GAAP ALERT No.7/2010 To read on line please click here
By Colin Parker B.Bus FCA MAICD
Principal, GAAP Consulting, colin@gaap.com.au
Member of the Australian Accounting Standards Board (2006-2009)
INTRODUCTION
- The following entities would continue to be required to apply full IFRSs as adopted in Australia: for-profit private sector entities that have public accountability; and Federal, State, Territory and Local governments, including at the level of whole of government and the general government sector; and
- The following entities could apply the RDR (or, if they chose, full IFRSs as adopted in Australia): for-profit private sector entities that do not have public accountability; all not-for-profit private sector entities; and public sector entities other than Federal, State, Territory and Local governments, including at the level of whole of government and the general government sector).
It was noted that the vast majority of reporting entities would fall under RDR. Most for-profit entities would not be publicly accountable. Publicly accountable entities include, for example, listed companies and other disclosing entities.
Reporting Entity Concept: The reporting entity concept will continue to be used for differential reporting purposes and a separate Application Standard will clarify the application of the two Tiers. Accordingly, in Stage 1, the focus of the application of Standards will remain unchanged
General Purpose Financial Statements Application Clarification: In the second stage of the project, agreed further research should be carried out on the potential impact on those entities currently preparing special purpose financial statements if they were to be required to produce general purpose financial statements
IFRS for SMEs: Noted that constituents’ comments confirmed that the IASB’s ‘IFRS for SMEs’ is not a suitable set of requirements for Tier 2 entities in Australia in the current circumstances. Will monitor development regarding the ‘IFRS for SMEs’, and endeavour to help shape those changes in the interests of making the IASB’s IFRS for SMEs more relevant to the needs of Australian preparers and users
Application: Agreed that any mandatory application of its revisions for the differential reporting framework should be annual reporting periods beginning on or after 1 July 2013
Further Deliberations: Continue its deliberations at the 9 and 10 June meeting with a view to dealing with remaining technical issues relating to the first stage of revising the differential reporting framework, and
June AASB Meeting Likely Agenda Items: Differential Reporting; Superannuation; Financial Instruments; Service Concession Arrangements and Extractive Activities.
GAAP Consulting Network Associate David Sauer noted that the AASB has dropped universities from its list of entities that should apply full IFRSs as adopted in Australia. However, he cautioned, “Like many entities that will be keen to early adopt the RDR for 30 June 2010 balance date reporting, universities will need to look further than the accounting standards to assess their eligibility to reduce disclosures. Other sources of authority such as legislation and directives of regulators may not be adjusted in time for this reporting season, or may in future periods remain unchanged with higher levels of reporting than the minimum under RDR.”
“The RDR is a good outcome for the Australian economy with consistency of recognition and measurements, and more certainty around the reporting entity concept. I look forward to the AASB releasing the final standard and I am sure that may entities will early adopt the RDR for 30 June 2010” says, Carmen Ridley, Associate, GAAP Consulting.
Government Introduces Legislation to Cut Red-Tape for Business
The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, introduced a Bill into Parliament to reduce red-tape on business and improve Australia's corporate reporting framework. The package of reforms will deliver much-needed relief from red-tape for Australian companies and implement a number of other important refinements to our corporate regulatory framework. The reforms are being implemented through the Corporations Amendment (Corporate Reporting Reform) Bill 2010 and accompanying Regulations.
The key measures to reduce red-tape include:
Significantly reducing the regulatory burden on companies limited by guarantee, which typically have a not-for-profit purpose, by introducing a three-tiered differential reporting framework
Modifying parent-entity reporting Providing greater flexibility for companies to pay dividends, by replacing the profits test with a solvency-type test, and Allowing companies to more easily change their year-end date to minimise the burden on companies and their auditors during peak reporting periods.
