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Information Paper

Financial Reporting Council - 2005 Timeline Planning Framework

The purpose of this information paper is to give an overview of the major issues to consider as Australia moves towards the adoption of IFRS on or before 1 January 2005. The main objectives of this information paper include the following:

  • Providing a central resource for stakeholders about the 2005 project, including links to other resources;
  • Helping raise awareness among stakeholders of key issues as well as providing additional opportunities for feed-back about issues that may need to be addressed; and
  • Indicating responsibilities for particular actions as well as highlighting and encouraging the active cooperation of stakeholders.

It is intended that this information paper be revised on an ongoing basis to reflect developments in issues surrounding the adoption and transition to IFRS.

Context Setting

For reporting periods beginning on or after 1 January 2005, Australian companies and other reporting entities under the Corporations Act 2001 will be required to prepare their financial statements in accordance with accounting standards issued by the International Accounting Standards Board (IASB).

In Australia, these standards will be issued by the Australian Accounting Standards Board (AASB) so that entities applying AASB standards from 2005 will also be complying with IASB standards.

The rationale behind Government policy concerning IFRS

The adoption of IFRS is consistent with long-standing Government policy and is being implemented through a broad strategic direction issued to the AASB by the Financial Reporting Council (FRC) - as the oversight body for the independent standard setter - under Part 12 of the Australian Securities and Investment Commission Act (The strategic direction can be viewed on the FRC website at http://www.frc.gov.au/bulletins/2002/04.asp). The decision to adopt IFRS follows extensive consultation with stakeholders through the Government's Corporate Law Economic Reform Program (`CLERP 1' and `CLERP 9').

The IASB is producing a cohort of high quality IFRS that represents world's best practice and is appropriate for world-wide adoption. Australia's adoption of IFRS will assist the Australian economy by facilitating cross-border comparisons by investors, reducing the cost of capital in Australia, and improving access to overseas capital for Australian businesses. While existing Australian accounting standards are widely recognised as being of high quality, they are of limited value in regard to cross-border comparisons.

Australia will continue to have a strong voice in the development of IASB standards through the AASB's liaison relationship with the IASB and the active involvement of Australians at senior board, staff and business advisory positions within the IASB. It is critical, however, that business and other stakeholders in Australia continue to be actively involved in commenting on IASB exposure drafts.

International developments

The European Union (EU) is also committed to adopting IFRS from 2005. IFRS are already applied in a number of economies in the Asia-Pacific region. The United States is looking at ways of making its standards more principles-based and its standard setter has struck an agreement with the IASB aimed at achieving greater convergence between IASB standards and US GAAP.

These developments increase the possibility that IASB standards will be applied globally within a reasonable timeframe. With sufficient short-term convergence between IASB standards and US GAAP, it is possible that the United States could ultimately accept company accounts prepared in accordance with IASB standards for cross-border purposes, without reconciliation to US GAAP. For Australian companies this would provide global recognition of their financial accounts.

Although Australia has been harmonising its standards with IASB standards for some years, full adoption of IFRS will represent a significant change in the accounting language of Australian companies, their accounting advisers, analysts and regulators.

The strategic view

The FRC encourages stakeholders to prepare early for the change and to view the adoption of IFRS as a strategic management issue and not simply a technical accounting issue. In many cases, companies will need to imbed changeover strategies that will include the alignment of internal reporting systems with the new external reporting environment, and the development of strategies to prepare analysts and other stakeholders for what could in some cases be significant bottom line changes.

The accounting profession has a key contribution to make through its advice to business clients and the accounting bodies' programs of professional development and the corresponding influence on accounting education.

This information paper sets out a selection of key issues to consider in regard to the adoption of IFRS and provides a link to the AASB's technical plans for adoption. It also provides broader links to relevant information sources. The information paper will be updated on an ongoing basis.

While the technical adoption of IASB standards is for the AASB, the FRC has an important role to play in helping to manage transitional issues arising from the adoption of IFRS within Australia. Thus, the aims of the FRC include:

  • supporting the AASB in its work preparing accounting standards for 1 January 2005;
  • encouraging and guiding necessary education programs for corporations and the broader market to ensure the economy has a mature understanding of the change;
  • encouraging key constituent groups to meet their own obligations and to openly support the move to IAS.

Not all of the issues included in the framework are within the FRC's ability to influence. However, the FRC will need to be in a position to report to the Government on overall progress towards adoption.

