INSTITUTIONAL ARRANGEMENTS FOR

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Chapter1

INSTITUTIONAL ARRANGEMENTS FOR

SETTING ACCOUNTING STANDARDS IN

AUSTRALIA

LEARNING OBJECTIVES

After studying this chapter you should be able to:

• identify the main sources of regulation of financial reporting;
• identify the major developments in the institutional arrangements for accounting

standard-setting;

• explain the present accounting standard-setting arrangements;
• explain the process of developing accounting standards and concepts statements in

Australia;

• explain the process of developing interpretations; and
• explain the process of enforcing accounting standards and interpretations.

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QUESTIONS

• The three main sources of regulation governing accounting policies and financial

reporting practices in Australia are government legislation, the Australian Securities Exchange Ltd (ASX) Listing Rules, and accounting standards and other pronouncements issued by the Australian Accounting Standards Board (AASB).

Government Legislation:

In the private sector, the most important legislation specifying financial reporting requirements is the Corporations Act 2001. In particular, the Corporations Act specifies general requirements that require the financial report to comply with accounting standards and to present a true and fair view. The form and content of the statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows are considered in accounting standards issued by the Australian Accounting Standards Board (AASB) that are discussed in later chapters of this book.

ASX Listing Rules:

The listing rules of the ASX apply only to entities whose securities are listed on the ASX. The disclosure requirements of the ASX are contained in Chapter 3 (continuous disclosure), Chapter 4 (periodic disclosure) and Chapter 5 (additional reporting on mining and exploration activities) of the listing rules. The listing rules specify the detailed disclosure of financial information and require the disclosure of some information not required by the Corporations Act (e.g. various disclosures relating to the 20 largest holders of each class of quoted equity securities). If a listed company does not comply with the ASX Listing Rules, it may be delisted.

The ASX has also issued Corporate Governance Principles and Recommendations as amended in 2014 through its Corporate Governance Council. There are eight guidelines to which 29 recommendations are attached. The guidelines and associated recommendations are not mandatory. However, the listing rules include two mandatory requirements relating to the corporate governance guidelines. First, ASX Listing Rule

4.10.3 requires listed entities to disclose in their annual reports the extent to which they

have followed the guidelines during the reporting period. Second, ASX Listing Rule 12.7 requires that companies included in the S&P/All Ordinaries Index have an audit committee and that companies included in the S&P/ASX 300 Index have an audit committee that is constituted in accordance with the Corporate Governance Principles and Recommendations.

Accounting Standards and Other Pronouncements Issued by the AASB:

The third source of regulation governing financial reporting is accounting standards and

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interpretations prepared by the Australian Accounting Standards Board (AASB).Accounting standards and interpretations are concerned with both accounting measurement and disclosure. Authority is provided to AASB accounting standards by the Corporations Act. The Accounting Professional and Ethical Standards Board (APESB) provides similar authority for Australian accounting standards via APES 205 ‘Conformity with Accounting Standards’ (para. 5).

• The role of the ASX’s Corporate Governance Principles and Recommendations as

amended in 2014 is to provide a voluntary code of best practice corporate governance to guide listed companies. There are eight principles supported by 29 recommendations provided to listed companies. The guidelines and associated recommendations are not mandatory. However, the listing rules include two mandatory requirements relating to the corporate governance guidelines. First, ASX Listing Rule 4.10.3 requires listed entities to disclose in their annual reports the extent to which they have followed the guidelines during the reporting period. Second, ASX Listing Rule 12.7 requires that companies included in the S&P/All Ordinaries Index have an audit committee and that companies included in the S&P/ASX 300 Index have an audit committee that is constituted in accordance with the Corporate Governance Principles and Recommendations.

The guidelines are always a ‘work-in-progress’ as their application and relevance need to be monitored as business practices and community expectations change over time.

• The Australian Professional and Ethical Standards Board (APESB) was established as

an initiative of CPA Australia and the then ICAA (now CAANZ) primarily to develop and issue appropriate professional and ethical standards for their membership. (The IPA has subsequently become a member.)

The APESB has reviewed existing professional and ethical standards such as the old Code of Professional Conduct and Miscellaneous Professional Statements (APS series) and guidance notes (GN series). The subsequent APES series of ethical and professional standards approved by the APESB are mandatory for accountants who are members of CPA Australia, the ICAA and the IPA.

The specific professional standard and ethical standard APES 205 ‘Conformity with accounting standards’ requires members to comply with accounting standards as

follows:

4.3 Members who are involved in, or are responsible for, the preparation and/or presentation of Financial Statements of a Reporting Entity shall take all reasonable steps to ensure that the Reporting Entity prepares General Purpose Financial Statements.

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5.1 Members shall take all reasonable steps to apply Australian Accounting Standards when they prepare and/or present General Purpose Financial Statements that purport to comply with the Australian Financial Reporting Framework.

5.2 Where Members are unable to apply Australian Accounting Standards pursuant to paragraph 5.1, they shall take all reasonable steps to ensure that any departure from Australian Accounting Standards, the reasons for such departure, and its financial effects are properly disclosed and explained in the General Purpose Financial Statements.

5.5 Members in Public Practice shall take all reasonable steps to ensure that Clients have complied with Australian Accounting Standards when they perform an Audit or Review Engagement or a compilation Engagement of General Purpose Financial Statements which purport to comply with the Australian Financial Reporting Framework.

Compliance with APES 205 is mandatory for members of the professional accounting bodies, and non-compliance represents a breach of the code of ethics issued by the Accounting Professional and Ethical Standards Board. Failure by members to comply with the requirements of APES 205 could result in disciplinary proceedings being brought against them, which could result in the imposition of a fine or expulsion from the professional body.

• The present institutional arrangements for accounting standard-setting in Australia are

summarised in Figure 1.1 in Chapter 1.

Financial Reporting Council:

The Financial Reporting Council (FRC) is a statutory body under the Australian Securities and Investments Commission Act 2001. It is the peak body responsible for the broad oversight of the accounting and auditing standard-setting process in Australia.The FRC is also responsible for monitoring the effectiveness of auditor independence requirements in Australia and has an oversight function of the Auditing and Assurance Standards Board (AUASB).

In general, the FRC has responsibility for oversight of the AASB and for presenting reports and advice on the Australian accounting standard-setting process to the

Minister. The role of the FRC includes:

 appointment of the members of the AASB (except for the full-time Chair who is appointed by the Minister);  approving and monitoring the AASB’s priorities, business plan, budget and staffing arrangements;  determining the AASB’s broad strategic direction;