The reforms will also implement refinements to the regulatory framework, including:
Improving disclosure of non-financial information in the directors’ report Refining the statement of compliance with International Financial Reporting Standards contained in the directors’ declaration, and Clarifying the circumstances in which a company can cancel its share capital.
“The Government is very mindful of the regulatory burden facing Australian companies. That is why the Government has taken action to improve Australia's corporate reporting framework and reduce unnecessary red-tape on business,” Mr Bowen said.
A measure contained in the draft Bill, protecting solicitors’ representation letters from disclosure to enable auditors to properly verify a company’s contingent liabilities, was removed from the final version of the Bill prior to its introduction. While most stakeholders supported the measure, several requested further consultation be undertaken on the details of the amendment. The Government will consult further on the proposal and include reforms in a later Bill once appropriate wording has been settled.
“The removal of parent entity financial statements is a fantastic step to improve the readability of financial statements for users and reduce the amount of information gathering needed by preparers’, says Carmen Ridley, Associate, GAAP Consulting Network”. “Also from a practical perspective, it will make it easier to accommodate the third balance under the revised AASB 101”, she concluded.
David Sauer, Associate, GAAP Consulting Network urged early attention to the changes. “Because the legislation becomes operative as soon as it is enacted, dividends paid just before the end of the financial year may be subject to the new solvency rules. Also, over 40% of companies limited by guarantee may be relieved from lodging 30 June 2010 audited financial statements with ASIC”. GAAP Consulting can assist company secretaries, directors and auditors to establish the impacts on their individual companies,” he concluded.
AUASB’s ED on Review of a Financial Report – Company Limited by Guarantee
The AUASB has issued exposure draft 02/10 Proposed Auditing Standard on Review Engagements ‘ASRE 2415 Review of a Financial Report – Company Limited by Guarantee’ for comment by 17 June 2010. Under the Corporations Amendment (Corporate Reporting Reform) Bill 2010, it is proposed that the Corporations Act 2001 and related Regulations be amended to enable certain companies limited by guarantee to elect for their financial report for a financial year to be reviewed instead of audited. Accordingly, the AUASB proposes to issue ASRE 2415 as an Auditing Standard under section 336 of the Act, to reflect the proposed changes to the Corporations Act and related Regulations.
This proposed Auditing Standard on Review Engagements establishes requirements and provides application and other explanatory material regarding a review of a financial report for a financial year of certain companies limited by guarantee; and the form and content of the review report. It is intended that this proposed Auditing Standard on Review Engagements will be operative for financial reporting years ending on or after 30 June 2010.
The Corporations Amendment (No 1) Bill 2010 Released
The Corporations Amendment (No 1) Bill 2010 (the Bill) has been introduced into Federal Parliament and amends the Corporations Act and the Corporations Regulations to change the way people access information kept on company registers. The measures will:
Require persons seeking a copy of the register of members to apply to the company, stating the purpose for which they will use the register Provide that where a register is maintained on a computer that it should be able to be inspected on a computer, and Provide for the Corporations Regulations to prescribe the formats in which a copy of the register can be provided.
The Bill also amends the Corporations Act and the ASIC Act to:
- Increase the magnitude of criminal penalties that can be imposed for breaches of the insider trading and market manipulation provisions of the Corporations Act
- Allow for telecommunications interception warrants to be applied for in the course of investigations into those offences
- Enhance ASIC’s search warrant power to enable ASIC to apply for a search warrant under the ASIC Act without first having to issue a notice to produce the material, and
- Clarify criminal liability in section 1041B of the Corporations Act in accordance with the requirements of the Criminal Code Act 1995.
Amendments to the ASIC Regulations will remove provisions that currently provide that a person who makes an off market offer is exempt from the unconscionable conduct provisions where they make certain disclosures. The Corporations Act will also be amended to clarify the intended application of existing legislation to confirm that off-market offers to purchase financial products must remain open for at least one month.