One of the FRC's key roles is to ensure that stakeholder views on the accounting standard setting process are heard. Accordingly, this document aims not only to help raise awareness among stakeholders, but also to provide them with an additional channel for feed-back to the FRC and AASB about their preparedness for 2005 and issues that may need to be addressed in the transition.

The 2005 Timeline Planning Framework

(i) The technical standard setting agenda

The AASB as the independent standard setter has developed its technical agenda for the adoption of IFRS.

The AASB website (www.aasb.com.au) includes the document "AASB plans for adopting IASB standards by 2005". This sets out the AASB's overall approach to adoption together with its detailed plans by individual standards.

IASB standards will be issued in Australia by the AASB. The Government has indicated that the standards would be legislative instruments for the purposes of the Corporations Act (they would therefore be subject to disallowance in the Parliament as is now the case with AASB standards).

The AASB's plans are based on the most recent information obtained from the IASB which has said that it will issue by 31 March 2004 all new and revised standards that are to apply from 1 January 2005. The AASB will mirror this process and issue the corresponding AASB standards as soon as practicable after the IASB standards are issued, for application in accounting periods beginning on or after 1 January 2005. This will ensure that from April/May 2004 reporting entities will have access to the body of standards that will apply in Australia from their relevant 2005 application date. For reporting entities with a June balance date, the first accounts to be prepared in accordance with the new IFRS will be for the financial year commencing 1 July 2005. That said, one-year comparative requirements will bring forward the application of IFRS to 1 July 2004.

For some companies, the impact on company reporting requirements and potentially share prices as a result of the adoption of IASB standards will be significant. There is a need to keep investors and users fully informed of the outcomes of the new standards. It is important that companies disclose to shareholders the impact of the new standards. Even if there is likely to be `little or no impact on the company's financial statements', this statement should be made by a particular date prior to January 2005. It will give investors some comfort that the company has considered the impact.

In terms of early adoption of international standards, the AASB announced in a press release dated 4 September 2003, that it intends to issue all final international standards simultaneously in April 2004. Up until this time, the AASB will issue `proposed standards' so that the text of the standard is available to interested parties. This approach has been adopted in light of legal advice received by the AASB on it ability to cross reference unmade standards.

Timeline: Initial set of standards to apply from 2005 to be issued by the AASB in April 2004.

Risk: Any change in the IASB timetable will have consequences for the AASB timetable. While any slippage may have implications for the inclusion of a particular standard in the initial body of standards to apply from 2005, this should be clear by the time of the March 2004 "pause".

(ii) Legal issues to be resolved

Copyright

As noted above, IASB standards issued by the AASB would be legislative instruments for purposes of the Corporations Act (and therefore be subject to disallowance in the Parliament as is now the case with AASB standards).

Copyright in standards issued by the IASB is held by the IASB and any right for the AASB to reproduce Commonwealth legislative instruments free of charge, must recognise pre-existing proprietary rights. The IASB's publications policy seeks to restrict the free availability of standards to protect IASB publications revenue. The AASB, Commonwealth Treasury and the IASB have now resolved concerns about the distribution of IASB standards in Australia. However, the AASB and the IASB are still to conclude an agreement in relation to the distribution of associated material that is released in conjunction with the actual standards.

Timeline: The issue has been resolved in respect of the actual standards, but not in respect of the associated material.

Risk: While the copyright issue has delayed the release of IFRS 1 - First-time Application of International Financial Reporting Standards, copyright issues will not further delay the issue of Australian equivalents of IASB standards.

(iii) Advice to Government on any need for tax or regulatory changes

The AASB has raised with the Commonwealth Government, Treasury and other agencies a number of issues arising from the interaction of IASB standards with Australian legislative and other requirements.

  • These include the interaction of share capital tainting rules with the proposed IASB standard on share-based payment, and the effect of the proposed financial instruments standard on prudential ratios for Australian banks and the prudential regulation of insurance companies.
  • Some Government regulations also rely on provisions of existing AASB standards.

It is recognised that there may be a need for tax and regulatory changes to accommodate IASB standards.

Any stakeholder inquiries about these issues could be directed to the FRC Secretary in the first instance.

Timeline: These issues will be addressed by the Government prior to the application date for the new standards.

Risk: The Government, through Treasury, will need to manage any unintended consequences arising from these issues.

