Converging Australian accounting standards to international standards AICD Review

January 1, 2005 is the target date for the adoption by Australia of international accounting standards. AASB chairman Keith Alfredson backgrounds progress towards this aim.

The Australian Accounting Standards Board has had a policy of international harmonisation of accounting standards since 1996. Fundamental to the 1996 policy was the board's decision to not fully conform AASB standards with international accounting standards where it was considered that the quality of AASB standards would be compromised. Accordingly the general thrust of the 1996 policy was to work towards ensuring that compliance with AASB standards would result in compliance with international standards, though the reverse would not necessarily be the case; for example, AASB standards would not allow certain alternative accounting treatments available under international standards or an AASB standard may require more specific disclosures than an international standard. The AASB has published The Australian Convergence Handbook that identifies non-conformities between AASB and international standards as at January 2002. This harmonisation process was undoubtedly fruitful from Australia's viewpoint as it increased the quality and comprehensiveness of AASB standards. However the process did not achieve the contemplated benefits of the harmonisation policy as a similar policy was not mirrored by other major national standard-setters such as those from the USA, Canada and the UK and international standards continued to be unacceptable, without reconciliation, in the US capital market. Still today there does not exist a set of high quality global accounting standards supported by the national standard-setting bodies and corporate regulators around the world. However, with the reconstitution of the former International Accounting Standards Committee in 2001 as the International Accounting Standards Board (IASB) with 12 full-time and two part-time members, under the leadership of Sir David Tweedie and with the decision of the European Union (EU) to require publicly-listed entities to prepare consolidated financial statements in accordance with IASB standards by the financial year commencing 1 January 2005 (2007 for certain entities that are foreign registrants in other countries), there is a real possibility that IASB standards will in due course achieve the status of high quality global accounting standards. This possibility is further supported by the decision of various Asian countries (including China and Singapore) to work towards adopting IASB standards.

In the process of establishing the IASB, Tweedie recognised that the effectiveness of the IASB in achieving its objective of producing a single set of high quality global standards is largely dependent on the ability of the IASB to influence the major national standard-setters. He therefore called for a partnership among the major standard-setters to facilitate the work of the IASB and to achieve the convergence of national standards towards the IASB standards. The national standard-setting bodies of Australia, Canada, France, Germany, Japan, New Zealand, United Kingdom and USA were invited to join the partnership. An IASB member has been given special liaison responsibility with each of these bodies. Tweedie requested that each liaison standard-setting body align its work program with that of the IASB and participate with the IASB on projects, with the objective of eventual convergence of the national standards with IASB standards. Liaison meetings are conducted regularly with the chairman (or other representative) and technical director of each of the liaison standard-setters.

AASB's response

The AASB's response to date have been:

• Issue of the updated Policy Statement 4 "International Convergence and Harmonisation Policy" that reflects the workings and intention of the IASB international partnership.

• Alignment of the work program of the AASB with that of the IASB and participation in and monitoring of key IASB projects of prime relevance to Australian standard-setting. There are of course public sector and other domestic issues that require attention.

• The IASB member with liaison responsibility for Australia (Warren McGregor) has been given participating observer status at AASB meetings. He is a regular attender.

• The AASB is spending increasing amounts of board time deliberating on the tentative decisions reached by the IASB on key issues. For example, much board time has been spent on the IASB's Business Combinations (including Intangibles) Phase I project.

• The AASB has been communicating on certain decisions of the IASB on which the AASB has an alternative view. These communications have related to both the Business Combinations project and the Financial Instruments project. The IASB has acknowledged and welcomed this contribution by the AASB.

• The AASB as been accepted as a partner with the IASB on the project designed to improve the IASB standard dealing with employers' accounting for the cost of defined benefit superannuation plans. This is a high priority IASB convergence project. The improved IASB standard will be used to fill this important gap in current AASB standards.

• In May 2002 the AASB issued an invitation to comment on the IASB's exposure draft that seeks to improve 12 of the existing international standards. The AASB invitation asks Australian constituents to respond to the IASB with copies to the AASB, as it is the AASB's intention to converge the Australian equivalent standards with the final improved standards. To influence the Australian output, AASB constituents must influence the IASB result.

• In June 2002, a similar invitation to comment was issued by the AASB on the IASB's exposure draft that seeks to improve IAS 32 "Financial Instruments" and IAS 39 "Financial Instruments: Recognition and Measurement". The AASB's present intention is to issue the final improved IASB standards as Australian exposure drafts. Again, to influence the Australian output, AASB constituents must influence the IASB result.

• Later in 2002 the AASB will issue an exposure draft on business combinations and intangibles to mirror an IASB exposure draft. That draft will include proposed standards for the recognition of identifiable intangibles, the conditions under which intangibles may be revalued, the non-amortisation of goodwill and intangibles with indefinite lives and specific standards for the impairment testing of goodwill. That exposure draft will be progressed by the AASB in the same timetable as the IASB.

• These projects will be followed by projects on share-based payments, improving the statement of financial performance, accounting for insurance contracts, second phase business combinations project and consolidations (including accounting for "dual-listed entities"), and revenue and liability recognition. Timetable for final convergence The Financial Reporting Council (FRC), the oversight body of the AASB, which among other functions has the responsibility (under Section 225 of the Australian Securities and Investments Commission Act 2001) for determining "the AASB's broad strategic direction" recently announced that "the FRC has formalised its support for the adoption by Australia of international accounting standards by 1 January 2005."

This date was adopted by the FRC after having regard to the decision by the European Union to require all publicly listed entities incorporated within the EU to prepare consolidated accounts in accordance with IASB Standards by financial years commencing 1 January 2005, (2007 for certain entities that are foreign registrants in other countries). The AASB is in the process of reviewing its due process procedures and work program in the light of this 2005 objective. Whether this date can be achieved of course depends not only on the AASB, but significantly also on the ability of corporates (including boards of directors and audit committees), accounting firms, regulators and others to cope with the change. Educational and professional development resources may well be strained. Of course all the required effort will be to little avail if the ultimate result is not high quality understandable enforceable standards that are recognised globally and which assist in the efficiency of the capital markets.

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