Financial Reporting Council
Chairman's report
The past 12 months have been a time of change for the FRC. We have seen the departure of 3 valued members, including the former Chairman, all of whom have made substantial contributions to the standard setting process in Australia. In addition, the Government has proposed changes to the standard setting arrangements under the ninth phase of the Corporate Law Economic Reform Program (CLERP 9) which will see the FRC assume an important role regarding auditor independence and the Auditing and Assurance Standards Board (AuASB) reconstituted and brought under the oversight of the FRC. The AASB has also continued on the path towards the adoption of International Accounting Standards (IAS) and this program is well on track.
As the new Chairman of the FRC, I would first like to take this opportunity to recognise the outstanding contribution and efforts of my predecessor, Mr Jeffrey Lucy AM. Mr Lucy AM, was the Chairman of the FRC from July 2001 until his resignation in February 2003. His considerable energy and time commitment has done much to lift the FRC's public profile, both in Australia and internationally and ensured that Australia has had a significant voice in the debate on IAS.
I would also like to thank Mr Keith Alfredson, the former chairman of the AASB between 8 May 2000 and 7 May 2003, for his contribution to the AASB and FRC. Keith 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 highly regarded both here and internationally and I thank him for his skilful and enduring representation of Australia's interests.
I am pleased with the FRC's significant achievements over the past 12 months, which include:
- Providing the strategic direction to the AASB including Australia's adoption of International Accounting Standards issued by the International Accounting Standards Board (IASB) from 1 January 2005.
- Pursuing as an urgent priority the harmonisation of Government Finance Statistics (GFS) and Generally Accepted Accounting Principles (GAAP) reporting in order to achieve an Australian accounting standard for a single set of government reports which are auditable, comparable between jurisdictions, and in which the outcome statements are directly comparable with the relevant budget statements.
- Consulting widely with key constituent, regulatory and professional groups in Australia, North America, the United Kingdom (UK) and European Union.
- Addressing the continued challenges of the tripartite funding agreement, including some progress in lifting the level of funding received from the business sector.
- Providing funding to the IASC Foundation to be applied towards the costs of the IASB.
- Examining and preparing for the expansion of the role of the FRC under CLERP 9.
These achievements are consistent with government policies to ensure robust private and public sector financial reporting framework in Australia and to ensure Australia moves towards adoption of IAS.
The workload of the FRC and the AASB has been significant, and members of both organisations have responded exceptionally well to the challenges that the last year has provided. We have been well supported by our Secretariat within Treasury, and the staff of the AASB.
Direction setting
In July 2002, the FRC announced its endorsement of the adoption of the IASB standards from 1 January 2005.
The adoption of the IAS will deliver a number of benefits to Australia including participation in a global framework for the preparation of financial accounts. This framework will allow Australian companies to prepare financial reports using accounting standards that will 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.
Despite the challenges posed by the transition to IAS, the AASB judge that their 2002 plan to achieve the 2005 target is on track. The AASB's plans are aimed at achieving the FRC's strategic direction by ensuring that for-profit entities applying standards on or after 1 January 2005 are also complying with IASB standards.
Two issues that are critical for the AASB to meet the target date are:
- the IASB meeting its March 2004 target for the release of the IAS for country adoption; and
- resolution of the implementation issues.
The FRC will continue to monitor and offer direction on these matters.
There is the need for ongoing consultation with government departments and the private sector, as well as international jurisdictions, to ensure the target date is met and there is a smooth implementation of the new standards.
In addition, the FRC has been overseeing the GFS/GAAP harmonisation program undertaken by the AASB. The AASB has begun a consultation round with its key stakeholders including the Australian Government and State Treasury departments. In addition, the Secretary of the Treasury, Dr Ken Henry, and the Secretary of the Finance Department, Dr Ian Watt, were guests at the October AASB meeting to speak on the subject.
Consultation
As part of the FRC's objectives to move to IAS, it is essential that we understand, and are aware of, not only domestic developments, but also of developments in major overseas markets. Like Australia, other jurisdictions have made, or are proposing to make, significant changes to their reporting requirements in key international markets.
