The Australian and International Regulatory Framework

Could it cost more for an Australian company to raise capital on the global markets because Australian accounting rule makers are not moving swiftly enough to convert to international accounting standards?

The scenario of Australian corporate funding costs rising because our accounting standards are out of line with those of some other countries might become reality, says PricewaterhouseCoopers partner Jan McCahey, if urgent steps are not taken to bring Australian accounting requirements in line with those of the International Accounting Standards Board (IASB).

McCahey, one of Australia’s pre-eminent financial reporting experts, believes the domestic accounting standard setter, the Australian Accounting Standards Board (AASB), needs to move more quickly to ensure there are as few differences as possible between the international accounting standards framework and the domestic literature.

Otherwise, notes McCahey, Australia and its business community will continue to lag behind international developments and be unable to keep in step with the rapid-fire pace at which the London-based standard setter is moving.

“The more telling thing is that companies are doing business globally and to me there is going to be a move to – if you like – an alternative set of recognised accounting standards worldwide. That’s going to be the IASB standards,” says McCahey, who is also a former chief accountant of the Australian Securities and Investments Commission (ASIC). “If you’re not using US generally accepted accounting principles or IASB standards, I think if you were trying to raise money – debt or equity – in capital markets, people are going to ask questions about the quality of your financial reporting,” she says.

Her comments come at a time when the IASB is beginning to challenge the international business community with a steady stream of exposure drafts – two are presently out for public comment – with the end goal of improving financial reporting across all capital markets.

The two IASB exposure drafts that have been the subject of recent AASB invitations to comment are a 404-page potpourri of amendments to 12 international accounting standards and a 337-page tidy-up job on the accounting standards dealing with disclosure, presentation, recognition and measurement of financial instruments.

An “invitation to comment” is the board’s document that summarises the Australian position on the international exposure draft and states the AASB’s intent to bring domestic accounting standards in line with the IASB.

In the case of financial instruments, for example, it would mean Australia would actually have rules in place dealing with the recognition and measurement of financial instruments. There’s nothing in the Australian literature that deals with forcing fair value accounting for derivatives, nor is there anything substantial in accounting standards regarding the derecognition of financial assets or financial liabilities.

That general strategy of engaging with the IASB in developing and exposing proposals is a good thing, McCahey asserts, but the domestic accounting authority needs to do much more to bring forward the implementation of IASB standards in Australia. She wants a firm resolve from the standard-setter to set actions in train so Australian companies will be able to say their financial statements comply with international standards by a specific target date – such as the European implementation deadline of January 2005. In this way, companies will not be left in a position where they will be penalised through no fault of their own for complying with a set of accounting pronouncements that are neither understood by nor relevant to groups or individuals making decisions related to investing.

That January 2005 date is one favored by Senator Ian Campbell, the Parliamentary secretary to the Treasurer, and also one that has been endorsed by the Financial Reporting Council, the AASB’s oversight body, as the adoption date for international accounting standards in a recent release.

“It seems to me that it goes without saying that we as a country must move to international accounting standards because otherwise, by the years 2005 and 2007, you are going to have the US doing their accounting in accordance with US standards, a very large number of companies in Europe on IAS, much of Asia on IAS and for us to be doing something different is going to be a problem,” says McCahey, who is also a former director of accounting standards at the Australian Accounting Research Foundation.

“It’s going to be a problem for corporates because, if there are two established reporting frameworks, anybody that is not reporting in accordance with either of those frameworks will incur a higher cost of capital.”

Analysts and other users of financial statements will be focusing on trying to understand two kinds of accounting frameworks, and McCahey believes companies could find themselves facing rather uncomfortable questions from market participants if they are reporting under a set of accounting rules that is not emanating from the London-based IASB or the US Financial Accounting Standards Board.

“People are going to gear up for understanding IAS and understanding US Generally Accepted Accounting Principles (GAAP). Companies preparing accounts not in accordance with either of those frameworks will have questions asked of them about what the differences are and why they aren’t doing it. There is going to be this presumption that the reporting they are adopting is of a lower quality. That will be the presumption whether that’s a fact or not.”

McCahey is nothing if not consistent. Her concerns about Australia’s lagging behind the IASB’s literature were expressed before she departed her former role as ASIC chief accountant in November 2000. Nearly two years later, the outstanding gaps that existed at the time she made her concerns known remain.

