House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

9 Accounting standards

9.1 The accounting standards provisions provide for the establishment of new institutional arrangements for the Australian accounting standard setting process and for the adoption of new procedures that must be followed by the standard setter when it is making or formulating accounting standards.

Schedule 2 - New Accounting standards provisions

Item 1 - Part 12

9.2 Item 1 provides that the Australian Securities and Investments Commission Act 1989 (the ASIC Act) is amended by replacing the existing Part 12 (Australian Accounting Standards Board) with a proposed new Part 12 (Accounting standards).

9.3 The proposed new Part 12 has three divisions:

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the Australian financial reporting system;

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accounting standards; and

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administrative provisions.

Section 224 - Main objectives of this Part

9.1 Proposed section 224 is an introductory provision which outlines the objectives of the provisions contained in the proposed new Part 12. Three objectives are specified:

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facilitating the development of accounting standards that require the provision of financial information that:

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enables users to make and evaluate decisions about allocating scarce resources;

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assists directors in meeting their obligations in relation to financial reporting;

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discloses information relevant to assessing issues such as performance and financial position; and

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is relevant and reliable, facilitates comparability and is readily understandable

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facilitating the Australian economy through reducing the cost of capital, enabling entities to compete effectively overseas and having financial reporting requirements that are clearly stated and easy to understand; and

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maintaining investor confidence in the Australian economy.

Division 1 - The Australian financial reporting system

Section 225 - establishment, functions and powers of the Financial Reporting Council

9.1 A Financial Reporting Council (FRC) will be established (proposed subsection 225(1)) to perform a wide range of functions associated with the standard setting process. In particular, the FRC will be responsible for:

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advancing or promoting the main objectives of proposed Part 12;

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providing broad oversight of the standard setting process and giving the Minister reports and advice on the process;

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seeking contributions towards the costs of the standard setting process;

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the operations of the AASB, including the appointment of all members of the AASB, except the Chairman (who will be appointed by the Minister);

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approving the AASBs priorities, business plan, budget and staffing arrangements; determining its broad strategic direction and giving the AASB directions, advice or feedback on matters of general policy and the AASBs procedures;

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monitoring the development of international accounting standards and furthering the harmonisation of Australian standards with those international standards;

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monitoring the operation of accounting standards to assess their continued relevance and effectiveness in achieving their objectives in respect of both the public and private sectors of the Australian economy; and

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establishing appropriate consultative arrangements in respect of its own functions (proposed subsection 225(2)).

9.2 The provisions have been designed to ensure that the FRC is in a position to provide broad oversight over the standard setting process without being able to determine the content of particular standards. In particular, the FRC will not have any influence over the technical deliberations of the standard setter and will not be able to veto, either in whole or in part, any accounting standard made by the standard setter. In performing its functions and exercising its powers, it is expected that the FRC will operate in a manner that is open and consultative in nature.

9.3 It is envisaged that funding for the standard setting process will be provided by the Government, the Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia (jointly) and preparers/users in the public and private sectors in broadly equal proportions.

9.4 Proposed subsections 225(3) and (4) provide that, in addition to the powers given to it by the ASIC Act, the FRC has power to do those things necessary or convenient to be done in connection with the performance of its functions, including the establishment of committees and advisory groups.

9.5 One of the bodies that it is envisaged would be established by the FRC is a committee equivalent to the existing Urgent Issues Group (UIG). Such a committee would, like the UIG, be responsible for reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching a consensus on the appropriate accounting treatment. Although the legislation will not establish a regime for approving or enforcing these consensus views, it is envisaged that compliance will be achieved through the rules of the professional accounting bodies and pronouncements of the Australian Securities and Investments Commission (ASIC).

9.6 Provisions dealing with the membership of the FRC and its reporting and procedural requirements are contained in proposed Subdivision A of Division 3.

Section 226 - Establishment of the Australian Accounting Standards Board

9.7 Proposed section 226 provides for the establishment of the Australian Accounting Standards Board (AASB) as a body corporate. This will enable the AASB to employ staff and acquire property in its own right.

9.8 The AASB will be a Commonwealth authority for the purposes of the Commonwealth Authorities and Companies Act 1997 (CAC Act). The CAC Act sets out the reporting, financial and other requirements with which Commonwealth authorities must comply.

9.9 While the AASB will be required to prepare an annual report in accordance with the requirements of the CAC Act, it is envisaged that these reporting obligations will be covered by the report that the FRC prepares in accordance with proposed subsection 235B(1) and not by requiring the AASB to prepare a separate report specifically for the purposes of the CAC Act.

