Trans-Tasman Accounting Standards Advisory Group
Report to Ministers
The Trans-Tasman Accounting Standards Advisory Group (the Group) met on three occasions in 2004 and has pursued a work programme over the past 12 months covering the following issues:
- aligning Australian and New Zealand financial reporting standards;
- the legal framework governing financial reporting in each jurisdiction;
- cross-appointments between Australian and New Zealand standard-setting and oversight bodies;
- regional engagement to influence the development of international standards; and
- the possible move to joint institutions for standard-setting and oversight.
In 2005 the main priorities of the Group will be to:
- consider closer cooperation and harmonisation between the countries in any proposals for reform of the financial reporting framework;
- work with neighbouring countries on closer cooperation on accounting standards issues including the hosting of a regional conference on International Financial Reporting Standards (IFRS) in the second half of 2005; and
- report back to Ministers at the end of 2005 on outcomes of the work of the Group.
On 30 January 2004, the Australian Treasurer and the New Zealand Minister for Finance announced the formation of the Group. The announcement was made in the context of the business regulatory environment becoming an increasing focus for the Closer Economic Relations (CER) framework that has assisted to develop the Australia/New Zealand relationship since 1983. The Memorandum of Understanding (MoU) on the Coordination of Business Law, signed by the two Governments in 2000, and the special Ministerial forum held in August 2003 to mark the 20th anniversary of CER, affirmed the commitment of both Governments to increase trans Tasman business activity including by harmonising accounting standards.
The formation of the Group reflects an increased interest in trans-Tasman cooperation across a number of different areas and recognises the benefits to be realised from increased trade and capital flows across the Tasman. Many large companies listed on Australian and New Zealand exchanges operate directly or via subsidiaries in both countries. Trans-Tasman trade and investment are important drivers of economic growth in both countries. This is reflected in figures such as the following:
- Australia is the largest foreign investor in New Zealand, with about A$29 billion of direct investment.
- New Zealand has approximately A$18 billion invested in Australia; it is the second largest destination for New Zealand investment.
- Trade between the two countries has increased by an average of around 9 per cent per annum over the past decade.
- Australian exports to New Zealand now exceed A$8 billion annually, while New Zealand exports over $5 billion annually to Australia.
The overriding goal of the Group is to advise the respective Governments and accounting standard-setters on ways to reduce business costs and improve efficiency through identifying inconsistencies in the accounting standard-setting framework and assisting the move to a single approach to accounting standard-setting to apply in both jurisdictions. The other major goal of the Group is to enhance the influence of the two countries in the development of international accounting standards.
Terms of Reference
The Group was given the task of providing advice under four broad headings:
- Standard-setting – advice primarily to the oversight and standard-setting bodies on achieving greater coordination and information exchange between the countries, including how to progress the alignment of Australian and New Zealand financial reporting standards in light of the adoption of international accounting standards;
- Policy coordination – advice primarily to the Australian and New Zealand Governments on the broader policy and legal framework for financial reporting, with a view to ensuring that, where appropriate, a consistent approach is taken to the application, monitoring and enforcement of standards;
- Joint institutions – advice primarily to the Australian and New Zealand governments on the specific institutional arrangements that might be established over time to ensure that the objective of a single set of trans-Tasman accounting standards is achieved and maintained effectively and efficiently; and
- International influence – advice to both the Australian and New Zealand Governments and to the oversight and standard-setting bodies on strategies to maintain Australia’s and New Zealand’s influence in the development of international accounting standards through involvement with the International Accounting Standards Board (IASB) and other relevant fora.
Membership and Administration
Membership of the Group includes representatives from the Financial Reporting Council (FRC), Australian Accounting Standards Board (AASB), New Zealand’s Financial Reporting Standards Board (FRSB) and Accounting Standards Review Board (ASRB), the professional accounting bodies, and officials from the Australian Treasury and the New Zealand Ministry of Economic Development.
The Group met in May, September and December 2004. In addition, New Zealand and Australian representatives met separately earlier in the year. It is anticipated that the Group will continue to meet approximately quarterly. The next meeting has been scheduled for 21 February 2005. The Australian Treasury representative is the founding Chairman of the Group.
