harmonization and convergence of financial reporting and auditing standards

7/28/2019 Harmonization and Convergence of Financial Reporting and Auditing Standards

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Harmonization and Convergence of Financial Reporting and Auditing Standards

Position: It is in the best interests of investors and for global financial markets generally for the differing

standards to be harmonized and complete convergence to be achieved at the earliest possible time.

Rationale:

The costs investors incur to harmonize the various standards so that cross-border comparisons of

companies may be made are large

Such costs are ultimately impounded in the costs of capital that investors demand for cross-border

investments

The magnitude of the costs are sufficiently large in some cases as to serve as an effective barrier tocross-border movements of capital

Investors, companies, and markets will benefit from the complete harmonization on a global basis of the

differing national and supra-national standards

Harmonization should converge to the best possible standard, that is, the method that best reflects the

underlying economics of transactions, rather than to any particular national standard

Only one method should be permitted for reporting similar transactions. The reporting method should

not differ depending on country, industry, size of company, or any other consideration, and managers

should not be permitted choices of reporting methods for similar transactions

Auditing is the examination of a companys financial statements by outside experts. Auditors report to

financial statement users on the accuracy and fairness of the statements

High-quality audits are essential if the financial statements are to be regarded as reliable by investors

and other users

The quality of both audit standards and the resulting audits differs substantially worldwide

It is essential that auditing standards be harmonized to the highest quality worldwide due to the critical

importance of audits to the usefulness of financial statements

THE GROUP OF 100 AND

INTERNATIONAL HARMONISATION


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Purpose

The purpose of this paper is to:

a. set out the Group of 100s policy on the international harmonisation of accounting standards;

b. explain the development of that policy;

c. outline the reasons underlying the development of the policy;

d. describe the alternative approaches considered in the resolution of that policy; and

e. explain the harmonisation program funded by a levy on listing fees including the CLERP proposals

regarding standard-setting arrangements.

The Policy

The Group of 100s policy on international harmonisation is that compliance with Australian accounting

standards should result in automatic compliance with international accounting standards being those

issued by the International Accounting Standards Committee (IASC).

The Group of 100 considered that the development of a uniquely Australian set of standards, while

superficially attractive, would eventually result in a loss of credibility of Australian financial reporting as

had occurred in the 1980's. An outcome such as this would be to the disadvantage of Australian

companies accessing international capital markets because they would be expected to provide

information prepared on an internationally accepted basis.

This policy position of international harmonisation was seen as a step towards achieving the long-term

objective of a global set of accounting standards which are applicable for domestic and international

purposes. Such a set of standards will be:


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generally accepted because of their quality and comprehensiveness;

complete and in sufficient detail to facilitate operational implementation, consistency, comparability

and transparency; and

rigorously interpreted and applied.

An important dimension of this policy is that to properly participate in the development of international

standards it is essential to the national interest for Australia to have a national standard-setter:

which is broadly based with clear lines of accountability;

which is strong and well resourced;

which is a vigorous and respected contributor in international forums and standard-setting

organisations;

which has a strong commitment to the process of international harmonisation; and

which is supported by a vigilant well resourced national regulator.

Thus an important element of the policy goal of harmonisation and the engagement of the international

community is the enhancement, rather than the replacement, of the national standard-setter.

The Group of 100 policy has been influential in the development of policy of the Australian Accounting

Standards Board (AASB) and the Public Sector Accounting Standards Board (PSASB) as reflected in their

Policy Statement on International Harmonisation (May 1996). This support is best expressed in the

Group of 100 Mission Statement issued in 1994 which committed it to:

support the development of a comprehensive set of international standards which will ultimately

supplant the need for national standards (except where individual national legal and cultural differences

require otherwise) as a long-term goal;

support for existing Australian standards to be tested against the relevant International standard and for

exposure drafts to be developed in line with existing International exposure drafts or standards;

actively encourage all members to state whether their accounts comply with International Standards

and comment on differences;

increase direct financial support to the IASC and make approaches to the ICAA and ASCPA to consider

similar support; and


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encourage the IASC to enhance the realisation of a truly internationally accepted code of accounting

standards by inviting standard-setting bodies (such as the AASB, FASB etc) and business to be

represented on the IASC.

In addition, the theme of the Group of 100's National Congresses held in November 1995 (Sydney) and

March 1997 (Melbourne) was international harmonisation of financial reporting.