An important part of the Chairman's role has been to liaise and consult with key international bodies and the private sector. The former Chairman, Mr Lucy AM, traveled to London, Brussels and the United States in October 2002 to meet with key stakeholders. Mr Lucy AM, also met with the New Zealand Minister for Commerce and senior public servants. In addition, Mr Lucy AM, conducted extensive private sector consultations, including representatives from Coles-Myer, WMC, Fosters, Telstra, and Coca-Cola Amatil.
Sir David Tweedie, Chairman of the IASB, visited Australia in August 2002 following the FRC's announcement of Australia's adoption of IASB standards by 2005. Sir David spoke to the FRC and AASB on the progress of IAS and the role Australia's adoption of the standards by 2005 would contribute to the work.
I have been privileged to continue the work of my predecessor and since assuming the Chair, I have held meetings with officials in Washington, New York and London and was accompanied by Mr Michael Rawstron of the Department of Treasury. In the United States (US), we met with the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the International Monetary Fund, the International Federation of Accountants and the American Institute of Certified Public Accountants. In the UK, we met with Mr Paul Volcker (Chairman of the Trustees, IASC Foundation), the UK Institute of Chartered Accountants, the Financial Review Panel, the Financial Review Council, Mr Derek Higgs (Office of Trade and Industry), Sir David Tweedie of the IASB and the National Association of Pension Funds.
These meetings provided me with an invaluable opportunity to address a wide range of issues with the leaders of the international standard setters and compliance bodies. The issues that were discussed included: benefits of a GAAP/IASB harmonisation in the US, GAAP/GFS harmonisation in Australia, auditor independence and accreditation, the principles based approach to regulation and the convergence of US and Australian auditing standards.
Funding
Over the past three years we have received support from the State, Territory and the Australian Government, the accounting bodies (ICAA, CPAA and NIA), as well as accommodation provided to the AASB, free of charge, from the ASX. However, in accordance with the funding model developed under CLERP 1, the FRC sought to ensure that the contributions for accounting standard setting are more broadly based and emanate from those who benefit from accounting standard setting, namely Government (both Australian and State governments), the professional accounting bodies and the business sector.
As reported in the 2001-02 annual report, the then FRC Chairman wrote to the top 100 listed companies seeking their voluntary contributions. This approach was aimed at securing funding of $750,000 per annum. However, this target was not met: only 21 of the top 100 listed companies have agreed to contribute a total of $290,000 per annum over the three years beginning in 2002-03. This response is somewhat disappointing as it undermines the integrity of the tripartite funding model.
The accounting bodies have in the past provided $750,000 per annum towards the funding of the FRC. However, they have recently advised that they are not prepared, at this time, to make a three-year funding commitment. Instead, they will extend the existing funding arrangements for a further six months and reassess their contributions, beyond December 2003, when the CLERP 9 process has become clearer.
In response to these funding developments, the FRC is consulting with the Government on the possible steps that might be taken to ensure a more secure funding base for the accounting standards setting process. The outcome of these consultations will be reported in the next annual report.
In September 2002, the Government announced reforms to the operation of the FRC, which will be implemented in CLERP 9. The Government has allocated $4 million over four years to cover the FRC's expanded functions. However, it is envisaged that an additional $500,000 per annum in total will be required from the accounting profession and business community specifically as a contribution to the FRC oversight arrangements under CLERP 9.
CLERP 9
CLERP 9 proposes that the responsibilities of the FRC be expanded to oversee Australian auditing standards setting in Australia. To this end, the AuASB will be reconstituted with a Government appointed chairman. The AuASB will be under the direction and oversight of the FRC, similar to the AASB. In addition, CLERP 9 proposes that the FRC, advise, monitor and report on responsibilities with respect to auditor independence, advise on and promote the teaching of business ethics by the professional accounting bodies and tertiary institutions, and monitor and assess the disciplinary procedures of the accounting bodies.
To ensure the FRC has a seamless transition to its new responsibilities, I have convened a Taskforce to examine the proposed changes and to consider the operational and implementation aspects of the proposals. The Taskforce will comprise myself as Chairman, Ms Elizabeth Alexander, Mr Gregory Pound, Mr Lewis Ting, Ms Karen Hamilton, Mr Ken Spencer and Mr Graeme McGregor.
