Understanding is the key to realising potential

Understanding is the key to realising potential

Coughlin, Mark


CPA AUSTRALIA BELIEVES THAT A common financial reporting language is vital to supporting the continuing growth of a global economy – and to advancing opportunities for countries within the global market.

An international financial reporting language will not result from us simply substituting our local standards for those issued by the IASB. It is only a beginning.

In fact, the Australian Auditing Standards Board has announced that, as part of its program to give audit standards the force of law from 1 July 2006, it will take the opportunity to review whether the standards are consistent with those issued by the International Auditing and Assurance Standards Board (IAASB). Australia has long sought to harmonise its standards with those issued by the IAASB and so this process continues this commitment, but also reminds us of the wider impact of a globalising economy.

International Financial Reporting Standards (IFRS) came into effect in Australia from 1 January 2005. The transition period has been a significant challenge for Australian business, as it came at a time of major regulatory reform in other areas of financial reporting and audit, as well as financial services, and that Australian businesses have shown immense fortitude in coping with all these issues.

In July 2002, the Australian Financial Reporting Council announced that Australia would adopt International Financial Reporting Standards (IFRS) for all reporting entities – which includes listed and non-listed entities for reporting periods beginning on or after 1 January 2005. Australia’s accounting standards have been enshrined in our legal system and require parliamentary approval. So the first step in our transition to IFRS involved changing the application and operative dates of the standards to meet the requirements of the Corporations Act and allow approval by the Australian parliament. The AASB also reviewed the standards to ensure they met the requirements for sector neutrality.

The process to review, expose and then seek parliamentary approval could not begin until the full suite of standards were issued, so the Australian Accounting Standards Board had less than a year to address more than 40 accounting standards, while during this period the International Accounting Standards Board (IASB) continued to add or amend standards and interpretations.

This rather hectic period is now behind us, in so far as the standards have been approved and there are now processes in place for Australian companies preparing their first IFRS compliant financial reports. However, the transition involves two elements: companies integrating the new reporting requirements into the internal business process, and secondly, the wider sharemarket coming to terms with changed accounting treatments and their impact on a companies “onpaper” financial position.

As part of our transition, the AASB issued a standard requiring companies to report known impacts in 2004 and 2005 annual financial reports. These financial reports required actual estimates of expected impacts. In addition, the Australian Stock Exchange requires listed entities to provide continuous disclosure of the impacts of IFRS.

For these reasons we are optimistic the market has factored in many of the impacts of IFRS. So far, we have not seen any major reactions as a result of the release of the first full-year financial reports. But it is a case of wait and see as most first-time adopters of IFRS will be reporting as at 1 June 2006.

Emerging issues

Based on our experience, we are keenly aware that adoption of international standards is not a one-off event like, for example, the Y2K challenge of a few years ago. This particular challenge is evolving, and continued harmonisation and/or convergence – especially for countries such as Australia that have standards enshrined in law – will continue to require an ongoing commitment from business, standard setters, the profession and governments.

It is also vital to recognise that producing a globally acceptable set of standards is a much bigger undertaking than substituting local accounting standards for those issued by the IASB. To achieve globalisation we must also look at what factors may undermine consistent application of these standards.

Sustaining consistency

An important concern is that the IASB standards are principles based, which simply means they are subject to interpretation. Within our region many countries have relied on US GAAP and will find the shift to a principles-based system a significant change.

There have been many calls for interpretations of the principles in IFRS. The lASB’s International Financial Reporting Interpretations Committee (IFRIC) is the recognised source of interpretations, but its progress in delivering interpretations in a timely manner has prompted various players to attempt to fill the gap by developing their own.

The development of competing interpretations can threaten global consistency in the implementation of IFRSs. This issue must be resolved urgently, and poses a real challenge for the profession.

We must also give thought to the impact of our local legal frameworks and historical experiences, including the impact of translating the lASB’s standards into other languages. These factors influence the application of the international financial reporting standards at a national level. Being aware that our past approaches to financial reporting can affect the context in which we interpret and implement IFRSs today can alert us to the potential for the inconsistent application of IFRSs across jurisdictions.

As accounting professionals, we must recognise that principles-based accounting standards place an important responsibility on us. We must first understand the standard and use our professional judgement to apply the principles in a way that reflects both the requirements and the substance of a transaction.

Global consistency will unravel if we fail to develop an agreed approach to the education of accounting professionals, which is supported by the professional bodies, national standard setters, tertiary institutions and the IASB.

Currently, international standards are being reviewed by IASB as part of the convergence with US GAAP. Like our old national standards, the lASB’s revisions need to take into account the practical, technical and, at times, philosophical concerns of all jurisdictions. This hinges on our ability to influence the development of standards and interpretations from the outset.

A need for a voice

Our view is that our local standard setter is key to addressing all of these concerns, but not by going it alone. It is up to the profession, standard setters and business to ensure we realise the ongoing opportunities that IFRS adoption can deliver.

But it is becoming increasingly apparent that as a small nation we have limited influence within the international standard-setting environment.

CPA Australia has recognised this risk and we have responded by looking outside our borders to identify how we can capture and better reflect the concerns of all CPAs.

In May last year we launched the Asia Pacific Financial Reporting Advisory Group (APFRAG). This group comprises CPAs from across the Asia Pacific region, appointed on the basis of their ongoing involvement and expertise in financial reporting. Through this group we are providing a voice for our membership with international standard setters.

Since this first meeting, the group has forwarded 16 submissions to international bodies on behalf of CPAs across our region.

Certain factors such as our local legal environment can only be addressed at a national level, but such efforts are greatly enhanced by our nations sharing their concerns and experiences on a regular basis. And this sharing needs to take place at all levels, betweengovernments, standard setters and professional bodies.

There is also a significant role for accounting bodies around the globe to work more closely to reconcile different approaches to the training of new accounting professionals and to also consider the training and support provided to our current members. The International Federation of Accountants (IFAC) provides a valued forum for such discussions. But I am also convinced there is much we can look to achieve within our local region.

Finally, we must look beyond the issues we face at a national level, and identify the challenges that are common to our region. And we need to develop mechanisms to ensure our voice is heard by the relevant standardsetting bodies.

APFFiAG is one mechanism, but so to are conferences where professionals from across our region come together to share thinking and build a common understanding.

CPA Australia represents more than 108,000 finance, accounting and business advisory professionals located in more than 89 countries around the globe. We are committed to providing training and development opportunities for all CPAs. This past year we held our first discussion group meeting in Vietnam. We also accredited a growing number of universities across the ASEAN countries, thereby enabling a seamless transition for graduates into the CPA Program. These steps all contribute to stronger linkages between accounting professionals across our region.

As we look to the future I am confident that shared understanding will pave the way to our region realising its dynamic and exciting potential.

This article originated from a speech given by CPA Australia immediate past president Mark Coughlin on convergence and harmonisation of accounting and auditing standards in ASEAN countries at the 14th AFA conference

Copyright CPA Australia Apr 2006

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