Part 1: Overview
Oversight by the Financial Reporting Council
The key functions of the Financial Reporting Council (FRC) are to determine the broad strategic direction of the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB), to provide broad oversight of the processes for setting accounting and auditing standards in Australia, and to monitor the effectiveness of auditor independence requirements in Australia.
In performing its functions the FRC takes into account the objectives of standard setting specified in the Australian Securities and Investments Commission Act 2001 (ASIC Act) — to facilitate the Australian economy by reducing the cost of capital, enabling Australian entities to compete effectively overseas, having accounting and auditing standards that are clearly stated and easy to understand, and maintaining investor confidence in the Australian economy (including its capital markets).
Activities of the Financial Reporting Council
During 2005-06 the FRC:
- commissioned research into how adequately a ‘sector neutral’ approach to the development of accounting standards can meet the information needs of users of financial statements and the public interest more generally;
- monitored the AASB’s work on GFS/GAAP harmonisation and the AUASB’s work in developing legally-binding auditing standards;
- considered issues raised by various stakeholders regarding the transition to the use of International Financial Reporting Standards (IFRS), and continued to monitor developments in the implementation of IFRS internationally;
- funded and participated in the International Financial Reporting Standards Regional Policy Forum in Sydney in October 2005, along with representatives from ten other jurisdictions of Asia-Oceania;
- conducted performance assessments of AASB and AUASB members and made appointments to the AASB and AUASB;
- established projects to fulfil its mandate to monitor developments in auditor independence, in the areas of the teaching of professional and business ethics, the quality review programmes of Australia’s professional accounting bodies, and the disciplinary procedures in place in Australia relating to auditor independence;
- organised and co-hosted the Ken Spencer Memorial Lecture;
- secured funding for international and Australian accounting and auditing standard setting, from the professional accounting bodies, the Commonwealth and the States and Territories; and
- held a strategy meeting to review aspects of its own operations and consider opportunities for the Council going forward.
Accounting standard setting
The AASB held 10 meetings, including a one-day strategy meeting, in 2005-06 for a total of 20 meeting days, at which it addressed significant standard setting and administrative issues.
The AASB issued one new Australian equivalent to IFRS, a revised Australian Accounting Standard and seven Australian Accounting Standards which incorporated subsequent amendments made by the IASB to its Standards and refinements made by the AASB. The AASB also issued twelve Exposure Drafts and four Invitations to Comment during the year.
The Urgent Issues Group (UIG), which ceased to operate on 30 June 2006, met seven times in 2005-06. The UIG continued to review IFRIC Interpretations for adoption in Australia and issued six Interpretations during the year including the adoption of four IFRIC Interpretations. Following public consultation the AASB has replaced the UIG with a new interpretations model that applies from 1 July 2006.
The AASB’s liaison relationship with the IASB continued with the AASB leading three joint research projects on accounting for intangible assets, joint ventures and the extractive industries and having direct involvement in projects on insurance contracts and revenue recognition.
Major progress was achieved in respect of meeting the FRC’s broad strategic direction regarding harmonisation of requirements of Generally Accepted Accounting Principles (GAAP) and Government Finance Statistics (GFS) with the issue of an exposure draft in July 2005 and subsequent consideration of constituents' comments and a draft Standard. At the time of this report the final Standard has been issued. The AASB also made significant progress in reviewing accounting standards relating to accounting by whole of government, government departments and local governments.
Auditing standard setting
The AUASB’s primary focus during the year was the review of all of those Auditing Standards which had been given interim legal endorsement and the reissue of those standards as legally enforceable instruments under section 307A of the Corporations Act 2001 for financial reporting periods commencing on or after 1 July 2006. The AUASB completed phase 1 of this review process in issuing 35 legally enforceable Auditing Standards (ASAs), together with a Foreword to AUASB Pronouncements and AUASB Glossary, on 28 April 2006 in anticipation of the need to have these standards in place by 30 June 2006. The Standards were lodged and registered as legislative instruments and tabled for Parliamentary review.
Phase 2 of the review and revision of the ASAs will be ongoing and may be impacted by the reissue of the International Auditing and Assurance Standards Board’s (IAASB’s) International Standards on Auditing (ISAs) in clarity format, which is not due for completion until 2008. Review of specific ASAs in the meantime will occur as a targeted response to developments nationally or internationally as they emerge.
The AUASB’s focus for the coming year will be the review, reissue or withdrawal of the Auditing Guidance Statements, Auditing Guidance Notes, Audit Guides and Audit and Assurance Alerts, issued by the former AuASB, along with commencement of the review of Auditing Standards which are not legally enforceable. These Auditing Standards will be reissued as Standards on Review Engagements (ASREs), Assurance Engagements (ASAEs) and Related Services (ASRSs).