Closing date for submissions is 10 June and should be addressed to: Manager, Governance and Insolvency Unit, Corporations and Financial Services Division, The Treasury, Langton Crescent, Parkes ACT 2600; or email: accesstoregisters@treasury.gov.au.
Significant Issues Discussed at Melbourne’s ASIC Liaison Committee Meeting
The Melbourne meeting of the ASIC Liaison Committee held on 28 May covered a range of important contemporary issues reports Jim Dixon, Associate, GAAP Consulting Network. ASIC were represented by Mr Doug Niven, Mr Bob Woolgar and Mr Peter Denovan who presented and effectively engaged the audience through the two hour meeting.
The most recently completed Accounts Surveillance Program involved a review of 130 entities reporting at 31 December 2009. The main focus of this program was on the reporting implications of the Global Financial Crisis which involved an analysis of the financial reporting practices around impairment, fair value and determining whether the entity was a going concern. The other aspect of focus was on the requirements of new and amended standards like segment reporting and consolidation. A detailed report on the findings of this program will be available within a month. For 30 June 2010, while arrangements and targets for Accounts Surveillance are yet to be finalised, it is expected that 350 entities will be reviewed of which 250 will be listed entities (which is similar to the prior year).
ASIC is drafting a Guidance Statement on ‘Non-Statutory Profit Reporting’ to cover their concerns about entities using alternative measures of profit to explain their performance. While ASIC acknowledges that it is the responsibility of entities to educate users of financial reports in measuring the performance of an entity, it also expects that such measures, based on accounting standards, be given precedence. Where alternative measures of profit are used, ASIC expects such measures to be reported outside of the financial report, that they not be given undue emphasis compared to measures based on accounting standards, that such measures are reconciled with accounting measures and that there is a consistent reporting as between periods. Questions were raised about the extent that entities were using underlying profit for dividend determination and about whether entities were continuing to use dividend payout ratios.
ASIC expects the Management Discussion & Analysis (MDA) included in a Financial Report to explain the financial result and for the analysis provided to form the basis of an informed assessment that is usable by investors.
Under the new Segment Reporting standard (AASB 8), concern was expressed that entities were relying on the aggregation clauses to avoid meaningful segmentation. The lack of guidance on issues like ‘economic similarity’, and the requirements for disclosures even when no reportable segments could be determined were discussed. There appears to be only limited early adoption of the new standard on financial instruments, and hence participants had limited experiences on which to comment. Despite the economic climate, business combinations were occurring and hence the issues of what constitutes ‘common control’ and accounting for reverse acquisitions had come to the notice of ASIC.
In relation to determining the fair values of bed licences, water rights and liquor licences, ASIC has expressed concerns to a number of entities at the lack of an active market, and in such circumstances the need to adopt cost. When questioned about the possible loss of information on the most recent market values, ASIC believes that it can only regulate according to what the Law and the standards require, despite acknowledging any downside to the action. If this recent data was thought to be valuable, then an entity could include it in notes to the financial statements.
The most recent audit firm inspection report has been posted on the ASIC website and covers a period of inspections between 1 January 2008 and 30 June 2009. The report states that Australia compares well internationally and that audit firms were improving in the quality of their systems and processes. The focus of the reviews by ASIC, which in turn correspond with the areas of need of future improvement, included impairment, determining fair values and going concern. The future focus would continue with this ‘ring of 3’, all associated with the ongoing GFC. Specific areas for improvement included initial risk assessments, subsequent events and reporting of related parties.
ASIC are particularly concerned that audit firms ensure that all members of an audit team have the appropriate level of knowledge, skills and experience for the audit client in question. It was stressed that the Engagement Quality Controller (EQC) should be a Registered Company Auditor and not merely a manager. The EQC should have sufficient experience and authority to significantly impact the quality of the audit and the ‘footprint’ of this person should be well documented on file.
