Introduction and Background to AIFRS

Advanced Search

Financial Reporting Home Latest News Emerging Reporting & Assurance Issues Current Issues Analysis of AASB Standards

Exposure Drafts & Submissions Corporate Reporting Discussion Group (CRDG) Corporations Act Publications Useful Links Reporting & Assurance Team

Introduction and Background to AIFRS

Print this Article

Email this Article

A. INTRODUCTION

FRC announcement

On 3 July 2002 the Financial Reporting Council (FRC) announced that Australia would adopt international accounting standards by 1 January 2005. The Institute of Chartered Accountants in Australia (ICCA) has been a strong supporter of the 3 July 2002 directive of the Financial Reporting Council.

The arguments in favour of international convergence of accounting standards are compelling and include the facilitation of cross-boarder listings, financial statement comparability for investors, reducing the cost of capital in Australia and improving access to foreign capital for Australian entities.

Convergence versus harmonisation

The Australian Accounting Standards Board (AASB) recognised the benefits of internationalisation some time ago and since 1996 has been ‘harmonising’ with accounting standards issued by the International Accounting Standards Board (IASB). As a result, the majority of Australia’s generally accepted accounting principles (GAAP) are already consistent with International GAAP. The AASB’s harmonisation program involved the issue of new and revised AASB Standards that were consistent with the relevant International Standards. By contrast, convergence is akin to the outright adoption of all International Standards.

Timing

The effect of the FRC’s edict is that the Australia’s accounting standards applicable to for-profit entities (AASB Standards) must be converged with the International Standards. The International Accounting Standards Board (IASB) issued its suite of International Financial Reporting Standards (IFRS) on 31 March 2004 for the purpose of the 2005 deadline for financial reporting by entities in the European Economic Union (EEU). The equivalent suite of AASB Standards were issued shortly thereafter on 30 June 2004.

The Australian converged Standards apply to financial years beginning 1 January 2005. However, comparative financial information must be prepared on the same basis (with some limited exceptions) meaning that international convergence effectively began at 1 January 2004 rather than 1 January 2005.

B. INTERNATIONAL CONVERGENCE

The AASB’s role

The AASB is responsible for the technical agenda of 2005 convergence. The AASB is governed by Part 12 of the Australian Securities and Investments Commission Act 2001. International convergence cannot proceed with the AASB being cognisant of its obligations under that Act which include:

Section 227 – to advance and promote the Australian economy and to maintain investor confidence in the Australian economy;
Section 227(1) - to make accounting standards for the purposes of the corporations legislation and for other purposes; and
Section 229(2) – to ensure that there are appropriate accounting standards for each type of entity that must comply with accounting standards.

The AASB’s overall approach

The AASB’s overall approach is to adopt the content and wording of IASB standards. Words will only be changed where there is a need to accommodate the Australian legislative environment. An example is the need to include an Australian application paragraph that mentions the Corporations Act 2001. These changes will not affect the substance of the requirements.

Sector neutral Standards required

The AASB makes Standards that are sector neutral, which means that they apply to all reporting entities whether for-profit entities or not-for-profit entities. By contrast, IFRS apply to for-profit entities only. Therefore, as part of the convergence process the AASB need to include additional text, suitably identified, to deal with those limited cases where there is a need to have different or additional requirements for not-for-profit entities. These additions will not impact on the requirements in relation to for-profit entities.

Additional commentary and disclosures

In some cases, existing AASB standards contain helpful commentary that is not included in the equivalent IASB standards. The AASB will retain this commentary as guidance that is not part of the standards where it is considered to be of benefit to users of AASB standards and provided it does not contradict the content of AASB equivalents of the IASB standards. Such guidance may, for example, deal with situations that are commonly encountered in the Australian environment but which are not catered for in the IASB standards.

The AASB has decided that when it includes unique Australian material in the Standards that this material should identified with the paragraph prefix ‘Aus’ followed by the preceding IFRS paragraph number.

Optional accounting treatments in Standards

The AASB is aiming for the highest quality financial reporting in adopting IASB standards. To this end, subject to due process, the AASB may permit only one of a number of optional treatments available in IASB standards. In addition, the AASB may require additional disclosures, particularly where these are already required under existing AASB standards.

