Policy
The purpose of this paper is to:
a. set out the Group of 100’s policy on the international harmonisation of accounting standards;
b. explain the development of that policy;
c. outline the reasons underlying the development of the policy;
d. describe the alternative approaches considered in the resolution of that policy; and
e. explain the harmonisation program funded by a levy on listing fees including the CLERP proposals regarding standard-setting arrangements.
The Group of 100’s policy on international harmonisation is that compliance with Australian accounting standards should result in automatic compliance with international accounting standards being those issued by the International Accounting Standards Committee (IASC).
The Group of 100 considered that the development of a uniquely Australian set of standards, while superficially attractive, would eventually result in a loss of credibility of Australian financial reporting as had occurred in the 1980's. An outcome such as this would be to the disadvantage of Australian companies accessing international capital markets because they would be expected to provide information prepared on an internationally accepted basis.
This policy position of international harmonisation was seen as a step towards achieving the long-term objective of a global set of accounting standards which are applicable for domestic and international purposes. Such a set of standards will be:
An important dimension of this policy is that to properly participate in the development of international standards it is essential to the national interest for Australia to have a national standard-setter:
Thus an important element of the policy goal of harmonisation and the engagement of the international community is the enhancement, rather than the replacement, of the national standard-setter.
The Group of 100 policy has been influential in the development of policy of the Australian Accounting Standards Board (AASB) and the Public Sector Accounting Standards Board (PSASB) as reflected in their Policy Statement on International Harmonisation (May 1996). This support is best expressed in the Group of 100 Mission Statement issued in 1994 which committed it to:
In addition, the theme of the Group of 100's National Congresses held in November 1995 (Sydney) and March 1997 (Melbourne) was international harmonisation of financial reporting.
The policy goal of international harmonisation has broad and authoritative support. For example:
a. In 1996 the ASX surveyed listed entities to determine whether they supported a process of harmonisation of Australian standards with IASC standards or the immediate adoption of IASC standards. An overwhelming majority of respondents (87.5%) favoured harmonisation with rather than the immediate adoption of IASC standards. Listed entities also provided strong support for the imposition of a 3% levy on listing fees for 2 years to raise $1 million to fund a harmonisation program.
b. Alan Cameron, Chairman ASC (November 1997):
"The ASC also agrees with the proposal that in the immediate future, Australia should continue to harmonise its standards with IASC standards so that compliance with Australian standards will automatically result in compliance with IASC standards"
c. The Wallis Committee also recognised the importance of participating in these developments:
"Recommendation 12 : Australian Standards should be harmonised with international standards.
' The Australian Accounting Standards Board should, where practicable, seek to harmonise Australia's accounting standards with international standards."
d. In addition the harmonisation program is supported by the professional bodies, the Australian Society of CPAs and The Institute of Chartered Accountants in Australia.
The Group of 100 took the view that standards issued by the IASC represented the best prospect for achieving a globally accepted set of accounting standards in a reasonable time frame. It still holds that view.
This view is also reflected in CLERP Paper No.1 "Accounting Standards: Building international opportunities for Australian business" which states:
"The development of a high quality set of IASC standards, and their adoption by major capital markets, offers the best prospect for the establishment of globally accepted accounting standards" (p24) and
"It is in Australia’s best interests to harmonise Australian standards with IASC standards with a view to adopting them when they have been accepted for reporting purposes in major capital markets (emphasis added)" (p25)
An issue in this regard is what constitutes global acceptance and acceptance in the major international capital markets. Fundamental to the application of this policy is the endorsement of a comprehensive set of IASC standards by the International Organisation of Securities Commissions (IOSCO) for cross-border capital raisings and the resultant acceptance of those standards in international capital markets. In June 1998 the National Executive of the Group of 100 indicated that acceptance in international markets required IOSCO endorsement and adoption by the SEC for cross-border listings and capital raisings (see media release).
In the Australian context, the requirement that the Financial Reporting Council to report to the Minister on the desirability of adopting international standards is an ample recognition of the potential significance of international harmonisation to Australian practice. More recently the draft legislative provisions establishing the Financial Reporting Council (s 2 (2) (e)) state that its functions include:
"(e) monitoring the development of international accounting standards; and
(i) to further the harmonisation of Australian accounting standards with international standards; and
(ii) to promote a greater role for international standards in the Australian standard-setting process if doing so would be in the best interests of investors, business and Australia's capital markets."