Australia has often prided itself on having a quality set of accounting standards, she explains, but the fact that Australia does not have accounting standards in significant areas such as the recognition and measurement of financial instruments and pension or superannuation accounting makes that claim less credible the longer these gaps remain.

When the earlier program to harmonise Australian accounting standards began in 1996, the AASB’s objective was to ensure that compliance with Australian accounting standards meant compliance with the material produced by the then International Accounting Standards Committee (IASC), which was the IASB’s predecessor body. That process was designed to exclude the options contained in those accounting pronouncements that were considered to be counterproductive to the objectives of standardisation and good financial reporting.

This all took place at a time when the international standard setter did not have as complete a suite of accounting pronouncements as it has now.

“At that stage, there wasn’t nearly as big a gap between IAS standards and Australian standards as there is now,” McCahey explains. “Over that period the IASC issued a whole lot of new accounting standards – standards on tax, impairment, provisions, financial instruments. All of those things came out of that process. It is to me imperative that we move to closing the gap. I don’t really care how we do it, to be honest. I just want it done.”

Each of the issues that are on McCahey’s list of gaps that need filling have been on the AASB’s agenda at one time or another. Accounting for intangible assets and pension accounting were issues on which the AASB failed to promulgate standards a decade ago, and they have been the proverbial millstone around the neck of the standard setters ever since.

“Those matters are all on issues the board has had difficulties dealing with over time so they are not going to be quick fixes. If we don’t bridge those gaps quite quickly we will be finding ourselves with very major gaps in our standards with comparison to the IASB for a very long time,” she asserts.

“If you compare Australian standards with them, we have gaps in a number of areas. Sure, we have a standard on extractive industries and the IASB doesn’t, but we don’t have a standard on the recognition and measurement of financial instruments. We don’t have a robust impairment test. We have a very small number of issues in the area of accounting for intangibles that are covered. We don’t deal at all as extensively with intangible assets accounting as the IASB series of standards do. They are just four or five topics that really need to be fixed.”

Another concern McCahey outlines is the need for clear communication of the board’s strategy to the community in general. A clear target date for convergence with IASB pronouncements would ensure companies and others would understand the need to respond to documents that have been exposed fairly quickly because there is a set deadline to which the AASB would be working.

A specified date would also ensure that the business community in general would have some degree of accountability from the board in relation to a timetable for the delivery of an outcome.

“If you expose certain proposals and your constituents understand that you need the feedback quickly because you’re trying to get a standard in place to meet this deadline, then they are going to be more comfortable about acceding to that than they would be if they believed we had another 20 years to get there,” McCahey says.

“The IASB has issued the document on improvements recently. It isn’t going to be the last document they will be issuing for three years, so we can get [the gaps in financial reporting rules in Australia] sorted out. Their next project will come out and the next one and so forth. We have so much to catch up on here before we even really start to think about doing these other things that are amendments to existing IASB.”

Keeping up to date with current developments at an international level is one challenge. Implementing existing literature that is in line with both IASB and FASB pronouncements is another. McCahey points to the recent deferral of the tax effect accounting standard by the AASB as an example of where Australia could have taken one step closer to having practical convergence with international standards.

That standard’s implementation or effective date was deferred, according to the AASB, in order to ease the burden of compliance that companies were facing because the same implementation date – July 1 – applied to both the tax effect accounting standard and the Federal Government’s tax consolidations regime.

Deferring the tax standard could not be justified, McCahey notes, in an environment where implementation of standards that lined up with the convergence objective was being done to a set timetable. “If you had expressed a target date it would be pretty clear to you – you would have set your own perimeters – that you couldn’t push out implementation dates willy-nilly if you were trying to achieve convergence by a particular date. It imposes a discipline on you, an accountability. And I think it’s an accountability the community probably deserves,” McCahey argues. “Each month we are not doing anything to get there, is a month less for us to do the work. We are running short of time.”

There may be a need for the AASB to change the way in which it goes about setting standards in order to have some type of speedy implementation. The present process appears to be moving too slowly and it might be time, McCahey suggests, to opt for some radical changes to processes.

One idea she places on the table is that the AASB could get a sub-committee of the board to deal with domestic issues while the board itself gets on with the international agenda. Another is for the AASB to propose the introduction of a number of IASB standards in separate tranches over the next few years in order to bring some closure to the present lack of completeness and, indeed, lack of comparability between parts of the Australian and IASB material.

“Sometimes the environment is such that you need to make some changes to the way you do things,” McCahey reflects. “Even if these things were successful in the past. We just have a long way to catch up.”

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