Other matters briefly addressed at the meeting included:
- The need for guidance for debenture issuers to include a directors’ report that addressed brenchmarks for performance
- The reluctance of property valuers in the recent economic downturn to write down the value of property until the very late stages of the downturn
- The intention of ASIC to issue guidance later in 2010 on how far down the profit and loss should pro forma financial information be disclosed
- The Corporate Law Reform initiatives were currently before Parliament, with the expectation of application on 1 July 2010. However, because of the lack of transitional provisions in the legislation relating to removal of the need for parent entity accounts and for the new criteria relating to the ability to pay dividends, ASIC would probably have to issue a Class Order covering the initial application of the Law on these matters
- ASIC has ownership of Standard Business Reporting methodology, which was being adopted by a range of regulators and public sector entities. Entities were encouraged to examine the many advantages of SBR (formerly XBRL) and could lodge using SBR with a number of regulators from 1 July 2010 on a voluntary basis
- Brief reports were given on the progress by the two ASIC Chairs Committee Projects namely ‘Banking Covenants’ and the ‘Expectation Gap’. It was noted that when maximum exposure was determined by that risk applicable to hedging arrangements that the exposure was possibly infinite, and
- Brief comments noted the ongoing work on IOSCO papers on ‘Auditor communications’, ‘Transparency of audit firms’, and ‘Ownership structure of audit firms’. The issuing of a graduated audit opinion was briefly examined, with not much enthusiasm for the concept being expressed. It was also unlikely that a paper would be issued on the 'Ownership structure of a firm due to its lack of a broader application.
Public Company Convicted for Failing to Lodge Financial Reports
Biron Apparel Limited, an Australian public company based in Melbourne, pleaded guilty in the Melbourne Magistrates Court to three counts of failing to lodge financial reports with ASIC and two counts of failing to hold annual general meetings. The company is a substantial public company with over 35 million issued ordinary shares and is a ‘disclosing entity’; the company and its related entities are in the wholesale and retail clothing business. The charges relate to the financial years ending 2007, 2008 and 2009. The company was convicted and fined $5,000.
The charges were brought by ASIC as part of a campaign to take action against companies who fail to comply with their reporting and shareholder obligations under the Corporations Act. The failure to lodge financial reports and hold meetings, restricts shareholder knowledge of the company’s financial position, future prospects and viability.
OPES Prime Director Faces Further Charges
Mr Laurie (Lirim) Emini, a director of Opes Prime Stockbroking Limited (OPSL) has been charged with further offences arising from the investigation by ASIC into the company’s collapse. Mr Emini has been charged with 22 offences of breaching his duties as a director of OPSL and another company of which he was a director, Leveraged Capital Pty Ltd (Leveraged Capital).
ASIC alleges that on a number of occasions between July 2006 and February 2008, Mr Emini caused the false recording of securities in the records of OPSL and Leveraged Capital so that securities were recorded as being held by more than one client at the same time. The result of this false recording was that the records of OPSL and Leveraged Capital were not a true reflection of the state of those companies’ securities holdings and consequently, their respective financial positions. The value of these securities was in excess of $50 million.
ASIC alleges that in causing the false recordings to be made, Mr Emini was intentionally dishonest and failed to exercise and discharge his duties in good faith in the best interests of OPSL and Leveraged Capital.
In January 2010, Mr Emini was charged with four separate offences of breaching his duties as a director of OPSL and associated companies. His co-directors of OPSL, Mr Julian Smith and Mr Anthony Blumberg were also charged with those offences.
Messrs Emini, Smith and Blumberg appeared in the Melbourne Magistrates Court today in relation to the matter. They were ordered to attend the committal proceedings listed for 28 February 2011 and bail was extended for Messrs Smith and Blumberg. Each offence carries a maximum penalty of five years imprisonment.