The AUASB held fourteen meetings in 2005-06 for a total of twenty meeting days, at which it addressed drafting principles for the legally enforceable Auditing Standards, which are set out in ASA 100 Preamble to AUASB Standards, and provided technical oversight throughout the redrafting process.
The AUASB has continued to maintain a strong relationship with the IAASB through regular representation at IAASB meetings. Revision of the ASAs has been based on the ISAs, although some additional requirements have been retained from the former AuASB’s standards and certain differing terminology has been necessary to reflect the mandatory requirements of the Australian regulatory system. The ASAs that have been issued conform with the ISAs and compliance with the ASAs enables compliance with the equivalent ISAs.
Audit independence function
From 1 July 2004, the FRC became responsible for monitoring the effectiveness of auditor independence requirements in Australia and giving the Minister reports and advice about those requirements. The FRC report on its activities in relation to its auditor independence function for 2005-06 is provided in a separate report.
Consultation
The FRC, AASB and AUASB jointly and individually seek to ensure maximum consultation with, and input from, stakeholders on particular standards and the standard setting process.
In 2005-06, the FRC:
- continued consultation with key private sector representatives and government agencies;
- liaised closely with international standard setting stakeholders;
- issued nine Bulletins about decisions taken at and between meetings;
- participated in the Trans-Tasman Accounting Standards Advisory Group which seeks to minimise differences in financial reporting standards between Australia and New Zealand, and promote the influence of the two countries in international standard-setting fora;
- used the www.frc.gov.au website to facilitate consultation, and
- in conjunction with the AASB and AUASB, maintained liaison with Australians who are members of relevant international bodies, including: the International Accounting Standards Committee Foundation (IASCF) (Mr Richard Humphry AO), IASB (Mr Warren McGregor), the IASB Standards Advisory Council (Ms Judith Downes), the International Federation of Accountants International Public Sector Accounting Standards Board (Mr Wayne Cameron), and the International Auditing and Assurance Standards Board (Mr Ian McPhee).
In 2005-06, the AASB:
- used its website www.aasb.com.au to provide information about the meetings, activities and work programme of the Board and the UIG;
- issued media releases to announce when new or revised accounting standards had been made; and
- issued an AASB Action Alert after AASB meetings and an UIG Action Alert after UIG meetings to summarise the proceedings of the meetings.
- used its website www.auasb.gov.au to provide information about the Board, its meetings and activities;
- issued media releases to announce the issue of pronouncements and the release of other publications; and
- met with a number of stakeholders in relation to these activities and conducted Executive Briefings and other seminars in May and June of 2006.
International
The FRC has a statutory obligation to:
- monitor the development of international accounting standards and accounting standards that apply in major international financial centres;
- further the development of a single set of accounting standards for world-wide use with appropriate regard to international developments; and
- promote 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 both the private and public sectors in the Australian economy.
In 2005-06, the FRC continued to monitor the adoption of international accounting standards both in Australia and overseas, following from the strategic direction in 2002 to the AASB to work toward the adoption of international accounting standards in Australia. The FRC supported and participated in the first Regional Policy Forum on IFRS held in Sydney in October 2005, with representatives from ten other countries in the region.
The FRC has a statutory obligation to:
- monitor the development of international auditing standards and auditing standards that apply in major international financial centres;
- further the development of a single set of auditing standards for world-wide use with appropriate regard to international developments; and
- promote the adoption of international best practice auditing standards in the Australian auditing standard setting process if doing so would be in the best interests of both the private and public sectors in the Australian economy.
In 2005-06, the FRC monitored the adoption of international auditing standards both in Australia and overseas. In April 2005, the FRC issued a strategic direction to the AUASB requiring it to develop Australian auditing standards of the highest quality and with a clear public interest focus. In May 2006 the AUASB issued legally-binding Australian Auditing Standards in accordance with the strategic direction.
FRC members were provided with regular updates on work carried out by international standard setting and oversight bodies and the national standard setting bodies of various jurisdictions in Europe, North America and Asia-Oceania.
Accountability
The FRC Chairman Mr Charles Macek and the FRC Secretary Mr Jorge del Busto appeared before the Senate Economics Legislation Committee on 31 May 2006 during hearings on the Budget estimates.
The AASB Chairman Professor David Boymal and Technical Director Angus Thomson appeared before the Senate Economics Legislation Committee on 1 June 2006 during hearings on the Budget estimates.
Australian accounting and auditing standard setting in 2005-06
Figure 1: Structure of institutional arrangements from 1 July 2004
The arrangements from 1 July 2004 follow the passage of the Corporate Law Economic Reform Programme (Audit Reform and Corporate Disclosure) Act 2004.
In addition to the oversight of the two Boards, the FRC has direct responsibility for monitoring the effectiveness of auditor independence requirements in Australia.
The AASB has overhauled its interpretations functions, and from 1 July 2006, the Urgent Issues Group ceased to exist. The new arrangements will be indicated in the next Annual Report.