Section 227 - AASBs functions and powers

9.10 Proposed subsection 227(1) provides that the functions of the AASB include:

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the development of a conceptual framework (not having the force of an accounting standard) for the purpose of evaluating proposed Australian and international accounting standards;

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making accounting standards for the purposes of national scheme laws, such as the Corporations Law;

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formulating accounting standards for other purposes, such as the public sector and non-Corporations Law entities (the legal effect of these standards will depend on the particular regulations/legislation governing the entities; however, it is expected that the practice of the ICAA and ASCPA in mandating compliance by members with accounting standards and consensus views in the preparation, presentation and audit of general purpose financial reports will continue to apply in respect of those standards);

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participation in the formulation of international accounting standards so as to influence their content towards the achievement of the objectives set out in proposed section 224; and

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advancing or promoting the main objectives of proposed Part 12.

9.11 For the purpose of performing these functions, the AASB will have a range of powers including the ability to engage staff and consultants and establish committees, advisory panels and consultative groups (proposed subsection 227(2)).

9.12 In performing its functions and exercising its powers, it is expected that the processes of the AASB will be open and consultative in nature. In particular, the AASB is expected to consult widely on both its own and international accounting standards.

9.13 The AASB is empowered to make an Australian accounting standard by simply issuing the text of an international standard with any modifications that may be needed to ensure that the standard operates effectively having regard to the existing legislative framework and institutional regulatory arrangements. The AASB may make such a standard regardless of the fact that the international standard does not reflect the views of the AASB when it provided comments on the exposure draft of the standard or when the AASB participated in any deliberations during the standards development. This is because it may be considered in Australias best interests to adopt an international standard with minimum modification as it represents the results of many deliberations and compromises necessary to achieve international acceptance and thereby facilitate international trade and investment.

9.14 The provisions in proposed Part 12 refer to the AASB making and formulating accounting standards. The word making is used when the AASB issues a standard for the purposes of a national scheme law (for example, the Corporations Law) while the word formulating is used where the AASB issues a standard for other purposes (for example, non-Corporations Law entities) or seeks to influence the content of an international standard.

Division 2 - Accounting standards

9.15 Proposed Division 2 contains provisions dealing with the interpretation of accounting standards, some of the powers of the AASB to make standards, requirements with which the AASB must comply when making standards and the ability of the FRC and the Minister to give directions to the AASB.

Section 228 - Purposive interpretation of standards

9.16 Accounting standards are to be interpreted in a manner that promotes the purpose or objective of proposed Part 12 of the ASIC Act (proposed subsection 228(1)).

9.17 In addition, each accounting standard made by the AASB is to be interpreted in a manner that promotes the purpose or objective of that accounting standard, provided that that purpose or objective is not contrary to the purpose or objective of proposed Part 12 of the ASIC Act (proposed subsection 228(2)).

Section 229 - Generic and specific standards

9.18 Proposed subsection 229(1) provides that accounting standards may be of general application (that is, apply to all entities that are required to prepare financial statements) or limited application (that is, apply to specific industries or entities).

9.19 Proposed subsection 229(2) provides that, when making an accounting standard, the AASB must have regard to whether an accounting standard is suitable for different types of entities. The AASB will also be able to express standards to apply on a differential basis; that is, requiring different classes of entity to provide different levels of information in respect of a particular disclosure requirement.

9.20 Proposed subsection 229(2) also requires the AASB to ensure that there are appropriate accounting standards in place for each type of entity that must comply with accounting standards. The purpose of this provision is to ensure that there are accounting standards that are applicable to all companies and other entities that are required by law to prepare financial statements.

9.21 However, in the case of both Corporations Law and non-Corporations Law entities, the issue of whether individual entities are required to comply with accounting standards is one for the legislation governing those entities rather than the AASB.

Section 230 - Comparative amounts

9.22 Proposed section 230 provides that an accounting standard may require financial statements to contain comparative amounts in respect of earlier periods.

Section 231 - Cost/benefit analysis

9.23 Proposed subsection 231(1) will require the AASB to undertake a cost/benefit analysis of the effect that a proposed accounting standard would have on the entities to which it applies before making or formulating the standard.

9.24 While the requirement to undertake a cost/benefit analysis would not apply to standards which effectively adopt the text of an international accounting standard (proposed subsection 231(1)), the AASB would be required to undertake a cost/benefit analysis of a proposed international standard either before providing comments to the international body that makes the standard or advocating its adoption as an international standard (proposed subsection 231(2)).