The policy goal of international harmonisation has broad and authoritative support. For example:

a. In 1996 the ASX surveyed listed entities to determine whether they supported a process of

harmonisation of Australian standards with IASC standards or the immediate adoption of IASC

standards. An overwhelming majority of respondents (87.5%) favoured harmonisation with rather than

the immediate adoption of IASC standards. Listed entities also provided strong support for the

imposition of a 3% levy on listing fees for 2 years to raise $1 million to fund a harmonisation program.

b. Alan Cameron, Chairman ASC (November 1997):

"The ASC also agrees with the proposal that in the immediate future, Australia should continue to

harmonise its standards with IASC standards so that compliance with Australian standards willautomatically result in compliance with IASC standards"

c. The Wallis Committee also recognised the importance of participating in these developments:

"Recommendation 12 : Australian Standards should be harmonised with international standards.

' The Australian Accounting Standards Board should, where practicable, seek to harmonise Australia's

accounting standards with international standards."

d. In addition the harmonisation program is supported by the professional bodies, the Australian Society

of CPAs and The Institute of Chartered Accountants in Australia.


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Why this Approach?

The Group of 100 took the view that standards issued by the IASC represented the best prospect for

achieving a globally accepted set of accounting standards in a reasonable time frame. It still holds that

view.

This view is also reflected in CLERP Paper No.1 "Accounting Standards: Building international

opportunities for Australian business" which states:

"The development of a high quality set of IASC standards, and their adoption by major capital markets,

offers the best prospect for the establishment of globally accepted accounting standards" (p24) and

"It is in Australias best interests to harmonise Australian standards with IASC standards with a view to

adopting them when they have been accepted for reporting purposes in major capital markets

(emphasis added)" (p25)

An issue in this regard is what constitutes global acceptance and acceptance in the major international

capital markets. Fundamental to the application of this policy is the endorsement of a comprehensive

set of IASC standards by the International Organisation of Securities Commissions (IOSCO) for cross-border capital raisings and the resultant acceptance of those standards in international capital markets.

In June 1998 the National Executive of the Group of 100 indicated that acceptance in international

markets required IOSCO endorsement and adoption by the SEC for cross-border listings and capital

raisings (see media release).

In the Australian context, the requirement that the Financial Reporting Council to report to the Minister

on the desirability of adopting international standards is an ample recognition of the potential

significance of international harmonisation to Australian practice. More recently the draft legislative

provisions establishing the Financial Reporting Council (s 2 (2) (e)) state that its functions include:

"(e) monitoring the development of international accounting standards; and


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(i) to further the harmonisation of Australian accounting standards with international standards; and

(ii) to promote a greater role for international standards in the Australian standard-setting process if

doing so would be in the best interests of investors, business and Australia's capital markets."

In its submissions on the CLERP Paper No.1 on Accounting Standards (October 1997) and on the

proposed legislation (May 1998) the Group of 100, while supporting the principle of harmonisation and

the role of IASC standards, expressed concern about the dangers of "locking-in" to the timetable and

agenda of an external body where Australia was not in control and its flexibility to adapt to

changing/evolving circumstances was constrained.

Thus the Group of 100 position is one of strong support for the principle of international harmonisation

where to do so does not conflict with Australian legislation. However, in implementing this policy the

Group of 100 has indicated to the AASB that where a particular accounting requirement in IASC

standards is unsuitable the AASB should first seek a reconsideration of it by the IASC but to ultimately

harmonise with the IASC requirement when the IASC standard is accepted in international capital

markets.

The Group of 100 views the process as comprising several dimensions and places increasing emphasis on

the importance of convergence in the approach to issues by major standard-setters which will result in

avoidance of unnecessary differences arising because of differences in the timing of their work

programs. The activities of the G4+1 group of standard-setters and cooperation with the IASC in relation

to work programs and common approaches to the resolution of issues is seen as an important part of

this process. The process of international harmonisation encourages convergence of activities and

accounting requirements which itself provides further impetus to a recognition of the benefits of

international harmonisation.

Alternative Approaches Considered

The Group of 100 considered a number of alternative methods of achieving its harmonisation objective.

These included:

a. "rebadging" IASC standards, discussion papers, draft statements of principles and exposure drafts for

issue as Australian standards.


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This approach while superficially attractive would mean that financial reporting developments and

responses to issues would depend on the work program and agenda of the IASC. It was also seen as

limiting the ability to deal with institutional and legal requirements relating to Australian reporting

including corporate governance and regulatory issues. While this approach was considered by some as aderogation of sovereignty others considered that such a process, managed appropriately, could

accelerate international harmonisation.

