International Accounting Standards Board
The GFC has lifted accounting standards setting onto the international economic policy making agenda. This is unsurprising — during the global financial and economic turmoil in the period around 2001, accounting standards also came under close scrutiny (for example as a result of the Enron scandal). While much has been done in the interim to close gaps in governance and to adapt to the impetus of globalisation, by working to ensure that International Accounting Standards (IAS) achieve global or near-global acceptance, a number of important IFRS have remained unreformed, most notably those relating to financial instruments such as IAS 39 Financial Instruments: Recognition and Measurement (and similar problems have remained in other jurisdictions such as the United States).
Since the current period of market turmoil began in 2007, eventually leading to the GFC, the IASB has been actively responding to the crisis, and has developed a number of projects to address issues identified early on by groups such as the Financial Stability Forum, now called the Financial Stability Board (FSB). It has also been amending the standards identified later by the G-20 while at the same time continuing to work with others such as the FASB and the Accounting Standards Board of Japan (ASBJ) to proceed with the goal of international convergence.
While acknowledging the value of this work in addressing issues associated with the GFC, it is important to keep in mind the findings of the recently released report of the Financial Crisis Advisory Group (FCAG) which noted that:
While the post-mortems are still being written, it seems clear that accounting standards were not a root cause of the financial crisis. At the same time, it is clear that the crisis has exposed weaknesses in accounting standards and their application (FCAG, p 3).1
In November 2008, at the Washington Leaders Summit, the G-20 identified a number of accounting standards policies requiring reform following the onset of the GFC. This was updated with more detailed requests at the London G-20 summit in April 2009. Furthermore, in April 2009 the newly created FSB released a report identifying a number of issues identified in accounting standards from a financial regulatory perspective.
The IASB has responded positively to the increased focus of policy makers, such as the G-20, with a number of fundamental reforms:
- the creation of the Monitoring Board in January 2009 to enhance the public accountability of the IASC Foundation;
- the creation, with the FASB, of the FCAG to advise on implications of the crisis;
- ongoing collaboration with prudential and regulatory bodies such as the FSB; and
- the announcement that IAS 39 would be fundamentally reformed.
In addition, the IASB has reviewed a number of standards identified as needing reform such as those relating to off-balance sheet exposures, disclosure, the complexity of financial reporting, the valuation of financial instruments and the recognition of loan loss provisions. Some of these processes are not complete and will require the goodwill and effort of all involved to ensure that international accounting standards reflect the fundamental principles underlying accounting standards. These include the need to accurately reflect the relative financial position of entities at a point in time, and the need for independent standard setting, with the policy imperative that accounting information encourage financial institutions in particular to behave in a cyclically neutral manner (rather than pro-cyclically). While there is widespread agreement that accounting standards did not cause the crisis, it is also clear that they require work as part of the current process of global economic reform.
FRC's role in responding to the GFC
The FRC has played an active role working with the IASB to achieve appropriate reforms of standards and governance, both through a submission to the IASC Foundation's constitutional review and by collaborating in discussions between standards setters and policy makers and others, including sponsoring research presented to the IASB/FASB Tokyo round table.
The FRC has supported the improvements in IASB governance, and Australia has strengthened the ability of the IASB to undertake these reforms through its very strong contribution to the IASB's independent operation; specifically, the Australian Government contributes A$1 million in annual funding to the IASC Foundation.
As mentioned above, the FRC also sponsored the report (including a survey of Australian banks) prepared and presented by Judith Downes to the IASB/FASB Tokyo Round Table on the GFC on 3 December 2008. Her presentation emphasised that the most pressing need for review identified in the report related to the difference between the prudential and accounting models for provisioning of loans held at amortised cost, although changing the accounting rules for hedging was also identified as an urgent need. The report was influential in guiding the debate on these issues.
The FRC has been something of a conduit for the transmission of ideas and opinions on the reform process between the Australian Government, the G-20, the FSB and other relevant supervisory bodies, and the IASB. This has been important in helping to ensure that the G-20's conclusions strike the appropriate balance between the valuable goal of standard setter independence and principle-driven accounting standards, and that of ensuring that accounting standards are consistent with the needs of globally appropriate financial regulation and with desirable economic principles such as minimising pro-cyclicality and hence avoiding boom and bust cycles.
Maintaining up-to-date information on global policy developments relating to accounting standards was greatly assisted by contacts and discussions with a number of organisations including the US Securities and Exchange Commission (SEC), the International Monetary Fund (IMF), the UK Treasury, the IASB, and the European Financial Reporting Advisory Group (EFRAG). In addition, strong regional links have been forged at the IFRS regional policy forum and the ADB annual general meeting.
Australia was also actively involved in the creation of AOSSG, and indeed the FRC Chairman and Secretary attended the meeting which created the AOSSG. The work of this organisation will help to promote the acceptance of IFRS in the region and increase the region's influence in global accounting standards setting. It is clear that work between standards setters in the Asia Pacific region will be increasingly important in the future, not just because Australia's economic ties increasingly lie here, but also because this will be a valuable way in which to increase the recognition and influence that Australia can have in the sector. Accordingly the FRC, and the AASB, are increasingly engaged with their regional counterparts and this is outlined further below.