(iv) Definition of reporting entity

Under Part 2M of the Corporations Act 2001, entities required to prepare annual and/or half-year financial reports in accordance with accounting standards are: all disclosing entities; all public companies; all large proprietary companies; and all registered schemes. Retaining these provisions in 2005 would mean that these entities would be required to prepare their financial statements in accordance with AASB equivalents of IASB accounting standards.

Existing accounting standards provide that entities that are not "reporting entities" do not need to comply with certain accounting standards. The continued application of these provisions will be considered by the AASB and the Government prior to 2005.

The entity coverage of the Corporations Act 2001 reporting requirements is a matter for the Commonwealth Government. Any stakeholder inquiries on this issue could be directed to the FRC Secretary in the first instance.

(v) Monitoring of progress at the international level

The FRC and AASB share responsibility for monitoring progress towards IASB adoption at the international level.

Timeline: The IASB expects to issue by 31 March 2004 all standards that are to form part of the initial body of IASB standards to apply from 2005. The AASB will mirror this timing in issuing the equivalent standards in Australia.

Risk: While there is some risk that the IASB, and hence the AASB, work program will not be met in full by 31 March 2004, this would only affect at the margin the body of standards to apply in Australia from 2005. The only identified risk to 2005 adoption would be any decision by the EU not to proceed with its present 2005 timetable. The EU appears strongly committed to 2005 and this risk is currently assessed as low.

(vi) Company preparedness

The major accounting firms in Australia have marshalled significant expertise in IASB standards which is available as part of their advisory services to business. They are also publishing material which seeks to raise awareness in the business community about the changeover (available in most cases on their websites - see links above). This material includes advice on the financial impact for Australian business of the 2005 deadline and briefs on particular accounting standards.

The professional accounting bodies are also publicising the changeover and the preparations required for it (see web links below).

Work is being undertaken at the company level to imbed changeover strategies, including the alignment of internal reporting systems with the new external reporting environment and the development of strategies to prepare and educate analysts and other stakeholders for what could in some cases be significant bottom line changes.

  • It is important that the adoption of IASB standards be regarded as a strategic management issue and not just a technical issue for the CFO level.
  • The extent of company preparedness is critical to a smooth transition and represents the key risk in 2005 adoption.

Surveys conducted by the major accounting firms are an important tool in assessing levels of preparedness.

For example, a recent survey by Ernst & Young found that: 85 per cent of survey participants were aware of the need to comply with IASB standards from 2005; only 68 per cent were aware of the requirement for comparatives from 2004; 56 per cent rated their knowledge of IASB standards as low (with most indicating they would remedy this by relying on their auditor, internal or other resources); and 73 per cent indicated that they had sufficient resources to adequately implement IASB standards.

  • The survey concluded that there was a high level of awareness but a limited understanding of the detailed requirements. Many participants said they have yet to seriously review the impact for their organisations.
  • CPA Australia has also undertaken a survey of its members to assess their awareness of the adoption of IAS from 2005.
  • The survey revealed that 69% of members were aware that IFRSs will replace existing Australian accounting standards from 2005 (AASBs and AASs), and that 62% of members were aware that the new standards will apply to all reporting entities (including not for profits and public sector). In contrast 11% of respondents indicated their business has a strategy in place to manage the transition.
  • More than three-quarters of respondents believe their company has adequate resources to meet the challenge of IFRS implementation to ensure these resources are applied effectively, CPA Australia is urging business to focus efforts on developing their strategy to support the transition to IFRS, and to consider the full scope of potential impact.

CPA Australia plans to undertake another survey at the end of 2003 so that they can keep track of their members' progress.

The Institute of Chartered Accountants in Australia (ICAA) has conducted a survey of participants on their understanding of the impact of IAS and their training requirements. The ICAA intends to conduct further surveys in the near future.

The FRC will be closely monitoring such surveys (and may consider some involvement in arranging or helping sponsor a future survey).

The AASB is also raising awareness within the business community through its "transit to 2005" seminars (some of which are being held in conjunction with the ASX), and information about the 2005 adoption process conveyed to constituents via the AASB web site and newsletters. The ASX/AASB program "Towards 2005" has involved 3 sessions in Sydney and in Melbourne. In addition, ASX has separately held 18 seminars in relation to financial reporting which has explained the 2005 adoption strategy, and intends to issue a Companies Update on the implications of 2005 on continuous disclosure obligations.