CAMAC’s Report on ‘Guidance for Directors’
Corporations and Market Advisory Committee (CAMAC) has published a report on ‘Guidance for directors’. The report responds to a request from the Minister for Financial Services, Superannuation and Corporate Law, the Hon. Chris Bowen MP, in August 2009 for advice on whether there is sufficient guidance provided to directors to ensure that they clearly understand their roles and responsibilities and whether their performance would be enhanced by the introduction of a code of conduct or best practice guidance by a regulator.
The Committee reviewed guidance available to directors in Australia and elsewhere, and formed the following views. While there is already a good deal of guidance available to directors, there is always scope for improvement having regard to the experience of companies and boards and changes in the environment in which they operate. The provision of guidance in itself does not ensure improved governance, but efforts to assist directors to understand their role and enhance their effectiveness are worthwhile and should be pursued.
A good deal of guidance in Australia focuses on the legal duties and responsibilities of directors and compliance, structural and process issues for boards. There is growing recognition of the benefits of guidance on broader behavioural issues that go to the effectiveness of a director and the effective functioning of a board. There is room for further attention to this area, with the aim of empowering directors to carry out the role expected of them and not to fall into a role of passive participant.
The Committee did not see a need for the development of a new code of conduct or best practice guidance by a regulator. The Committee considered that it would be timely for the ASX Corporate Governance Council to review its ‘Principles and Recommendations’ in the light of international developments. The report draws attention to emerging themes in corporate governance reviews carried out in the United Kingdom and by the OECD and other international bodies, having regard to the global financial crisis and other developments.
The Committee encouraged continuing efforts by ASIC and other regulators to provide guidance in areas for which they are responsible, including assisting directors to understand their enforcement approach in particular areas.
The Committee also acknowledged the contribution of professional and industry bodies in encouraging high standards of performance by directors and boards. There is scope for leadership, including through peer group and mentoring programs, to help equip directors with the skills and understanding to operate effectively in a board context.
Commenting on the report, Colin Parker, Principal, GAAP Consulting, stated, “Directors will be pleased that CAMAC has not made any recommendations of legislative change, instead it has thrown down the gauntlet to ASX Corporate Governance Council to take a long hard look at its rules in light of overseas benchmarks”.
IASB Proposes Improvements to Presentation of Items of OCI
The International Accounting Standards Board (IASB) published for public comment proposals to improve the consistency of how items of Other Comprehensive Income (OCI) are presented. The IASB is proposing to require that entities present profit or loss and other comprehensive income in separate sections of a continuous statement. This would amend IAS 1, which currently permits entities a choice of presenting results of operations either in a single, continuous statement similar to the proposal in the ED, or in two separate statements – an income statement and a statement of comprehensive income.
Other proposals in the ED include:
- Items of OCI grouped on the basis of whether they will eventually be ‘recycled’ into the profit or loss section of the statement of comprehensive income
- Income tax on items presented in OCI allocated between items that might be subsequently ‘recycled’ and those that will not be ‘recycled’ (where the items in OCI are presented before tax), and
- The title of the statement of comprehensive income would be changed to ‘Statement of profit or loss and other comprehensive income’ when referred to in IFRSs, though entities could use another title (such as 'statement of comprehensive income').
The exposure draft ‘Presentation of items of Other Comprehensive Income (Proposed amendments to IAS 1)’ is open for comment until 30 September. Commenting on the proposals, Sir David Tweedie, Chairman of the IASB, said: “We have recently published several proposals that broaden the use of Other Comprehensive Income. It is therefore appropriate that this information is presented clearly and in a uniform manner. If adopted, these proposals will result in further convergence of IFRSs and US GAAP in an increasingly important part of the financial statements.”
Hacketts Joins the Lawler Alliance
The Lawler Alliance, a group of like-minded independent group of chartered accounting firms announced that Hacketts Chartered Accountants has joined the alliance. Queensland-based Hacketts, with offices in Brisbane and Rockhampton, joins Lawler Alliance members, Lawler Partners and Lawler Draper Dillon, who have offices in Newcastle, Sydney and Melbourne.