Trans-Tasman Accounting and Auditing Standards Advisory Group
The FRC Chairman is a member of the Trans-Tasman Accounting and Auditing Standards Advisory Group (TTAASAG), which was established in 2004 to advise the Australian and New Zealand Governments and accounting and auditing standards setters on ways to reduce costs and improve efficiency by aiming for single sets of accounting and auditing standards to apply to both jurisdictions. TTAASAG also seeks to maximise the influence of Australia and New Zealand in the development of international accounting standards and international auditing and assurance standards, including the international standard setting process.
During the year TTAASAG:
- considered the possible development of a set of accounting and auditing outcomes that would apply reciprocally between Australia and New Zealand. These outcomes would form part of a broader Single Economic Market outcomes agreement, which would identify outcomes on a wide range of issues between Australia and New Zealand;
- monitored progress with a number of policy proposals being developed by the New Zealand Ministry of Economic Development, including a review of the audit regulation and financial reporting frameworks; and
- considered a range of issues common to Australia and New Zealand, such as asset valuation in thinly traded markets, response to the global financial crisis, standard business reporting, the going concern principle, reporting by not-for-profit entities and differential auditing.
In addition, TTAASAG continued to actively monitor upcoming vacancies on international bodies, such as the IASB and the Standards Advisory Council, and sought to identify Australians and New Zealanders who would be high-quality candidates for those positions.
Cross-membership with NZ Accounting Standards Review Board
Shortly after its establishment, TTAASAG proposed that cross-membership between relevant standard setting and oversight bodies of Australia and New Zealand would be a desirable step in the process of reducing costs and improving efficiency of businesses operating in both jurisdictions.
The FRC Chairman was a member of the Accounting Standards Review Board of New Zealand (ASRB) throughout the period covered by this report. The Chairmanship of the ASRB changed during the year, with Mr Warwick Hunt retiring on 31 December 2008 and Mr Kevin Simpkins commencing a five-year term on 1 March 2009. Appendix A details the periods during which Messrs Hunt and Simpkins served on the FRC during 2008-09.
During 2008-09, TTAASAG reviewed the role of cross-appointees and the procedural rules (for example, voting rights) applicable to such appointees. TTAASAG noted that cross-appointees are contributing to the standard setting process by facilitating cooperation and communication and agreed that the current arrangements should be maintained.
IFRS Regional Policy Forum
The third IFRS Regional Policy Forum was held in Beijing on 16 April 2009. The Forum, which was hosted by the Ministry of Finance of the People's Republic of China, was attended by participants from Australia, Brunei, India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, Singapore, China, Hong Kong SAR and Macau SAR. Australia was represented by the FRC Chairman, senior officers of the Australian Treasury and members of the accounting profession.
The Forum's sessions covered a range of issues, including: the relationship between the global financial crisis and the financial reporting framework; the actions taken by jurisdictions in the region in response to the financial crisis; international convergence and regional influence in the international standards setting environment; and financial reporting requirements for non-publicly accountable entities.
Those participating in the Forum:
- expressed their appreciation for the actions of the IASB in response to the financial crisis, and agreed to further strengthen cooperation to improve the current system of IFRS;
- confirmed that the objective of financial reporting is to improve the quality of information available for capital providers so as to enhance the operation of the world's capital markets;
- agreed that the establishment of a single set of high-quality global accounting standards is an important ingredient in a well-informed market that would assist in the prevention of financial crises and the development of the global economy;
- agreed that countries and regions should actively promote their own accounting standards to converge with IFRS, with the aim ultimately of adopting the IFRS;
- agreed that the accounting standards setting bodies should strengthen cooperation with the relevant regulators and supervisors in coordinating the accounting standards with related regulatory requirements, and agreed to promote consistent implementation of accounting standards; and
- agreed that in the development of the IFRS the realities and opinions of different regions should be given due consideration. It is critical to intensify cooperation among the regional accounting standards setting bodies and to set up a corresponding mechanism for the region to contribute to the development of IFRS.
It was also agreed that the next IFRS Regional Policy Forum will be hosted by Singapore.
Asian-Oceania Standards Setters Group
A preparatory meeting of the AOSSG was held in Beijing on 17 April 2009. The meeting was co-sponsored by the AASB, the Brunei Ministry of Finance, the China Accounting Standards Committee, the Indonesia Institute of Accountants, the ASBJ, the Korea Accounting Standards Board, the Malaysian Accounting Standards Board, the Financial Reporting Standards Board of New Zealand, the Singapore Accounting Standards Council, the Hong Kong Institute of CPAs and the Committee for the Registry of Auditors and Accountants of Macau. The FRC Chairman and the Acting Chairman of the AASB represented Australia at the meeting.
The meeting agreed to establish the AOSSG as a forum to promote the adoption of, or convergence with, the IFRS in the region, support the IASB's effort to establish a single set of high-quality global accounting standards, coordinate positions of jurisdictions in the region and participation in the development of the IFRS, improve the consistency and comparability of the financial reporting standards in the region and enhance the quality of financial reporting in the public interest of jurisdictions in the region.
The first regular meeting of the AOSSG will be hosted by Malaysia in November 2009.
Asian Development Bank
On 2 May 2009, the FRC Chairman presented a paper, 'International trends in accounting and auditing regulation and what it means for Asia Oceania', at a seminar on International Trends in Financial Sector Supervision and Regulatory Regimes arranged by Indonesia in conjunction with the 42nd annual meeting of the Board of Governors of the ADB.
1 Report of the Financial Crisis Advisory Group, 28 July 2009, http://www.iasb.org/NR/rdonlyres/2D2862CC-BEFC-4A1E-8DDC-F159B78C2AA6/0/FCAGReportJuly2009.pdf.