The Parliamentary Secretary to the Treasurer and the FRC Chairman have referred to the importance of IAS adoption and the need for proper preparation in speeches and in consultations with stakeholders.

It should also be noted that the Australian Securities and Investment Commission and the FRC are calling on all company boards and management to take an active interest in preparing early for the adoption of the standards of the IASB for application within Australia.

ASIC and the FRC encourage all companies and advisers involved in the preparation of financial reports to ensure they have the appropriate systems and procedures in place to effectively manage the transition to the adoption of the new standards.

ASIC and the FRC encourage companies to take a proactive approach to the implementation of the standards, and to familiarise themselves now with the detail of the new requirements. ASIC and the FRC seek to maintain high quality financial reporting by Australian companies, and to promote investor protection and market confidence, it is vital that boards and audit committees take an active interest in this matter.

Risk: A lack of preparedness by the business community is the key risk to the smooth adoption of IASB standards in Australia from 2005.

(vii) Education and professional development

The professional accounting bodies in Australia (and, at the international level, the International Federation of Accountants) have in place professional development and accounting education programs geared to the adoption of IASB standards.

CPA Australia offered free sessions Australia wide to members in June this year to increase their awareness of the adoption of IAS from 2005. As part of CPA Australia's development program, they are offering seminars comparing the current IASs with AASB/AAS standards up until the release of the new standards. On the release of the new standards, a series of workshops will be offered (mainly post 31 March 2004). The courses cater for specific sectors including private and public and not-for-profit. CPA's accreditation process will require universities to incorporate and teach international standards as early as is practical.

The National Institute of Accountants (NIA) is offering a series of continuing professional education (CPE) on the adoption of IAS as part of their National CPE program. The first introductory seminars were being offered around Australia in October and November 2003. These general seminars will be followed by a series of seminars on specific issues, starting early in 2004. The NIA is also looking to supplement these seminars with on-going information being provided on the adoption of IAS in the NIA journal (National Accountant) and with additional seminars (both generic update sessions and specific issue sessions) aimed outside of its membership.

In October 2003, the ICAA also conducted major seminar program, IFRS: Think Global, Act Local - A Transition Strategy for Australian Business, in all capital cities. The program outline of the seminar can be found at the following link: www.icca.org.au/cpe/ifrs

The FRC and AASB have an obligation to ensure that adequate educational material on the adoption of IFRS is accessible to all stakeholders. This will be done through monitoring the extent of educational material available and to which audiences this material is targeted. The FRC and AASB will also determine how to ensure that any gaps, in the educational material available, are filled.

The IASC Foundation has announced its commitment to develop a world-wide assessment and certification program aimed at meeting the anticipated EU and world-wide demand for training in IASB standards. The Trustees are currently still considering the concept of developing a testing program and looking at several alternatives.

The ICAA has also made communication and education efforts in regard to IFRS, as outlined below:

Communication

The Institute's monthly Journal Charter has a section each month on 2005 topics and this is supplemented by the Institute's weekly e-mail Newsletter ANT which most weeks has an update on 2005 (eg proposed accounting standards, IASB releases, news etc).

In addition the Institute's web-site has a dedicated 2005 Section which includes recent Australian exposure drafts, proposed and actual submissions to the AASB, and a detailed 100 page paper that summaries the current status of the 2005 project including an analysis of the key differences between current Australian accounting standards and what will apply in 2005, as well as a detailed analysis of the accounting standards that are currently out in 2005 exposure draft form. On 23 October 2003 - the conclusion of the Institute's 2005 RoadShows, the paper was updated for the 246 page paper being used in the RoadShows that compares all Australian accounting standards with what is expected to apply in 2005. Further details on the Institute's web-site can be found at the following Addresses:

http://www.icaa.org.au/tech/index.cfm?menu=312&id=A106024746

http://www.icaa.org.au/upload/download/2005_Globalised_Acctg(Fncl_Reporting)Standards.pdf

The Institute's Technical Standards Team also provides a Technical Enquiry Service for Members on financial reportion issues, and not surprisingly there have been many requests for information/assistance on 2005.

Education

In 2003, IFRS was presented at the Institute's CA Business Forums (in Sydney and Melbourne) in May. Two further seminars were held in Sydney in June.