In its submissions on the CLERP Paper No.1 on Accounting Standards (October 1997) and on the proposed legislation (May 1998) the Group of 100, while supporting the principle of harmonisation and the role of IASC standards, expressed concern about the dangers of "locking-in" to the timetable and agenda of an external body where Australia was not in control and its flexibility to adapt to changing/evolving circumstances was constrained.
Thus the Group of 100 position is one of strong support for the principle of international harmonisation where to do so does not conflict with Australian legislation. However, in implementing this policy the Group of 100 has indicated to the AASB that where a particular accounting requirement in IASC standards is unsuitable the AASB should first seek a reconsideration of it by the IASC but to ultimately harmonise with the IASC requirement when the IASC standard is accepted in international capital markets.
The Group of 100 views the process as comprising several dimensions and places increasing emphasis on the importance of convergence in the approach to issues by major standard-setters which will result in avoidance of unnecessary differences arising because of differences in the timing of their work programs. The activities of the G4+1 group of standard-setters and cooperation with the IASC in relation to work programs and common approaches to the resolution of issues is seen as an important part of this process. The process of international harmonisation encourages convergence of activities and accounting requirements which itself provides further impetus to a recognition of the benefits of international harmonisation.
The Group of 100 considered a number of alternative methods of achieving its harmonisation objective. These included:
a. "rebadging" IASC standards, discussion papers, draft statements of principles and exposure drafts for issue as Australian standards.
This approach while superficially attractive would mean that financial reporting developments and responses to issues would depend on the work program and agenda of the IASC. It was also seen as limiting the ability to deal with institutional and legal requirements relating to Australian reporting including corporate governance and regulatory issues. While this approach was considered by some as a derogation of sovereignty others considered that such a process, managed appropriately, could accelerate international harmonisation.
The participation by business and other interested partners at the IASC level was seen as being more arduous than at a local level. Greater reliance on an integration of activities with those of the IASC would place substantial additional demands on business and other interested parties. In many cases Australian business would be less influential at the IASC level than at a national standard-setting level because of Australia's relative significance in the world economy. However, this is regarded by many as a reasonable price to pay to achieve a common business language.
The success of the IASC Improvements and Comparability Project has resulted in improvements in the quality of international standards and the replacement of a large number of alternatives with a benchmark and allowed alternative approach. The recent creation of a Standing Interpretations Committee (SIC) now means that there is an authoritative body to deal with diverse interpretations of IASC standards. However, some observers have noted, and expressed concern, that the IASC has recently introduced more options into its standards, for example, accounting for superannuation obligations.
b. Adopting US GAAP
Adoption of US GAAP was seen as an attractive option for those corporates whose securities are listed in the USA or in jurisdictions where US GAAP is accepted. However, this approach was not supported because there are many elements of US GAAP which are unlikely to be acceptable to Australian companies, for example, the ban on revaluations and the detail and breadth of the required disclosures. Further, given the European view that US GAAP was politically unacceptable, IASC standards were considered to be more acceptable in that environment. In the final analysis "political" factors were, and continue to be, such that US GAAP is unlikely to be universally accepted in the same sense that IASC standards were likely to be following the IOSCO endorsement. Thus, while the FASB may be prima facie the international standard setter the political dynamics dictate otherwise.
In this regard the IASC’s experience in attempting to accelerate the development of a standard on the recognition and measurement of financial instruments by the issue of an exposure draft based on US GAAP indicates the difficulties and tensions associated with formally recognising US standards in this way.
Adoption of US requirements would also mean:
c. Adopting a policy that compliance with national standards resulted in automatic compliance with IASs which are accepted in international capital markets.
The choice of this approach is discussed above.
The Group of 100 considered that international harmonisation had the potential to provide the following benefits:
As mentioned above, this program is funded by listed entities through a 3% levy on ASX listing fees. The program provides for an accelerated work program by the AASB (and PSASB) over 2 years to achieve harmonisation such that compliance with Australian standards will result in automatic compliance with IASC standards but not vice-versa. This process has been characterised as involving some pain, for example, different rules on the revaluation of non-current assets and segment reporting and potentially some gains such as the adoption of merger accounting. Australia is the first country with a significant and active national standard-setter to undertake a program of this nature. While other national standard-setters may work closely with the IASC, for example, through the G4 + 1 group of standard-setters, none has implemented the approach adopted by Australia.