Lawler Chairman, Terry Lawler, said that this represented an important milestone in the Alliance’s dedication to offer superior value and service range to their clients and the middle market. “We are committed to providing innovative advice and assisting in creating value for organisations striving for success. Size means nothing unless it delivers real results for our clients. The Alliance is not about building a national presence to be ‘an alternative to other accounting brands’, it is about like-minded firms working together to provide superior service to the middle market. We have all developed and grown our firms and therefore share the culture and experience of this sector.”
We have been on a mission for the last nine months or so to find a high calibre group in Queensland to join our alliance. Hacketts is a highly respected firm lead by outstanding professionals in the fields of audit and assurance, taxation and business advisory services, corporate advisory and wealth management. The alliance now offers the combined skills, knowledge and expertise of these three independent accounting firms in NSW, Victoria, and Queensland. We are seeking representation in other states and territories by firms that share our culture, commitment and client focus”, Terry Lawler said.
Hacketts Partner, Tom Hackett, said that the alliance had impressed him with its energy and commitment to quality and offered Hacketts the best of both worlds. “As a professional services firm our focus is on helping clients achieve their goals and objectives. The Lawler Alliance provides Hacketts with an expanded network of professionals with the same values and commitment to personalised client service, and a structure where we remain independently-owned and managed partnership”, Mr Hackett said.
Carmen Ridley Joins GAAP Consulting Network
GAAP Consulting is pleased to announce that Carmen Ridley has joined the GAAP Consulting Network. Carmen will undertake financial reporting training and advisory services on accounting standards for accounting firms, listed companies and public sector entities. Carmen was previously Associate Director with Grant Thornton and is also known to many though her training sessions with CPA Australia.
Commenting on Carmen’s appointment, Colin Parker, Principal, GAAP Consulting, said “Carmen is an important resource for our client base as we move into the Reduced Disclosure Regime and the 2nd Wave of IFRS. I am delighted to have Carmen join the team”.
Carmen says “Working with my colleagues under the GAAP Consulting brand, offers me the opportunity to assist a diverse and interesting client base on the many financial reporting challenges that are emerging. I am particularly looking forward to release of our Reduced Disclosure Regime publication, and undertaking diagnostic reviews of financial statements and training workshop for the 2nd wave of IFRS”.
Carmen joins Colin Parker (Financial Reporting and Forensic Accounting), David Sauer (Financial Reporting and Auditing), Justin Reid (Audit), Jim Dixon (Public Sector), Stephen LaGreca (Financial Reporting and Forensic Accounting) and Susan Orchard (Superannuation) to provide independent financial reporting, auditing and superannuation solutions.
Accounting
- 21 June ED 193 ‘Conceptual Framework for Financial Reporting: The Reporting Entity’ – AASB
- 30 June ED 43‘Service Concession Arrangements: Grantor’ – IPSASB
- 30 June ED 44 ‘Improvements to International Public Sector Accounting Standards’ – IPSASB
- 2 July ITC 23 ‘Extractive Activities’ – AASB
- 2 July ED 196 ‘Fair Value Option for Financial Liabilities – AASB
- 16 July ED 2010/2 ‘Conceptual Framework for Financial Reporting: The Reporting Entity’ – IASB
- 30 July Discussion Paper ‘Extractive Activities’ – IASB
- 9 August ED 195 ‘Defined Benefit Plans (proposed amendments to AASB 119)’ –AASB
- 6 September ED 2010/2 ‘Defined Benefit Plans – Proposed Amendments to IAS 19’ – IASB
- 30 September ED 2010/3 ‘Presentation of items of Other Comprehensive Income (Proposed amendments to IAS 1)’ – IASB
Audit
- 17 June ED 02/10 Proposed Auditing Standard on Review Engagements ‘ASRE 2415 Review of a Financial Report – Company Limited by Guarantee’ – AUASB
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