During October and November, 9 half day seminars were scheduled for the following national capital cities: Sydney, Canberra, Melbourne, Hobart, Perth, Adelaide and Brisbane. Presenters from the ICAA technical team, ASIC (Chief and Deputy Chief Accountant) and PwC (Partners with relevant practical expertise and experience) provided analysis of the standards, the practical impact of implementing them as well as regulatory issues and environment.

A comprehensive manual that outlines the differences between the current standards and the 2005 standards has been produced for participants. The manual includes case studies examining the impact of the standards and how they will be applied. These seminars, relevant to accountants in commerce and government as well as those in practice, were attended by approximately 1000 participants nationally. Each seminar was tailored to meet regional requirements. The seminars were recorded by video and made available to those who were unable to attend the seminar on a CD ROM (including also all the papers).

Further IFRS workshops will be conducted in early 2004, allowing for more detailed and personalised instruction of the application of the standards.

CA Business Forum's in 2004 will offer IFRS sessions that will be tailored according to state based issues and member needs.

The ICAA has co-branded PwC's P2P IAS e-learning tool. This sophisticated, self paced CD Rom provides 21 hours of interative learning on all aspects of the International Standards. A user friendly e-learning tool, P2P IAS allows users to complete the modules in the order than best meets their needs.

(viii) Resourcing of accounting standard setting process

One of the FRC's functions under section 225 of the Australian Securities and Investments Commission Act is to seek contributions towards the costs of the accounting standard setting process. The FRC is also required to monitor and periodically review the level of funding, and the funding arrangements, for the AASB.

The FRC has asked the AASB to advise it of any concerns it may have about the availability of funding to enable it to achieve the 2005 transition as well as undertake its responsibilities for public sector standard setting. The broad strategic direction provided to the AASB by the FRC requires the AASB to advise the FRC promptly of any resource constraints on the Board's ability to fulfil its responsibilities.

Funding for accounting standard setting is provided by the Commonwealth, State and Territory governments, the professional accounting bodies, the Australian Stock Exchange, and a number of individual listed companies.

The FRC is accountable to contributors for the use of these funds. Accountability arrangements were recently agreed with listed company contributors and with the Australian Stock Exchange in relation to $2 million to be provided over two years from the Financial Industry Development Account. These include reporting on progress of the 2005 project.

Australia is, through the FRC, making financial contributions to the IASB. The IASB will provide the FRC with six-monthly stock-takes ("Chairman's reports") of progress against their work program in addition to the IASB annual report. Thus, the IASB's accountability to the FRC will be an important input to the FRC's accountability for the use of contributions by Australian stakeholders, with progress towards 2005 adoption being a core reporting requirement.

Timeline: The FRC is responsible for ensuring there is adequate funding for accounting standard setting, and the funding arrangements are under its continual review.

Risk: Any risk of a funding shortfall should be quickly recognised and addressed.

Feedback

The FRC welcomes feedback from stakeholders on issues relating to the transition to IFRS.

As the oversight body of the Australian accounting standard setting regime, the FRC's role is to provide broad oversight in regard to setting accounting standards in Australia; to monitor the development of IFRS and to monitor the operation of accounting standards to assess their continued relevance and their effectiveness. The FRC welcomes stakeholder views on practical issues arising from the transition to IFRS on or before 1 January 2005 and any policy issues that may arise in regard to the application of IFRS.

Key dates

March 2004

All IFRS to be applied from 2005 onwards, are intended to be finalised by the IASB by 31 March 2004.

1 January 2005

Australian companies will be required to apply accounting standards that are issued by the IASB to reporting periods that commence on or after 1 January 2005.

However, one-year comparative requirements will bring forward the application of IFRS to 1 January 2004.

1 July 2005

For reporting entities with a June balance date, the first accounts to be prepared in accordance with the new IFRS will be for the financial year commencing 1 July 2005.

However, one-year comparative requirements will bring forward the application of IFRS to 1 July 2004.

Comments or questions can be forwarded to:

The Chairman
Financial Reporting Council
c/- The Treasury
Langton Crescent
PARKES ACT 2600

chairman@frc.gov.au

or

The Secretary
Financial Reporting Council
c/- The Treasury
Langton Crescent
PARKES ACT 2600

Ph: (02) 6263 3144;
Fax: (02) 6263 2770;
frcsecretary@treasury.gov.au