Information on the Group’s work has been placed on the websites of the FRC and the ASRB.
3. Major Issues Considered by the Group
(a) Alignment of Australian and New Zealand financial reporting standards
The Group has been examining the consistency of financial reporting standards and the level of coordination between the standard-setters in the two countries. The Group recognises that the adoption by both countries of International Financial Reporting Standards (IFRS) has already led to a substantial degree of harmonisation. However there are a number of differences in the content of similar standards applying in Australia and New Zealand, and the Group has been examining the extent and causes of those differences. The Group considers that it would be desirable to minimise those differences following the adoption of IFRS as a way of facilitating trans-Tasman business activity.
Extent of Differences
The FRSB compiled an analysis of differences between New Zealand equivalents to IFRS and Australian equivalents to IFRS and presented this to the Group. The analysis outlined the additions and amendments made when adopting IFRS in each country and provided comments on those differences. The document effectively sets an agenda for the standard-setters to work through the standards and where possible remove the differences that have been identified.
It was noted by the Group that although both countries were adopting the same international standards, some differences would exist when implemented in each jurisdiction for the following reasons:
- legislative and regulatory differences between the countries;
- additional domestic disclosure requirements;
- Australia providing its own guidance to IFRS whereas New Zealand was largely relying on the guidance provided by the IASB; and
- the different approaches to financial reporting for public sector entities.
Future work on alignment
In the short to medium term, the Group considered that it would be desirable for the AASB and FRSB to continue their work to align the standards as far as practicable. Both Boards have been working to remove existing differences and as a result there is already significant convergence in the standards applying in both jurisdictions.
As a way of ensuring consistency in the ongoing development of the standards, the Boards have taken steps to align their meeting agendas and examine each other’s draft standards. Other initiatives designed to promote the development of consistent standards in both jurisdictions include cross-appointments to each of the Boards and a proposed protocol between the FRSB and AASB to be used when working through each standard.
In the longer term, the Group concluded that further progress towards a common trans Tasman market in relation to accounting standards would require the better alignment of financial reporting frameworks. This issue is discussed further in section 3(b).
Survey of Companies
The Group sought the views of Australian and New Zealand companies on the practical difficulties which arise in the trans Tasman market from differences in the financial reporting requirements. The Chairman of the Group consulted with the President of the Group of 100 Inc in Australia. Similarly, a survey of companies in New Zealand was undertaken by the ASRB.
The comments received from businesses in both jurisdictions broadly indicated that the different requirements were manageable and did not give rise to significant costs. While there was clear support for consistent standards, survey respondents considered that there were a range of other issues, such as taxation, the broader investment regulatory environment, and industrial relations issues, which were a greater impediment to the expansion of trans-Tasman business. These issues lie outside of the Group’s remit. The Group was of the view that the responses indicated a general satisfaction in the extent to which the standards are aligned. Consequently, a focus of the Group will be on measures required to maintain that alignment. These are discussed further in section 3(b). The Group intends to continue consultations with business during the course of this work.
(b) Policy and legal framework for financial reporting
The Group considered that the differences in the broader framework governing financial reporting in both jurisdictions were the main impediment to the complete alignment of financial reporting standards.
Currently Australia and New Zealand have different legislative frameworks governing financial reporting. While the frameworks may be broadly comparable, there are differences in key requirements such as which entities need to prepare financial reports, the status of accounting standards and the coverage of auditing standards. In addition, the two countries have different approaches to public sector financial reporting. These issues will need to be considered when looking at how to achieve greater alignment in the frameworks.
The Group is proposing that a detailed analysis of the legal frameworks be undertaken, with a view to advising each Government on options for change, including any necessary legislative changes.
