with government, regulatory, professional and business leaders to encounter first hand the global mood for change in accounting (and auditing/governance) regulation following Enron and the other large US corporate failures. Much of what I was advised is now in the public arena through proposed US and EU regulatory changes. It will continue to be important to maintain our dialogue with key contacts to get the benefits of their experiences and to ensure we do not unwittingly fall out of step with global changes.
During the last twelve months I have met regularly with representatives of key constituent groups including regulators, professional and business associations, leaders of listed corporations and Heads of Treasuries and Finance. On several occasions I met with the AASB, and also appeared before two Senate Estimates Committees. I have also had the benefit of regular meetings with the Parliamentary Secretary to the Treasurer, Senator Ian Campbell, who supports the Treasurer in his role in this important area. The feedback received from all these meetings has been invaluable.
The FRC has been active in seeking funding alternatives for the AASB/FRC structure and has aimed to match Australia's human input to the IASB with a financial contribution. We have undertaken this with regard to the government's ambition for a form of partnership for funding including government, business and the accounting profession. We have also been very mindful to ensure that any funding provided would not in any way prejudice the independence of the AASB.
Over the last two years we have received support from State, Territory and Federal Governments as well as the accounting profession through the three accountancy bodies (ICAA, CPAA and NIA). The business support received has to date been provided by the Australian Stock Exchange. However, consistent with the support strongly provided by G100 at the time the funding model was developed by Government, we have sought voluntary financial contributions for three years from the top 100 Australian publicly listed companies. This approach has received the bipartisan support at the political level. Invitations to contribute funding are currently before those companies, and will be reported on in the next annual report.
The Australian Stock Exchange, with the approval of the Parliamentary Secretary to the Treasurer, has made available, subject to certain conditions, $2 million funding over the next two years from the FIDA fund. These moneys will provide an important funding basis for the FRC to ensure that the AASB is adequately funded, and that we are able to provide a significant financial contribution towards the IASB. The FRC has sought and obtained acceptable assurances from the IASB Foundation that our financial contribution will be appropriately applied.
The FRC/AASB have received strong support and input from Mr Warren McGregor, the IASB Liaison member to the AASB, and Mr Ken Spencer, Trustee of the IASB Foundation. This year we also intend to invite Australia's representative from the IASB Standards Advisory Council (Peter Day) to present to the FRC during the course of our meetings.
The FRC has continued its very close contact with the AASB, primarily through its Chairman, Mr. Keith Alfredson. This involvement has included Keith's full participation at FRC meetings, including the Audit and Nominations Committees. The FRC has undertaken appointments to the AASB following extensive consideration by our Nominations Committee. This followed press advertisements seeking expressions of interest to serve on the AASB.
I also wish to formally acknowledge the following:
- Michael Ullmer, who served as Deputy Chairman and Chairman of the Nominations Committee, and Gary Potts both retired from the FRC during the course of last year. In their respective areas, they both made very significant contributions to the FRC and Australian standard setting in general.
- Keith Alfredson has worked tirelessly to meet the challenges of leading the AASB during a period of significant change and demand. His contribution to standard setting in Australia is very well regarded. He is also well respected internationally for his skillful representation of Australia's interests.
- The Secretariat provided by Treasury under the leadership of Michael Kooymans has met the high expectations of the FRC in very demanding times. Michael's support and counsel has been invaluable to me and in no small manner the achievements of the past year are due to his and his colleagues' efforts.
- All members of the FRC have devoted themselves willingly and ably to the issues we have faced. There has been no shortage of new challenges this last year, with the global business and political spotlight being on accounting standards. I sincerely believe the members of the FRC as a team have worked well with our decisions having been taken with full regard to our statutory obligations and the expectations of our constituents.
The next twelve months will require prompt attention to the many consequences of the decision to adopt international standards by 2005. Many of these fall under the responsibility of the AASB; however, responsibility for many will also lie with the FRC to manage or to provide strategic direction to the AASB. We also need to meet the ongoing expectations of both the public and private sectors. I am sure the FRC looks forward to meeting those obligations.
Chairman of FRC
5 September 2002
Financial Reporting Council governance
Establishment, functions and powers
The FRC is a statutory body which was established under subsection 225(1) of the Australian Securities and Investments Commission Act 1989, and which is continued in existence by section 261 of the Australian Securities and Investments Commission Act 2001 (the ASIC Act). Under subsection 225(2) of the ASIC Act, the FRC is responsible for providing broad oversight of the process for setting accounting standards in Australia and giving the Minister reports and advice on that process.
Specific matters for which the FRC is responsible include:
- overseeing the operations of the AASB, including:
- appointing its members (other than the Chair, who is appointed by the Treasurer);
- approving and monitoring its priorities, business plan, budget and staffing arrangements;
- determining its broad strategic direction;
- giving it directions, advice or feedback on matters of general policy and its procedures; and
- monitoring the effectiveness of its consultative arrangements;
- monitoring the development of international accounting standards and accounting standards that apply in major international financial centres;
- promoting the adoption of international best practice accounting standards in the Australian accounting standard setting process if doing so would be in the best interests of the Australian economy;
- monitoring the operation of Australian accounting standards to assess their continued relevance and effectiveness in achieving their objectives; and
- seeking contributions towards the costs of the Australian accounting standard setting process.
The legislation expressly limits the FRC's ability to become involved in the technical deliberations of the AASB. It provides that the FRC does not have power to direct the AASB in relation to the development, or making, of a particular standard, or to veto a standard formulated or recommended by the AASB. This provision is designed to ensure the independence of the standard setter on technical matters.
