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Accounting alert 2010/09 - Trans-Tasman convergence

Unravelling a tangled web

Author: Frank Betkowski and Darryn Rundell, Accounting Technical Group

The Australian Accounting Standards Board (AASB) and New Zealand Financial Reporting Standards Board (FRSB) have issued joint exposure drafts of proposals to harmonise Australian and New Zealand Standards in relation to entities applying IFRSs as adopted in Australia and New Zealand.

In this Accounting alert, we explore:

Key points:

  • The joint AASB-FRSB proposals would streamline Accounting Standards, eliminate some disclosures and introduce new options in accounting
  • Australian and New Zealand Standards will be more closely aligned, but not identical – the initial phase is focussed on for-profit entities and will not address all differences
  • Early adoption may be attractive, particularly to eliminate superfluous or sensitive disclosures, to achieve convergence in accounting policies between Australian and New Zealand entities in a consolidated group, and for non-reporting entities reporting under the Corporations Act 2001


Overview of the proposals

Summary of the requirements

The AASB has issued the following exposure drafts:

  • AASB ED 200A Proposals to Harmonise Australian and New Zealand Standards in Relation to Entities Applying IFRSs as Adopted in Australia and New Zealand – details those standards proposed to be amended
  • AASB ED 200B Proposed Separate Disclosure Standards – this proposes the creation of a new Australian-specific disclosure Standard which includes those non-IFRS disclosures transferred from other Standards.

The exposure drafts propose to eliminate many of the IFRS-related differences between the two countries for for-profit entities and represent the first phase of a longer-term project to harmonise accounting requirements in Australia and New Zealand.

The proposals arise from the Single Economic Market Initiative which seeks to enable for-profit entities to prepare only one set of financial statements what would be recognised in both jurisdictions. The proposals seek to introduce a number of additional options available under IFRSs (where options available under IFRS were previously not permitted), ensure consistency in the wording of standards and also harmonise additional disclosures between the countries in a separate domestic standard.

The exposures drafts are open for a three-month comment period ending on 8 October 2010. The proposals are expected to be effective for annual reporting periods beginning on or after 1 July 2011, but early adoption is expected to be available.

The proposals will have the effect of moving the wording in Australian and New Zealand Standards closer to be a ‘word for word’ copy of IFRSs, subject to application and other requirements and a number of supplementary Standards (for disclosure and differential reporting purposes). However, the initial proposals will retain a large number of ‘Aus’ or ‘NZ’ paragraphs, particularly in relation to not-for-profit requirements, but also in some for-profit areas (see below).

Key changes proposed

The proposals would be a significant step forward in cross-Tasman convergence. A large number of differences between Australian and New Zealand Standards would be eliminated. In terms of the introduction of new options, the New Zealand proposals are more extensive as the AASB has previously gone through a large number of changes to more directly align Australian Accounting Standards with IFRSs.

Whilst the amendments are numerous, from the Australian perspective, the following changes are noteworthy:

  • Introduction of the ‘true and fair’ override for entities not governed by the Corporations Act 2001
  • Elimination of additional Australian guidance and requirements, e.g. how to eliminate unrealised profits on contributions to joint ventures, prohibition on presenting the financial statements in more than one presentation currency
  • Removal of many Australian-specific disclosure requirements, e.g. reconciliation of cash-flow to operating profit, disclosure of capital commitments and other contracted expenditure commitments.
The proposals are a welcome step towards convergence both across the Tasman and with IFRSs themselves. The AASB is gradually ‘undoing’ the changes made to IFRSs when they were original adopted in Australia. Whilst these changes do not undermine the ability of eligible entities to make an explicit and unreserved statement of compliance with IFRS, the minor disclosure relief and wording alignments are welcome. Some entities may also wish to early adopt the proposals (once made as Standards) to eliminate the need for superfluous or sensitive disclosures not made by their international counterparts.

