22 August 2011

Dear Sir/Madam

Considering the Effects of Accounting Standards

The Group of 100 (G100) is an organization of chief financial officers from Australia's largest business enterprises with the purpose of advancing Australia's financial competitiveness is pleased to provide comments on the discussion paper.

The G100 supports efforts to foster debate on the role that consideration of the economic and social effects/consequences should perform in the development of accounting standards. In this regard the G100 believes that the formation of the IASB's Due Process Oversight Committee and the inclusion of effects as part of its mandate is a welcome development.

While embedding an effects analysis as an integral component of standard setting it is important that the assessment of the outcomes of the effects analysis does not lead to an 'opinion poll' approach to standard setting or to a paralysis in decision making as a result of meeting increasingly bureaucratic requirements.

In the final analysis the standard-setter must make a judgment on the basis of the circumstances and facts available to it, including the results of effects analysis consistent with its mandate. In the case of the IASB this is to develop and maintain a set of globally accepted high quality financial reporting standards.

The process of effects analysis

The G100:

1. agrees with the definition of 'effects analysis' as a general description of a process. We consider that, in practice, the formal stages of the effects analysis should be a matter of judgment for the standard-setter taking account of the nature of the project.
   
   
2. agrees that effects analysis should be an integral part of the standard setting process but should not lead to unnecessary bureaucratic burden for its own sake;
   
   
3. agrees that the standard-setter should have the responsibility for undertaking effects analysis. However, this should not preclude the standard-setter engaging consultants and involving other standard setters and regulators to perform effects analysis;
   
   
4. considers that requiring an effects analysis at each stage of the life cycle of a project is likely to impose significant bureaucratic burdens on the standard-setter. The G100 considers that an effects analysis should form part of a project agenda proposal and should be undertaken as early as practical in the project.

Where a project seeks to replace an existing standard, the effects analysis should be able to identify short comings with the existing standard and then assess whether early proposals for change will remedy the shortcomings. However, the timing of an effects analysis may differ from standard to standard, with the latest practical date being an effects analysis undertaken while the exposure draft is current. The IASB should be prepared to abandon, or substantially change, its project, should the effects analysis demonstrate that the benefits from a new or changed standard are marginal. We also believe that an effects analysis updating that which is undertaken at the exposure draft stage should accompany the final standard. In addition, a post-implementation review of new standards on major projects and major amendments should be undertaken after the changes have been in effect for at least two years;

e. considers that a full-scale effects analysis should be required for major projects and amendments and that it be a matter for the judgment of the standard for other projects. However, an effects analysis should be part of an agenda proposal for all new standards. We believe that this approach will result in a focus of effort on major projects and enhance consideration of agenda proposals without imposing unnecessary bureaucracy;

f. suggests that investor input to the effects analysis is paramount. Should investors not take the time to respond to questions on the effects of new or changed standards, this may suggest that the change is not required by the investor community, and should therefore be reconsidered.

The concept of "effects"

The G100:

1. agrees that 'effects' should be defined and that the proposed definition in terms of serving the public interest with improved financial reporting provides a reasonable basis for assessing 'effects'. However, the interpretation of the 'public interest' is problematical. Identifying the public interest is likely to be easier to capture for a domestic/national standard-setter than for an international or regional standard-setter where there may be several 'publics'. Potentially, based on the mission of the Foundation, the public interest could be reviewed by considering the response of investors to the proposed changes;
   
   
2. considers that use of the term 'effects', 'consequences' or 'impacts' is preferable to 'costs and benefits' which implies the application of cost benefit analysis. While elements of cost benefit analysis may be appropriate in some circumstances we do not believe that it is appropriate for its application to become embedded as an integral requirement. This is particularly the case in setting accounting standards where qualitative factors are significant;
   
   
3. agrees in principle that the analysis of effects in agenda proposals and exposure drafts should include all the anticipated effects. Where an objective of standards is the improvement of financial reporting to contribute to better allocation of resources it would be inconsistent not to include macroeconomic effects in an analysis. However, awareness of potential macroeconomic effects should not lead to an expectation that quantification is required;
   
   
4. agrees that where an effect is outside its remit, for example, a public policy or macroeconomic effect, the standard-setter should notify/communicate with the relevant regulator or government body.
   
   However, the standard-setter is not in a position to require/expect the body advised to respond appropriately. In these cases how is the standard-setter to react if it does not consider the response appropriate?
   
   
5. believes that 'effects' should be defined by reference to an objective such as that identified in (a) above;
   
   
6. considers that:
   i) effects can be positive, negative or neutral and each type should be identified in an effects analysis;
   ii) in most circumstances the effects analysis would normally identify incremental/marginal effects. However, the identified effects should include the impact of proposed changes on other accounting standards or other requirements; and
   iii) the effects analysis in agenda proposals, exposure drafts and final standards should be the anticipated effects while the actual effects should be identified in the post-implementation review and compared with the anticipated effects.
   
   
7. The effects analysis should involve consideration of who is affected and how they are affected. In addition, the standard-setter should be explicit in stating why it has given more weighting to the effects on one group in preference to another. This is likely to be more transparent where the identified effects are classified according to their potential impacts.

The key principles underpinning effects analysis

The G100:

1. agrees that it would be preferable for a set of key principles to underpin the effects analysis;
   
   
2. considers that the items recognised as principles are not in essence principles. Rather these items explain the key steps in, and characteristics of, the process involved in undertaking an effects analysis. The G100 agrees that while these are appropriate steps in the process they should not be asserted to be principles
   

The practicalities of performing effects analysis

The G100:

1. considers that applying the processes and actions outlined in Section 5 would consume significant resources on the part of the standard-setter and would introduce the risk that the effects analysis will consume more resources than the technical development of a standard. We suggest that these steps be regarded as guidance to the standard-setter for consideration in exercising its judgement of an effects analysis. The exposure of the provisional analysis in para 5.2(d) would normally be prepared as a component of an agenda proposal and public consultation should occur at that stage;
   
   
2. agrees that the decision on the nature and extent of the effects analysis is a matter for the judgement of the standard-setter. In the case of the IASB while it has the responsibility for the effects analysis process, it should be able to delegate tasks to national standard-setters and/or consultants and other bodies.

Next steps

The G100 has no objections to the proposed steps to progress the proposals. However, before this occurs we suggest that the outcomes of the project should be considered by the IFRS Advisory Council and the IASB's Due Process Oversight Committee.

Yours sincerely
Group of 100 Inc

Peter Lewis
President