The Group noted that New Zealand is currently undertaking a review of its Financial Reporting Act (FRA) and that this may present an opportunity to achieve greater consistency in the frameworks. In November 2004 New Zealand’s Ministry of Economic Development released a discussion document outlining possible institutional and enforcement arrangements for financial reporting. This document proposed that the existing ASRB be reconstituted with an increased range of functions, including the power to issue determinations, interpretations and exemptions. As such, the ASRB’s powers would be similar to those of the AASB and FRC in Australia and would promote greater consistency and coordination between the two countries. The main difference between the New Zealand proposals and Australian institutional arrangements is that the ASRB’s functions would cover the strategic oversight function performed by the FRC and the standard-setting function performed by the AASB.
The discussion document also proposes that New Zealand adopt similar criteria to Australia in determining whether a company has financial reporting obligations. New Zealand is looking at implementing a similar test to the small / large proprietary companies’ regime, although with higher numerical thresholds for differentiating large from small.
The review also considers a number of provisions related to the mechanics and practicalities of financial reporting. In relation to the setting of auditing standards and the regulation of auditors, the review takes account of the recent changes under the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9) and also seeks first-principle views on the regulation of auditors. The Group will provide comments during the public consultation phase from the perspective of trans-Tasman markets.
The Group has noted that in the longer term, consideration should be given to interpretations and enforcement in each jurisdiction as these also impact on the degree of consistency of the legal frameworks. Following the analysis of the differences in the legal frameworks, each country will be in a better position to consider interpretation and enforcement issues. It is anticipated that this will occur during 2006.
(c) Joint institutional arrangements
The Group was asked to consider the specific institutional arrangements that might be established over time to ensure that a single set of trans-Tasman accounting standards could be achieved and maintained.
It was noted by the Group that the current institutional arrangements operating in the two countries were significantly different and could not easily be integrated into a common institution at present. In the two countries, different boards and bodies are responsible for different aspects of the financial reporting process, such as standard setting, oversight, enforcement, interpretations and exemptions. The New Zealand arrangements also see far greater involvement of the profession in standard setting. In addition Australia has a broader focus than New Zealand and since the CLERP 9 reforms, the FRC has had responsibility for the oversight of audit standard-setting and auditor independence arrangements in Australia. In New Zealand, these matters are dealt with partly or entirely by the profession.
The Group considered that in the short term, the priority should be on achieving greater coordination among the current standard-setting and oversight bodies in both countries. This would result in some clear outcomes by facilitating the operation of companies in the trans Tasman market. The Group noted New Zealand’s review of its Financial Reporting Act which proposes measures that, if implemented, would better align the functions performed by institutions in the two countries.
The Group noted that in a number of other areas, such as therapeutic goods administration and food standards, Australia and New Zealand had been able to achieve common institutional arrangements. These could serve as models for joint institutional arrangements for the setting of accounting standards.
The attendance of the accounting standard-setters at each other’s meetings was considered an important way of aligning work agendas and ensuring consistency in the development of standards. The Group noted that informal arrangements were well under way and that the Chairmen of both the FRC and ASRB attend each other’s meetings. In addition the FRSB Chairman has been attending meetings of the AASB and the AASB Chairman intends to attend meetings of the FRSB in the near future. While cross attendance at meetings of standard-setting bodies and the FRC had become more extensive, the Group noted that the move to align standards would be enhanced if these arrangements were formalised.
Currently, processes are in train to appoint a New Zealand representative to the FRC and an Australian representative to the ASRB. Both of these are ministerial appointments. The Group also recommended to the AASB and FRSB that they institute similar arrangements for the cross-appointment of the respective Chairmen.
At the FRC meeting on 6 December 2004, the Chairman of the FRSB, Ms Joanna Perry, was appointed to the AASB for a one-year term commencing on 1 January 2005. It is anticipated that the appointment will be extended depending on the institutional arrangements in place in New Zealand at the end of 2005. It is also anticipated that other cross-appointments will be in place in early 2005.
(e) Australian and New Zealand influence on the development of international accounting standards
Australia and New Zealand have traditionally had considerable success at influencing the international accounting standard-setting debate. This has been achieved through significant involvement in bodies such as the G4+1 and the IASB. Both countries have provided high quality technical input into such fora and are recognised as having high quality domestic accounting standards.