Membership and meetings
Under section 235A of the ASIC Act, the members of the FRC are appointed by the Treasurer and hold office on terms and conditions determined by the Treasurer. The Treasurer in the past has appointed FRC members from nominations put forward by key stakeholder groups.
A full list of members during 2001-02, their qualifications and the stakeholders who nominated them, is in Appendix A. In addition, alternate members have been appointed to participate in FRC meetings when the members for whom they are appointed are unable to attend. Their details also appear in Appendix A.
Operations and activities
Appointments to the AASB
The FRC Nominations Committee, established in mid 2001, is responsible for recommending appointments to the AASB. Until his resignation on 22 March 2002 the Chairman of the Nominations Committee was FRC Deputy Chairman Mr Michael Ullmer. Mr Phillip Prior was appointed Chair on 28 June 2002. The other members of the Committee are the AASB Chairman, Mr Keith Alfredson, and FRC members Mr Don Challen, and Mr Robert Nottle, CBE. Mr Robert Wylie participated as an informal member of the Committee during 2001-02.
The Nominations Committee held one formal meeting in 2001-02, on 7 November 2001. At this meeting it: agreed to change its Charter to allow for recommendations on remuneration for part-time AASB Board members and staff; following advertising in the national press in September 2001, recommended appointments to upcoming vacancies in the AASB; and undertook the regular performance review of AASB members.
Overseeing the AASB
The FRC's responsibilities include approving the AASB's priorities, business plan, budget and staffing arrangements.
On 28 September 2001 the FRC established a group of members to examine improvements to the operation and output of the AASB.
On 3 December 2001 the FRC approved the AASB's revised budget for 2001-02.
On 28 June 2002, the FRC approved the AASB's proposed standard setting priorities for 2002-03. These work program priorities are set out at Appendix F. The FRC also considered the AASB's broad strategic direction and proposed budget and staffing arrangements for 2002-03, and endorsed the AASB's proposed business plan.
The FRC Audit Committee met on 3 June 2002 and approved the AASB Fraud Control plan, Security Risk Management Policy, the AASB engagement of the Australian National Audit Office, and the timetable for AASB reporting for 2001-02. It met again on 21 August 2002 to review the draft annual report and financial accounts for the period 2001-02.
International accounting standards
2001-02 saw major movements in accounting policy in Australia and overseas. On 28 June 2002 the FRC formally supported the adoption of International Accounting Standards by 1 January 2005. This decision was taken following extensive consultation with stakeholders regarding the European Union decision to embrace IASB standards by the same date.
The FRC supported the Government's view that a single set of high quality accounting standards which are accepted in major international capital markets will greatly facilitate cross-border comparisons by investors, reduce the cost of capital, and assist Australian companies wishing to raise capital or list overseas.
Further developments included the IASB issuing exposure drafts of improvements to 12 existing standards, and of amendments to existing standards IAS32 and 39 relating to financial instruments. There have also been significant changes in regulation in the United States and Canada.
The FRC is monitoring and assessing further developments in international accounting standard setting, including the work of the IASB, and national accounting standard setting bodies in Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States. It is also monitoring the work of the European Commission, the International Federation of Accountants Public Sector Committee, and the pronouncements of national securities market regulators in major capital markets.
The FRC regularly issues a bulletin about decisions taken at its meetings and other important developments in accounting standard setting. The bulletin is distributed to the media and stakeholders and is available on the FRC website. Access to past issues is possible from the FRC website, or by contacting the FRC's Secretary (see address below).
During the year, FRC Chairman Mr Jeff Lucy and other members of the FRC consulted extensively with representatives of corporations, business organisations, other stakeholder bodies and accounting organisations. In 2001-02 Mr Lucy also travelled overseas and consulted widely with corporate and accounting body executives on matters relating to international harmonisation of accounting standards.
In 2001-02 the FRC initiated a major change in funding arrangements, seeking further private sector contributions to the development of international and Australian Accounting Standards. Managing Director and CEO of the Australian Stock Exchange, Mr Richard Humphry addressed the FRC meeting of 28 June 2002 on this matter. At the same meeting the FRC approved an approach to the top 100 listed companies for financial contributions to standard setting.
On 12 June Senator Ian Campbell announced Australia would be making a substantial financial contribution, through the FRC, to the International Accounting Standards Committee (IASC) Foundation in 2002-03. This contribution will be sourced from funds available to the FRC for the standard setting process contributed by the Commonwealth, State and Territory governments, the three accounting bodies, the Australian Stock Exchange, and from the Financial Industry Development Account.
Section 238 of the ASIC Act provides that the moneys of the AASB may be applied in meeting the administrative expenses of the FRC and the payment of any remuneration and allowances payable to a person appointed under Part 12 of the ASIC Act.
FRC members receive out-of-pocket expenses incurred in enabling them to fulfil their roles, including attendance at meetings. This expense was met by the AASB where not otherwise met by stakeholder bodies.
On 3 December 2001 the FRC held a half-day workshop examining AASB and UIG business processes. The outcomes were presented to the FRC at the 22 March 2002 meeting.
Freedom of information
The FRC maintains possession of the following documents:
- FRC meeting agenda papers;
- administrative and technical papers concerning the FRC's functions and its performance of those functions;
- copies of bulletins issued by the FRC; and
- correspondence with stakeholder groups and members of the public.
Requests under the Freedom of Information Act 1982 for access to documents in the possession of the FRC can be directed to the FRC secretariat using the contact details set out below.
Contacting the FRC
The FRC can be contacted as follows:
Post: Mr Michael Kooymans
Financial Reporting Council
c/- The Treasury
PARKES ACT 2600
Telephone: (02) 6263 3984
Facsimile: (02) 6263 2770