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Translating International Standards: Not As Easy As It Looks
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By Ellen K. Stoddart, Senior Project Manager, Australian Accounting Standards Board

 
Implementing the Financial Reporting Council’s decision to adopt International Accounting Standards is not as simple as just changing ‘IAS’ to ‘AASB’. The decision has presented the AASB with a number of important legal challenges to resolve which are discussed in this article  
 
Translation into the Australian legal context of International Financial Reporting Standards (IFRSs) presents several difficulties, as well as raising the question of whether there should be any translation at all. The most significant difference between IFRSs and accounting standards issued by the Australian Accounting Standards Board (AASB) is that the latter are disallowable instruments (delegated legislation) via the Corporations Act 2001. Prior to the 1990s, a company that breached an accounting standard could expect a qualified audit report but, after 1990, that became a breach of law. 
 
When the Financial Reporting Council (FRC) announced in July 2002 its policy of adopting the standards of the International Accounting Standards Board (IASB) in Australia by 1 January 2005, it was not expected this could be achieved by simple fiat. Constitutional impediments would restrain parliament from granting an overseas body (on which it has no representation) the power to make delegated legislation. It was always envisaged that accounting standards retain their status, and this would be achieved by the AASB issuing Australian standards equivalent to the IFRSs (including the earlier IAS) of the IASB.  
 
What’s In A Financial Statement? 
 
In making Australian equivalents of IFRSs, the AASB must ensure these are consistent with the Corporations Act 2001 (and regulations), accord with the criteria in the Australian Securities and Investments Commission Act 2001 and satisfy the requirements of the Acts Interpretation Act 1901. Unless an IFRS is translated into Australian terms, the Australian equivalent could be ineffective.  
 
For example, the IASB uses the term ‘financial statements’ to include notes to the financial statements. This is inconsistent with s295 of the Corporations Act where ‘financial statements’ and notes are separately identified as components of the financial report. The financial reporting obligations imposed by the Corporations Act refer to ‘financial reports’, not financial statements. Depending on the context, ‘financial statements’ in an IFRS refers sometimes to the statements per se and sometimes to the statements and notes. The AASB proposes to translate the latter with the term ‘financial report’.  
 
Recent standards issued by the IASB express requirements in terms of ‘shall’, but the earlier standards are still expressed in terms of ‘should’. AASB standards currently use ‘must’. Since it is possible to interpret ‘should’ as conditional and not mandatory, it would be detrimental to retain this term untranslated in an Australian equivalent. The AASB intends to translate ‘should’ to ‘shall’, despite objections from some constituents lobbying for verbatim adoption, as to do otherwise may expose the Board to criticism for failing to carry out its statutory obligations.  
 
A more significant issue is that relating to retrospective application. The validity of retrospective application is critical to the intended outcomes of IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ (issued 19 June 2003). If retrospective application meant that the comparative information included in the first IFRS report replaced the financial report of the previous period, then any such requirement in an Australian Standard would be automatically invalid under the Acts Interpretation Act 1901 and have no effect. However, if the comparative information is required to help understand the current reporting period and not intended to replace information in the financial report for the previous period, then such retrospective application is acceptable in an Australian Standard. To prevent any misunderstanding, the AASB is likely to include clarification in the Australian equivalent of IFRS 1. 
 
What is an IFRS? 
 
Following the issue of IFRS 1, it became apparent that the new definition therein for IFRSs was incapable of simple translation into Australian terms. The term is defined to mean IFRSs, plus IASs (the earlier series of standards originally issued by the predecessor of the IASB and currently being amended by the IASB) and also Interpretations (both IFRICs issued by International Financial Reporting Interpretation Committee and SICs issued by its predecessor, the Standards Interpretation Committee). The definition is critical to the meaning of compliance with IFRSs.  
 
In the Australian context, there is a clear distinction between accounting standards and interpretations based on the status of the former as delegated legislation. Adoption of Interpretations as AASB Standards is possible but this solution seems not only impractical but in conflict with the separate identification of Standards and Interpretations in other IASB Standards. To achieve compatibility with the intended scope of the IFRS definition, the AASB is considering expressing the compliance requirement as referring to Australian International Financial Reporting Pronouncements (AIFRPs). This would enable inclusion in the AIFRP definition of both AASB standards equivalent to IFRSs and UIG Abstracts (to be issued by the Urgent Issues Group as equivalents to IFRICs and SICs) while avoiding any misleading implication that the latter are standards with the status of delegated legislation.  
 
Cross References 
 
Further issues relate to translation of references in one IFRS to other IFRSs (including Interpretations) so as to refer to AIFRPs and not (ineffectually) to IFRSs. Since the AASB has decided on a system for naming its new Standards (retain the same title as the IFRS, replace prefix with AASB, use same number for the IFRS series, add 100 to number for the earlier IAS series), translation of references appears a simple, almost mechanical, task. However, the constraints of the Acts Interpretation Act 1901, combined with ‘gridlock’ in cross-referencing between IFRSs, make this complex and the AASB is currently evaluating alternative resolutions. The AASB intends there will be no scope to question the legal efficacy of the planned staged roll-out of new AASB standards between now and 31 March 2004 or restricted early adoption by companies.  
 
Those who view delays in issuing Australian equivalents to IFRSs pending resolution of translation questions as unnecessary or hampering the adoption process should consider the legal context. If accounting standards are to be enforceable by law, then the protocols of the law must be observed.  
 
Editor’s Note:  
 
Since this article was first published, the AASB has announced in a media release dated 4 September 2003 that it intends to resolve some of the legal issues referred to above by choosing to issue all Australian equivalents to IASB standards simultaneously, when the IASB has finalised all the standards applicable from 1 January 2005. This is anticipated for around April 2004. For more details, refer to The Panel. 
 
This article appears courtesy of Butterworths Corporation Law Bulletin. It originally appeared in Issue No 16, 2003.