Support
The FRC/AASB have received strong and continued support and input from Mr Warren McGregor, the IASB liaison member to the AASB, and Mr Ken Spencer, Trustee of the IASC Foundation.
The FRC has continued its very close contact with the AASB, primarily through its former Chairman, Mr Keith Alfredson and more recently with the Acting Chairman, Ms Ruth Picker. Mr Alfredson participated at FRC meetings, including the Audit and Nominations Committees, and provided a valuable link between the two bodies.
I also wish to formally acknowledge the following:
- Mr Leigh Hall, AM and Mr Robert Nottle who retired from the FRC during the course of the last year. Mr Hall and Mr Nottle were foundation members of the FRC and have made valuable and lasting contributions to the quality of standard setting in Australia.
- The Secretariat provided by Treasury, previously under the leadership of Mr Michael Kooymans, has met the high expectations of the FRC in very demanding times. I look forward to working with the new FRC Secretary.
- Finally, I would like to thank the members of the FRC for their strong commitment to the accounting standards setting arrangements and their willingness to make time available for this important work and their valuable contributions to the work of the FRC.
The next twelve months will be a time of significant challenge for the FRC. The direction and support for the AASB as it gears to introduce and oversee the change to IAS will be crucial and I am confident that Council members and the Secretariat will rise to the challenge.
SIGNED
Charles Macek
Chairman of FRC
12 September 2003
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 (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 2002-03, 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. In 2002-03, the Chairman of the Nominations Committee was Mr Phillip Prior. The other members of the Committee are the FRC Chairman, Mr Charles Macek, and Mr Don Challen and Mr Klaus Zimmerman.
The nomination committee met during 2002-03 and recommended to the FRC that 4 new members be appointed to the AASB, Mr Glen Appleyard, Ms Alice Williams, Mr Brett Kaufmann and Mr Steve McClintock.
Overseeing the AASB
The FRC's responsibilities include approving the AASB's priorities, business plan, budget and staffing arrangements.
The FRC considered the AASB's broad strategic plan and its timetable for the implementation of the IAS. The AASB's work program is outlined in Appendix E. The FRC also approved the AASB's work program for 2003-04 and its priorities are set out in Appendix F.
The Audit Committee met twice in 2002-03. The Committee examined the AASB's risk management program and security, as well as the superannuation liability of the AASB.
Consultation
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 Charles Macek and other members of the FRC consulted extensively with representatives of corporations, business organisations, other stakeholder bodies and accounting organisations. In 2002-03 both the former and current Chairman traveled overseas and consulted widely with corporate and accounting body executives on matters relating to international harmonisation of accounting standards.
Finances
In 2001-02 the FRC initiated a major change in funding arrangements in order to make the funding deal more equitable for all parties through further business sector contributions to the development of international and Australian Accounting Standards. Managing Director and Chief Executive Officer 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.
The response from the top 100 has been disappointing and in December 2002, the Chairman issued follow-up letters to the companies that had not responded. However, response to the follow-up did not result in significant additional contributions and the Chairman subsequently wrote to the Parliamentary Secretary to the Treasurer seeking the Government's advice in view of the need to secure the funding base.
Of the top 100, 21 companies have contributed to the funding arrangement:
Amcor, Argo Investments, ANZ Banking Group, AXA, Centro Properties, Cochlear, Commonwealth Bank, Goodman Fielder, Mayne Group, National Australia Bank, Newcrest Mining, Origin Energy, PaperlinX, Qantas, Rio Tinto, Telecom New Zealand, Telstra, Wesfarmers, Westfield Holdings, Westpac and Macquarie Bank.
As part of their triennial funding commitment, the State government's provided $500,000 towards the funding of the FRC. The States are due to review their funding commitments in 2003-04.
The FRC made a contribution of $700,000 to the IASB and will be making further contributions in the future.
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.
After 30 June 2001, FRC members received 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.
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: Secretary
Financial Reporting Council
c/- The Treasury
Langton Crescent
PARKES ACT 2600
Telephone: (02) 6263 3144
Facsimile: (02) 6263 2770
E-mail: frcsecretary@treasury.gov.au