There have however been increasing concerns within the business community and the standard-setters that the level of influence is diminishing with the emergence of large regional blocs such as the EU which have become more persuasive in the standard-setting process. In addition, moves by the IASB to strengthen the role of the US Financial Accounting Standards Board in IASB projects have also given rise to concerns about the capacity of individual jurisdictions to influence IASB standard-setting.
Overall, there are now a number of countries that have a strong interest in the development of IASB standards and many are looking at ways to exert more influence in standard-setting debates. This is evident in the context of the International Accounting Standards Committee Foundation (IASCF) constitutional review which has largely been driven by concerns from some countries that the IASB, in developing the standards, does not give equal weight to the views of all national standard-setters.
The Group has been considering options to maintain the influence of Australia and New Zealand in the development of accounting standards. It was agreed that better cooperation and coordination between the countries was desirable when putting views to the IASB. One example of this was demonstrated in the support that the two countries gave to each other’s submissions to the IASCF constitutional review.
The Group also considered that one way of maintaining influence would be to engage more with other countries in the Asian region and promote the adoption of IFRS and where possible develop a regional view on issues of common concern as a way of better influencing the IASB. This would involve building relationships with other countries at a number of levels, including by governments, the standard-setters and the professional accounting bodies.
The Group agreed that it would be desirable to test the interest of key jurisdictions in the South East Asian region in this proposal. In light of this, Treasury presented a paper on these issues for consideration and discussion at a meeting of the Four Markets Group in October 2004. The Four Markets Group comprises senior representatives from economic and finance ministries, central banks and monetary authorities in Australia, Japan, Hong Kong and Singapore. Treasury’s paper questioned whether there was scope to achieve greater consistency in financial reporting requirements across the region and whether there were opportunities for regional coordination in the development of IFRS.
The paper argued that as markets were increasingly exposed to cross-border competition, consistent and uniform financial reporting requirements would provide cost efficiencies to business and greater safeguards to the public. A common accounting language within the region would have significant scope to enhance cross-border investment and corporate activity.
The paper was well-received and the other jurisdictions expressed interest in Australia hosting a seminar where standard-setters, the profession and policy advisers could meet to discuss experiences in adopting IFRS including implementation issues, standard development and how to cooperate on financial reporting issues. The Group is giving consideration to how this initiative could be progressed, with the possibility of organising an event for the second half of 2005.
The Group was provided with an update of the outcomes of the Executive Committee meeting of the Confederation of Asian and Pacific Accountants (CAPA) held in Sri Lanka in November 2004. The CAPA meeting focused on convergence of accounting standards and the difficulties associated with translating standards into other languages. The Group was advised that CAPA had agreed to set up a taskforce to work with the IASB on its small and medium enterprise project.
4. Priorities into 2005
The Group has started the process of aligning financial reporting standards in Australia and New Zealand by identifying where differences exist and putting in place a number of mechanisms to achieve consistency on an ongoing basis. In addition, the Group has focused on how Australia and New Zealand can maintain their influence in standard-setting at an international level as well as drawing more broadly on jurisdictions within the region.
In 2005 the main priorities of the Group will be to:
- consider closer cooperation and harmonisation between the countries in proposals for reform of the financial reporting framework. Early in 2005 the Group will prepare a submission commenting on proposals contained in New Zealand’s review of its Financial Reporting Act. The submission will include input from the AASB, the Auditing and Assurance Standards Board and the FRC, and will focus on ensuring that changes to New Zealand’s framework lead to a more consistent approach with Australia;
- encourage the establishment of a protocol setting out cooperative activities between the AASB and FRSB;
- consider whether changes are necessary to New Zealand’s audit regulation and standard-setting processes;
- work with neighbouring countries on closer cooperation on accounting standard issues including the hosting of a regional forum on IFRS in the second half of 2005; and
- report back to Ministers at the end of 2005 on outcomes of the work of the Group.
The work of the Group to date has been accommodated within the budget parameters of agency funding. It is considered that the majority of the Group’s work can continue to be advanced without giving rise to funding difficulties. In the event however that Ministers in Australia and New Zealand see broader regional engagement as a priority of the Group, this will give rise to the need for specific funding to allow these initiatives to be advanced.