The international harmonisation program has the following implications for Australia:
(a) The adoption of some IASC standards on issues where there is no equivalent Australian standard.
The program involves the introduction of standards where there are no equivalent Australian standards, for example, borrowing costs, accounting for superannuation liabilities, provisions and contingencies and intangible assets.
However, concerns have been expressed by the Group of 100 and others about some outcomes of the program for example, the failure in ED 84 "Acquisition of Assets" to propose harmonisation in respect of pooling of interests. The Group of 100 has indicated to the Board that the process of harmonisation will involve a balancing of some benefits (such as harmonisation with some requirements that are not presently permitted in Australia, for example, pooling of interests) and some costs (such as removal of some current practices).
(b) A challenging program of revision and harmonisation with new developments
An important feature of the program is the renovation and refurbishment of the fabric of Australian standards. Many standards which were developed several years ago are in need of care, maintenance and updating, for example, profit and loss statements, inventories, segment reporting, and
extractive industries. This has not occurred because of a lack of resources and new projects being given a higher priority.
The updating of old standards and the filling of gaps in the suite of standards will benefit the preparers and in particular, the users of financial reports.
The harmonisation program and the cooperation between standard-setters, for example, the G4+1, is also resulting in a convergence in the approach to issues which are being dealt with at approximately the same time. Projects on provisions and contingencies, impairment of assets, performance reporting and the recognition and measurement of financial instruments have been initiated during this period.
It is anticipated that an enhanced financial reporting framework resulting from the program will provide more relevant and reliable information for decision making which will result in improvements in the efficiency of capital markets and in corporate governance and accountability.
(c) Effect on domestic standards
Part of the price of globalisation is that the international standard-setter may not give Australian needs and circumstances the same emphasis as would a national standard-setter. As such, in the absence of a strong national standard-setter with a clear brief on the quality of financial reporting and active participation in the development of international standards, there may be some erosion of quality in relation to domestic standards. However, the compensations for this are the benefits to the economy and international competitiveness of a move to international harmonisation which is considered to be unavoidable in a period of globalisation of commerce, technological and financial innovation.
The Group of 100 recognises that IOSCO endorsement of IASC standards is crucial to achieving the benefits of harmonisation with IASC standards and that the views of the US Securities and Exchange Commission (SEC) are first among equals in the IOSCO process. In this regard the SEC is unlikely to participate in an erosion in the quality of financial reporting in US capital markets merely to appease those constituents and other entities who perceive benefits from accepting IASC standards for cross-border listings in the USA. As such the US response is critical. In reporting to the US Congress in October 1997 the SEC stated that:
"At this point it is not clear what the Commission's final decision regarding core Standards will be. Nevertheless, the IASC's efforts to date already have contributed significantly to raising the level of accounting standards worldwide and reducing the number of differences between International Accounting Standards and accounting principles used in the United States. These and other efforts at the International level are encouraging development of accounting principles that have the needs of investors and capital markets as their primary focus."
Speaking at a conference in Brussels in March 1997, Mary Tokar, Senior Associate Chief Accountant of the SEC stated that:
"… broader endorsement [of the IASC process and organisation] of the type the SEC has given to the FASB, is dependent on an oversight role and responsibility for the SEC – a role that is unlikely to be duplicated at the international level."
Arthur Levitt Chairman of the SEC stated in May 1997 that:
"Commission acceptance of international standards is not a foregone conclusion. It bears repeating that while harmonisation is a desirable goal for the US our standards are already accepted in capital markets throughout the world, and their quality is unmatched. We can only accept a framework that will enhance, rather than diminish, the strength and stability of US capital markets".
It is likely to be some time before any endorsement by IOSCO translates into effective action because:
i. IOSCO does not have a normal procedure for endorsement;
ii. IOSCO members are not bound by its recommendations: and
iii. the impact of the SEC's due process and quality requirements on the endorsement process.
In addition, the IASC is now unlikely to have completed its core set of standards by the end of 1998.
While the Group of 100 acknowledges these difficulties it does not believe that their existence should detract from the pursuit of the goals and realising the benefits of international harmonisation.
A number of entities and participants in the process have recently expressed concerns about the approach to harmonisation and the timing of the process. In the main they support the principle of harmonisation but are concerned about;
Addressing these and other concerns provides a challenge to maintaining the commitment to the principle of harmonisation while adapting to the loss of freedom of action and flexibility which have been and, to some extent are a feature of the current environment.
The Group of 100 believes that:
June 1998
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