24 June 2005

Dear Sirs

Invitation to Comment
Memorandum of Understanding
The Role of Accounting Standard-Setters

The Group of 100 (G100) is an organisation which represents the views of chief financial officers of major business entities in Australia. The G100 supports the initiative to establish a Memorandum of Understanding and agrees with the underlying approach taken in the document.

Our specific comments are set out below:

1. Interpretations

The G100 considers that the process for developing interpretations of IFRSs is the most significant on-going issue. Experience to date has been that the IFRIC processes have been inflexible and cumbersome in responding to the need for Interpretations, particularly in the transition process. However, we are heartened by some recent changes in IFRIC processes to respond to needs of preparers.

The G100 believes that, ideally all interpretations of IFRSs should be developed by IFRIC in order to provide clarity and certainty as to whether a pronouncement is IFRS compliant. In this regard it is important to separate the issues arising in the transition process from the ongoing process of interpretations guidance.

The dangers and pitfalls of designing process to respond to a short-term peak in demand should be recognised and avoided. While it is important to develop processes to deal with ongoing needs that process should not be impaired when seeking to resolve short-term problems.

We acknowledge that IFRIC may not have the resources to deal with such matters on a timely basis and agree that, in certain limited circumstances, it may be appropriate for national bodies, either separately or in combination, to prepare interpretations of IFRSs. However, in these circumstances such Interpretations by a national standard-setter become part of IFRS GAAP and achieve status by way of the hierarchy in IAS 8 ‘Accounting Policies, Changes in Estimates and Errors’.

In order to provide clarity and certainty the G100 believes that Interpretations prepared on this basis should be reviewed by IFRIC to provide preparers with the assurance of IFRS compliance. A protocol to achieve this and avoid the development of a body of interpretations that are potentially non-IFRS compliant is the most significant challenge.

The design of a robust and responsive long-term process including review as outlined above, should be sufficient to avoid those situations where a national standard-setter feels obliged to deal with an issue because IFRIC is unwilling or unable to do so in a timely fashion.

The transparency of the process of dealing with requests for Interpretations and efficiency in identifying relevant issues would be enhanced if the proposed data base of issues was publicly available and the IFRIC Agenda Committee is required to address issue proposals in a specified timeframe.

2. Communication with Constituents

While not detracting from an entity being able to convey its views on issues directly to the IASB we believe that national standard-setters can play an important role in presenting views of their constituents to the IASB.

It is important that the national standard-setter achieve an effective two-way dialogue with its constituents in order to formulate its own views on IASB proposals but to also reflect on the views and concerns of its constituents. By doing so the national standard-setter can engage the IASB in a constructive manner.

However, conveying views through the national standard-setter, which in reaching its views will consider those of all of its constituents, should not be regarded as replacing direct communication with the IASB.

In this regard it is important for the national standard-setter and its constituents develop processes to facilitate this two-way dialogue and to ensure its ongoing effectiveness.

3. Project Role of National Standard-Setter

The G100 strongly supports the involvement of national standard-setters in undertaking/participating in projects on behalf of, and in conjunction with, the IASB. We consider that this involvement will demonstrate that the IASB’s processes are inclusive and fosters the development of broadening the skill base internationally. This process is also likely to reduce the time between including a project on the work program and the delivery of an IFRS. However, it is incumbent on the IASB and the national standard-setters to establish appropriate project timetables for these projects, and to ensure that participation is supported with adequate resources so that projects are developed in a timely manner.

In addition, we have the following broad concerns:

• the MOU is either the basis of agreement between the IASB and national standard-setters that adopt it or it is used as the basis of separate agreements depending on the circumstances and the nature of the relationship between the IASB and a particular national standard-setter. It is not clear from the proposals whether the Norwalk Agreement relating to the short-term convergence of IASB and FASB requirements is a separate arrangement or is within the scope of the MOU; and
   
• the MOU appears to be written from the perspective of the role and responsibilities of the national standard-setters to the IASB but does not appear to address the role and responsibilities of the IASB to national standard-setters to the same degree.

From an Australian perspective, the benefits of adopting IFRSs will be eroded if companies are not able to make a statement that the financial statements are IFRS compliant. In view of the importance of being able to do so the G100 believes that IFRSs should be adopted without amendment of the substantive requirements, such as optional treatments in IFRSs, when preparing the Australian equivalent. Where IFRSs are modified, irrespective of how minor the modification appears, the possibility of non-compliance arises. The potential for such non-compliance is inimical to achieving the objectives of the Year 2005 strategy.

Yours sincerely

Tom Honan
National President