9.25 Proposed subsection 231(3) provides that the AASB has to comply with the requirements to undertake a cost/benefit analysis only to the extent that it is reasonably practicable. It is not expected that any cost/benefit analysis would necessarily be undertaken in a scientific manner by quantifying each cost and benefit. However, the analysis could involve the production of a form of economic impact statement by the standard setter which canvassed the merits of a proposed standard and assessed its impact on users and preparers and the economy as a whole.

Section 232 - FRC views

9.26 Proposed section 232 provides that, when it is performing its functions, the AASB must have regard to the FRCs views concerning the broad strategic direction of the standard setter, follow the general policy directions given to the standard setter by the FRC and take into account the advice and feedback provided by the FRC on matters of general policy.

9.27 The FRC does not have a power to direct the AASB in relation to the development, or making, of a particular standard.

9.28 Examples of a general policy direction which the FRC may give to the AASB, include how quickly Australia should move towards greater adoption of international standards and/or market value accounting.

Section 233 - International accounting standards

9.1 Proposed section 233 provides that the Minister may give the AASB a direction about the role of international accounting standards in the Australian accounting standard setting system. However, prior to giving a direction to the FRC, the Minister must obtain and consider a report from the FRC about the desirability of giving the direction.

9.2 This provision therefore provides a mechanism for the Minister, upon the advice of the FRC, to require the AASB to move towards greater adoption of international standards if that is considered appropriate and the AASB has not moved in that direction of its own accord.

9.3 Issues that the FRC would be expected to have regard to when it is preparing a report for the purposes of this provision include:

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whether the standards made by the international standard setter had been endorsed by the International Organisation of Securities Commissions for cross-border raisings and listings;

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the level of acceptance of international accounting standards in the worlds major capital markets (including the United Kingdom, France, Germany, the United States and Japan); and

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whether the adoption of international accounting standards would be in Australias best interests.

Section 234 - Validity of accounting standards

9.1 Should the AASB, through error or oversight, fail to follow all the procedures associated with the making of accounting standards when it makes or formulates a particular standard (for example, omits to undertake a cost/benefit analysis or fails to have regard to the views of the FRC), the error or oversight will not affect the validity of the standard made as a result of those defective procedures (proposed section 234).

Saving existing standards

9.2 Proposed section 1493 of the Corporations Law is a transitional provision to ensure that accounting standards made by the AASB prior to the commencement of proposed Part 12 continue in operation as if they were standards made by the reconstituted AASB.

Division 3 - Administrative provisions

9.3 Proposed Division 3 of Part 12 of the ASIC Act contains the detailed administrative provisions for the management and operations of the FRC, the AASB, the confidentiality of information and financial matters.

Subdivision A - The Financial Reporting Council

Section 235A - Membership of FRC

9.4 The Minister will be responsible for appointing, by written instrument, the Chairman and other members of the FRC (proposed subsections 235A(1) and (3)). The members of the FRC may appoint one of their number to be the Deputy Chairman (proposed subsection 235A(3)).

9.5 The terms and conditions under which members of the FRC hold office will be determined by the Minister (proposed subsection 235A(2)) and will be set out in the instrument of appointment. Appointments will normally be for three years, although some initial appointments may be for shorter periods to ensure that all appointments do not expire at the same time.

9.6 It is envisaged that the members of the FRC will be drawn from nominations made by the following groups:

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the professional accounting bodies;

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users, preparers and analysts of financial statements;

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governments and public sector entities; and

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regulatory agencies, such as the ASIC and the Australian Stock Exchange.

Section 235B - Annual report

9.1 Proposed subsection 235B(1) provides that, before 31 October in each calendar year, the FRC must give the Minister a report on the operations of the FRC, the AASB and their respective committees and groups during the 12 months that ended on 30 June in that calendar year and the achievement of the objectives listed in proposed section 224. In special circumstances, the Minister may grant an extension of time for the preparation of the report (proposed subsection 235B(2)).

9.2 Proposed subsection 235B(3) requires the Minister to table the FRCs report in each House of the Parliament as soon as practicable after it has been received.

9.3 Proposed subsections 235B(4) and (5) are transitional provisions dealing with the reporting requirements for the year in which the FRC is established. If the FRC is established during the last three months of a financial year, the matters relating to that period of time may be dealt with in the following annual report of the FRC, while if it is established in the first nine months of a financial year, it must prepare a report covering the period from the time of its establishment until the end of the financial year.