Removal of optional treatments and additional disclosure requirements will not impact on the capacity of an Australian entity to achieve compliance with IASB standards.

Prohibition on early adoption

The AASB considered a number of alternative approaches to the early adoption of the Australian equivalents of IASB standards, between the time they are made in 2004 and their effective date of reporting periods commencing on or after 1 January 2005. In the process the AASB considered detailed papers outlining the interrelationships between the Standards and, in particular, the possibilities of permitting piecemeal adoption of certain groups of Standards.

The AASB decided to prohibit early adoption of the AASB equivalents of IASB standards either in full or on a piecemeal basis. The key reason for this view is the potential adverse impact on users of financial reports if different entities were to prepare reports using different sets of Standards in the same reporting period. The Board considered it to be important to maintain comparability between the financial reports of Australian reporting entities.

Retention of existing Australian GAAP

IFRS do not have comprehensive Standards that address a number of topics found in current AASB Standards including accounting for exploration and evaluation costs, materiality, concise financial reporting and insurance. The AASB plans to keep this existing Australian GAAP.

Conceptual framework

The AASB notes that it is necessary to adopt the IASB Framework when adopting the IASB standards because the standards are based on the Framework. The Framework is also part of the hierarchy of rules and guidance that entities need to apply under AASB 101 Presentation of Financial Statements.

ED 124 Request for Comment on: The Definition of Reporting Entity; IASB Framework for the Preparation and Presentation of Financial Statements; IAS 18 Revenue; and IAS 20 Accounting for Government Grants and Government Assistance proposes adopting the IASB Framework, which some would argue is relatively less comprehensive than the Australia’s Statements of Accounting Concepts (SACs). However the AASB has agreed to retain, in some form the substantive content of SAC 1 ‘Definition of the Reporting Entity’ and SAC 2 ‘Objective of General Purpose Financial Reporting’.

Numbering of Standards

The suite of accounting standards for annual reporting periods beginning on 1 January 2005 is complete and because it cannot be changed for at least one year, the term “stable platform” has been used. This ICAA document is designed to outline the 2005 stable platform, which is made up as follows:

AASB Standards 1 – 6 equivalent to the most recently released IFRS, for example, AASB 1 for IFRS 1
AASB Standards 101 – 141 equivalent to the IFRS that were previously released as international accounting standards, IAS, for example, AASB 101 for IAS 1
AASB Standards 1004, 1023, 1031, 1038, 1039, 1046, 1047, 1048 that are AASB Standards without international equivalents. For example, AASB 1031 “Materiality” has been maintained because it provides useful practical guidance on the application of the materiality principle not otherwise available in the IFRS.
AAS Standards 25, 27, 29, 31 that cover financial reporting by superannuation plans and government entities and are not dealt with by IFRS.

AASB Program for Australian converged Standards

The AASB’s program for 2005 convergence can be divided into four groups of International Standards as follows:

A. International Standards not scheduled for change before 2005 (other than consequential or editorial changes);
B. Proposed ‘improved’ International Standards scheduled reissued in 2003;
C. International Standards scheduled for short-term convergence with U.S. Standards; and
D. Proposed ‘new’ International Standards.

The International Standards in the first category do not form part of the IASB’s projects that are due for completion before the 2005 deadline with the European Union. For example, IAS 7 ‘Cash Flow Statements’ is already in place and already of sufficient quality not be changed before 2005. The AASB issued convergence ED’s for these International Standards as an initial priority.

The International Standards in the second category are those that are the subject of the IASB Improvements ED issued in May 2002. Also included are the financial instrument Standards IAS 32 and IAS 39, which was the subject of an IASB ED issued in June 2002. The AASB originally issued Invitations to Comment for these IASB EDs, however, both Invitations to Comment were deemed to be Australian EDs in August 2002. The AASB considered the work of the IASB before converging with these International Standards

The International Standards in the third category involve short-term convergence between the IASB and the U.S.’s Financial Accounting Standards Board (FASB) with revised standards scheduled for the first quarter of 2004. The AASB issued EDs at the same time as the IASB.

The IASB standards in the fourth category are topics of IASB projects. The AASB plans to replicate the IASB’s due process in respect of all such topics, for example, ED 2 ‘Share Based Payment’