The participation by business and other interested partners at the IASC level was seen as being more

arduous than at a local level. Greater reliance on an integration of activities with those of the IASC

would place substantial additional demands on business and other interested parties. In many cases

Australian business would be less influential at the IASC level than at a national standard-setting level

because of Australia's relative significance in the world economy. However, this is regarded by many as a

reasonable price to pay to achieve a common business language.

The success of the IASC Improvements and Comparability Project has resulted in improvements in the

quality of international standards and the replacement of a large number of alternatives with a

benchmark and allowed alternative approach. The recent creation of a Standing Interpretations

Committee (SIC) now means that there is an authoritative body to deal with diverse interpretations of

IASC standards. However, some observers have noted, and expressed concern, that the IASC has

recently introduced more options into its standards, for example, accounting for superannuation

obligations.

b. Adopting US GAAP

Adoption of US GAAP was seen as an attractive option for those corporates whose securities are listed in

the USA or in jurisdictions where US GAAP is accepted. However, this approach was not supported

because there are many elements of US GAAP which are unlikely to be acceptable to Australian

companies, for example, the ban on revaluations and the detail and breadth of the required disclosures.

Further, given the European view that US GAAP was politically unacceptable, IASC standards were

considered to be more acceptable in that environment. In the final analysis "political" factors were, and

continue to be, such that US GAAP is unlikely to be universally accepted in the same sense that IASC

standards were likely to be following the IOSCO endorsement. Thus, while the FASB may be prima facie

the international standard setter the political dynamics dictate otherwise.


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In this regard the IASCs experience in attempting to accelerate the development of a standard on the

recognition and measurement of financial instruments by the issue of an exposure draft based on US

GAAP indicates the difficulties and tensions associated with formally recognising US standards in this

way.

Adoption of US requirements would also mean:

a lack of responsiveness by a national standard-setter (the FASB) because its primary focus is on national

issues rather than issues put forward by corporates from a different jurisdiction;

the suitability of the FASB standards and other elements of US GAAP in an Australian environment and

the problems of implementation, provision of guidance and interpretation in the local environment;

dealing with significant differences from Australian practice including goodwill and intangibles, pensions,

post-employment benefits, inventories, impairment of assets, the use of historic cost and the ban on

revaluations.

c. Adopting a policy that compliance with national standards resulted in automatic compliance with IASs

which are accepted in international capital markets.

The choice of this approach is discussed above.

The benefits of international harmonisation

The Group of 100 considered that international harmonisation had the potential to provide the

following benefits:

reductions in the cost of capital through the resolution of uncertainty relating to the interpretation and

implementation of national standards;

administrative benefits arising from the ease of filing in multiple jurisdictions and the resultant simplicity

in the development of common accounting systems in place of adjusting, reconciling and explaining

different bases applied in different countries;

enhanced comparability and transparency of financial reporting requirements and credibility of the

reported information;

facilitation of cross-border investment and fund raising and the removal of an impediment to a more

efficient allocation of resources;


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lower investment risk because it reduces an element of risk associated with understanding foreign

financial reporting for investors and lenders.

The Harmonisation Program

As mentioned above, this program is funded by listed entities through a 3% levy on ASX listing fees. The

program provides for an accelerated work program by the AASB (and PSASB) over 2 years to achieve

harmonisation such that compliance with Australian standards will result in automatic compliance with

IASC standards but not vice-versa. This process has been characterised as involving some pain, for

example, different rules on the revaluation of non-current assets and segment reporting and potentially

some gains such as the adoption of merger accounting. Australia is the first country with a significant

and active national standard-setter to undertake a program of this nature. While other national

standard-setters may work closely with the IASC, for example, through the G4 + 1 group of standard-

setters, none has implemented the approach adopted by Australia.

Implications for Australia

The international harmonisation program has the following implications for Australia:

(a) The adoption of some IASC standards on issues where there is no equivalent Australian standard.

The program involves the introduction of standards where there are no equivalent Australian standards,

for example, borrowing costs, accounting for superannuation liabilities, provisions and contingencies

and intangible assets.

However, concerns have been expressed by the Group of 100 and others about some outcomes of the

program for example, the failure in ED 84 "Acquisition of Assets" to propose harmonisation in respect of

pooling of interests. The Group of 100 has indicated to the Board that the process of harmonisation will

involve a balancing of some benefits (such as harmonisation with some requirements that are not

presently permitted in Australia, for example, pooling of interests) and some costs (such as removal of

some current practices).