Section 235C - Procedure

9.4 The members of the FRC will be able to set the rules under which the FRC operates (proposed section 235C). These rules include the length and form of notice that must be given for meetings of the FRC, the number of members who need to be present to enable a meeting to be held, and the procedures to be used for voting on issues for which a vote is required.

Subdivision B - The Australian Accounting Standards Board

Section 236A - Procedure

9.5 Meetings of the AASB will be chaired by the Chairman or, in his absence, the Deputy Chairman. In the event that the Deputy Chairman is also absent, the members of the AASB may choose one of their number to chair the meeting (proposed subsection 236A(1)).

9.6 Meetings, or parts of meetings, that consider the contents of accounting standards or international accounting standards, must be held in public (proposed subsection 236A(2)).

9.7 Subject to the need to comply with any directions that the FRC may give the AASB about its procedures (proposed subsection 236A(3)), the members of the AASB will be able to set the rules under which the AASB operates (proposed subsection 236A(4)). These rules could, subject to any directions given by the FRC, include the length and form of notice that must be given for meetings of the AASB, the number of members who need to be present to enable a meeting to be held and the procedures to be used for voting on issues for which a vote is required.

Section 236B - Appointment of members of the AASB

9.8 Proposed section 236B sets out the procedures for appointing the Chairman and other members of the AASB.

9.9 The Chairman is to be appointed by the Minister while the other members are appointed by the FRC. The members of the AASB may appoint one of their number to be Deputy Chairman (proposed subsections 236B(1) and (2)). The Chairman holds office on the terms and conditions that are determined by the Minister while the other members hold office on the terms and conditions determined by the FRC (proposed subsection 236B(6)).

9.10 Under proposed subsection 236B(3), a person must not be appointed to the AASB unless they have appropriate knowledge of, or experience in, business, accounting, law or government.

9.11 Appointments to the AASB are to be made in writing and may be for a maximum period of five years, although retiring members are eligible for reappointment. The actual term of appointment, along with particulars of the terms and conditions, are to be set out in the appointment document (proposed subsections 236B(4) and (5)).

Section 236C - Resignation and termination of appointment

9.12 Proposed section 236C deals with the manner in which the Chairman or another member of the AASB may either resign or have their appointment terminated. The independence of the AASB is preserved by strictly limiting the grounds upon which an appointment can be terminated.

9.13 In the case of resignation, the Chairman is required to provide a written resignation to the Minister, while other members are required to provide a written resignation to the Chairman of the FRC (proposed subsection 236C(1)).

9.14 The Minister may terminate the appointment of the Chairman for misbehaviour, physical or mental incapacity or for breaching the terms and conditions of his or her appointment. The Minister must terminate the appointment of the Chairman if the Chairman:

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becomes bankrupt;

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applies to take the benefit of any law for the relief of bankrupt or insolvent debtors;

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compounds with his or her creditors;

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makes an assignment of his or her remuneration for the benefit of his or her creditors; or

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contravenes section 227 (proposed subsections 236C(3) and (4)).

9.15 Proposed subsections 236C(6) and (7) deal with the circumstances in which the FRC may or must terminate the appointment of a member of the AASB (other than the Chairman). These subsections are expressed in terms similar to proposed subsections 236C(3) and (4) and give the FRC the same powers in respect of AASB members as the Minister has in respect of the AASBs Chairman.

Section 236D - Acting appointments

9.16 The Minister will be able to appoint a person to act as Chairman of the AASB during any vacancy in the office of Chairman or at any time when the Chairman is absent from duty (proposed subsection 236D(1)). Similarly, the members of the AASB will also have the ability to appoint one of their number of act as Deputy Chairman during any vacancy in the office of Deputy Chairman or at any time when the Deputy Chairman is absent from duty (proposed subsection 236D(2)). The FRC will also be able to appoint a person to act as a member of the AASB (other than Chairman) during any vacancy in the office of member or at any time when a member is absent from duty (proposed subsection 236D(3)).

9.17 Subsection 236D(1) is primarily intended to ensure that any delegations, functions or powers that can only be exercised by the Chairman of the AASB can continue to be dealt with during any period in which there is either no Chairman (for example, because of death, resignation or expiration of appointment) or the Chairman is absent (for example, because of overseas representational requirements or recreation leave or illness). The other provisions are intended to ensure that the AASB retains the structure and the number of members needed to operate effectively and efficiently.