(b) A challenging program of revision and harmonisation with new developments


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An important feature of the program is the renovation and refurbishment of the fabric of Australian

standards. Many standards which were developed several years ago are in need of care, maintenance

and updating, for example, profit and loss statements, inventories, segment reporting, and

extractive industries. This has not occurred because of a lack of resources and new projects being given

a higher priority.

The updating of old standards and the filling of gaps in the suite of standards will benefit the preparers

and in particular, the users of financial reports.

The harmonisation program and the cooperation between standard-setters, for example, the G4+1, is

also resulting in a convergence in the approach to issues which are being dealt with at approximately

the same time. Projects on provisions and contingencies, impairment of assets, performance reporting

and the recognition and measurement of financial instruments have been initiated during this period.

It is anticipated that an enhanced financial reporting framework resulting from the program will provide

more relevant and reliable information for decision making which will result in improvements in the

efficiency of capital markets and in corporate governance and accountability.

(c) Effect on domestic standards

Part of the price of globalisation is that the international standard-setter may not give Australian needs

and circumstances the same emphasis as would a national standard-setter. As such, in the absence of a

strong national standard-setter with a clear brief on the quality of financial reporting and active

participation in the development of international standards, there may be some erosion of quality in

relation to domestic standards. However, the compensations for this are the benefits to the economy

and international competitiveness of a move to international harmonisation which is considered to be

unavoidable in a period of globalisation of commerce, technological and financial innovation.

IOSCO Endorsement

The Group of 100 recognises that IOSCO endorsement of IASC standards is crucial to achieving the

benefits of harmonisation with IASC standards and that the views of the US Securities and Exchange


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Commission (SEC) are first among equals in the IOSCO process. In this regard the SEC is unlikely to

participate in an erosion in the quality of financial reporting in US capital markets merely to appease

those constituents and other entities who perceive benefits from accepting IASC standards for cross-

border listings in the USA. As such the US response is critical. In reporting to the US Congress in October

1997 the SEC stated that:

"At this point it is not clear what the Commission's final decision regarding core Standards will be.

Nevertheless, the IASC's efforts to date already have contributed significantly to raising the level of

accounting standards worldwide and reducing the number of differences between International

Accounting Standards and accounting principles used in the United States. These and other efforts at the

International level are encouraging development of accounting principles that have the needs of

investors and capital markets as their primary focus."

Speaking at a conference in Brussels in March 1997, Mary Tokar, Senior Associate Chief Accountant of

the SEC stated that:

" broader endorsement [of the IASC process and organisation] of the type the SEC has given to the

FASB, is dependent on an oversight role and responsibility for the SEC a role that is unlikely to be

duplicated at the international level."

Arthur Levitt Chairman of the SEC stated in May 1997 that:

"Commission acceptance of international standards is not a foregone conclusion. It bears repeating that

while harmonisation is a desirable goal for the US our standards are already accepted in capital markets

throughout the world, and their quality is unmatched. We can only accept a framework that will

enhance, rather than diminish, the strength and stability of US capital markets".

It is likely to be some time before any endorsement by IOSCO translates into effective action because:

i. IOSCO does not have a normal procedure for endorsement;


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ii. IOSCO members are not bound by its recommendations: and

iii. the impact of the SEC's due process and quality requirements on the endorsement process.

In addition, the IASC is now unlikely to have completed its core set of standards by the end of 1998.

While the Group of 100 acknowledges these difficulties it does not believe that their existence should

detract from the pursuit of the goals and realising the benefits of international harmonisation.

Current Concerns

A number of entities and participants in the process have recently expressed concerns about the

approach to harmonisation and the timing of the process. In the main they support the principle of

harmonisation but are concerned about;

adopting approaches required by IASC standards which differ from the practices which are required or

permitted in the USA and the UK, for example, the net cash investment method of accounting for

leverage leases;

the approach on particular issues, for example, accounting for intangible assets;

the effect of adopting a new accounting requirement in respect of transactions and arrangements which

were structured and undertaken under previous arrangements;

the perceived damage to competitive advantage resulting from the adoption of standards which are

more restrictive than those applying to competitors;

the intensity of the international harmonisation program and the resultant lack of time to adequately

review the proposed changes, their implications for current practice and to prepare submissions on

exposure drafts etc; and

the process by which IASC standards are to achieve acceptance in international capital markets.

harmonization and convergence of financial reporting and auditing standards

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