Subdivision C - Confidentiality

Section 237 - Confidentiality

9.18 Both the FRC and the AASB are required to protect from unauthorised use or disclosure information that is given to them in confidence (proposed subsection 237(1)).

9.19 The bodies may, however, disclose information where such disclosure is allowed by a law of the Commonwealth, is made to enable an authority or a person in a jurisdiction outside Australia perform or exercise a function or power that corresponds to any of the functions or powers of the FRC or AASB, or is made to a body that sets international accounting standards (proposed subsection 237(2)).

9.20 In addition, the bodies may disclose information to the ASIC to facilitate the latters performance of its functions under national scheme laws.

Subdivision D - Financial matters

Section 238 - Application of money

9.21 Proposed section 238 provides that the money of the AASB may only be used for three purposes:

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for paying the costs, expenses and other obligations incurred by the AASB in the performance of its functions or the exercise of its powers;

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for paying the administrative expenses of the FRC and any committees or groups that it establishes;

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for paying the remuneration and allowances of any person appointed under Part 12 of the ASIC Act.

9.22 This provision would cover the expenses of employing research staff and/or consultants.

Schedule 4, Part 3 - Consequential amendments

Australian Securities and Investments Commission Act 1989

Items 1, 3 and 4 - Section 5 (new definitions)

9.23 It is proposed that three new definitions, AASB, FRC and international accounting standards, be added to section 5 of the ASIC Act.

9.24 AASB is used in Part 12 of the ASIC Act as an abbreviation for Australian Accounting Standards Board, the standards setting body established by proposed section 226.

9.25 FRC is used in Part 12 of the ASIC Act as an abbreviation for Financial Reporting Council, the advisory body established by proposed section 225.

9.26 The expression international accounting standards is used in Part 12 of the ASIC Act to refer to accounting standards made by the International Accounting Standards Committee (IASC) (paragraph (a) of the definition). However, the regulations may provide that accounting standards made by another overseas standard setting body are to be treated as international accounting standards for the purposes of proposed Part 12 (paragraph (b) of the definition). Paragraph (b) has been included principally to provide flexibility in the event that the IASC changes its name or another overseas body/standard setter takes over the role of the IASC in developing a set of internationally accepted standards.

9.27 It should be noted that this definition is not an operative provision in the sense that it will be a matter for the FRC, the AASB and the Minister to determine the appropriateness of the international standards for Australia under proposed section 233 before they would become applicable in Australia.

Items 2 and 9 - Section 5 (definitions of Director and Standards Board)

9.28 In conjunction with the repeal of the existing Part 12 of the ASIC Act, dealing with the establishment and operation of the Australian Accounting Standards Board as originally constituted, the definitions of Director and Standards Board are no longer required and, accordingly, are also repealed.

Items 5 and 6 - Section 5 (definition of meeting)

9.29 Paragraph (d) of the definition of meeting, which refers to meetings of the Standards Board, is no longer required and, accordingly, is repealed.

Items 7 and 8 - Section 5 (definition of member)

9.30 In paragraph (a) of the definition of member, the reference to Standards Board is to be changed to AASB. This change is in keeping with the revised drafting style used in the new provisions, where the standard setting body is referred to either by its full name or its initials.

9.31 Paragraph (e) of the definition of member is to be replaced by proposed paragraphs (e) and (ea), which define member for the purposes of the FRC and AASB respectively.

Item 10 - Subparagraph 135(1)(a)(iv)

9.32 This subparagraph, which provides that the moneys of the ASIC may be applied for the purposes of the Standards Board, is to be amended by changing Standards Board to AASB.

Corporations Law

Items 11 and 12 - Subsection 334(3) and section 336

9.33 Subsection 334(3) and section 336 of the Corporations Law (the Law) deal with the AASBs power to make accounting standards of general or limited application and the inclusion of requirements for the disclosure of comparative amounts in accounting standards. These provisions will be repealed when the proposed Part 12 of the ASIC Act comes into operation.

9.34 The matters in current subsection 334(3) will be dealt with in proposed subsection 229(1) of the new accounting standards provisions while the matters in current section 336 will be dealt with in proposed section 230.

9.35 These amendments are designed to bring together, in Part 12 of the ASIC Act, the AASBs general powers for making and formulating accounting standards. As a consequence of these amendments, the standard making powers that are retained in the Law will relate specifically to the AASBs powers to make standards for entities that are required by the Law to prepare financial statements.