Impacts on individual pronouncements
Pronouncement Proposed amendments
AASB 1 First-time Adoption of Australian Accounting Standards
  • Deletion of the explanatory guidance relating to initial application of the standard
AASB 5 Non-current Assets Held for Sale and Discontinued Operations
  • Deletion of the clarification of the requirement to restate comparative information
AASB 101 Presentation of Financial Statements
  • Relocation of the definitions with specified meanings used in the standard?
  • Deletion of additional guidance relating to a true and fair view
  • Relocation of the disclosure requirements to assert whether the financial statements have been prepared in accordance with Australian Accounting Standards
  • Relocation of the disclosure requirements to provide information on the statutory base and other related information
  • Relocation of the disclosures relating to GPFSs or SPFSs
  • Deletion of guidance relating to limited explicit unreserved statement of compliance
  • Include the requirements relating to true and fair over-ride? (but include a footnote noting the true and fair over-ride is not available for entities governed by the Corporations Act 2001)
  • Deletion of requirement for presentation in English
  • Relocation of audit fee disclosures? (with a reduction in complexity)
  • Relocation of the disclosures relating to imputation credits? (the new requirements will be largely based on current New Zealand requirements)
  • Deletion of disclosure requirements relating to capital and expenditure
AASB 107 Statement of Cash Flows
  • Deletion of the requirement to disclose a reconciliation of cash flows arising from operating activities to profit or loss
AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
  • Deletion of guidance relating to restatement of comparative information
AASB 121 The Effects of Changes in Foreign Exchange Rates
  • Deletion of requirement to present a financial report drawn up in one presentation currency
AASB 128 Investments in Associates
  • Deletion of guidance relating to restatement of comparative information
AASB 134 Interim Financial Reporting
  • Amendment to the scope to comply with IFRS wording
Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments
  • Deletion of guidance relating to cancellation of membership of non-active members
Interpretation 112 Consolidation – Special Purpose Entities
  • Deletion of guidance relating to prohibition of a company from acquiring shares in itself
Interpretation 113 Jointly Controlled Entities – Non-monetary Contributions by Venturers
  • Deletion of guidance relating to recognition of an elimination of an unrealised gain or loss

Source: AASB ED200A, Appendix A (summarised, additional commentary added)

New or amended disclosures

As noted above, ED 200B proposes a new Australian-specific disclosure standard incorporating the disclosures transferred from other Standards as proposed in ED 200A. These disclosures have in some cases been modified and some new disclosures requirements are proposed, e.g.:

  • Rewording of the requirement to make a statement of compliance with Australian Accounting Standards
  • A mandatory requirement to disclose the statutory base or other reporting framework
  • Substantial simplification of the requirement to disclose auditor fees
  • Disclosure about the impact of imputation credits (franking credits) in relation to classes of investor.

Initial observations

Early adoption may be attractive in some cases

Whilst some may consider the proposals somewhat ‘technical’ in focus, there are a number of situations where the proposals will benefit Australian entities and so early adoption may be attractive.

From an Australian perspective, these include:

  • Consolidated groups with entities reporting in both countries – the elimination of differences, and introduction of consistent IFRS options (particularly into NZ equivalents to IFRSs) will permit the application of consistent accounting policies within a group, i.e. accounting policy choices available in Australia will also be available in New Zealand. Largely consistent disclosure requirements will enhance this benefit
  • Entities seeking to remove some disclosure from their financial statements to achieve a general reduction of non-essential information, international neutrality or for commercial reasons - the removal of these disclosures may avoid the need for additional explanation to overseas analysts and other users of financial statements
  • Non-reporting entities preparing special purpose financial statements – the new Australian specific Standard is proposed to broadly apply only to reporting entities and general purpose financial statements, meaning non-reporting entities can avoid some additional Australian specific disclosure in the ‘core’ standards applied by these entities, e.g. audit fee, franking credit and similar disclosures under AASB 101.
Interaction with ‘reduced disclosure requirements’ (RDR)

ED 200B is proposed to broadly apply only to reporting entities and general purpose financial statements (and accordingly the additional disclosures will not mandatorily apply to non-reporting entities).

The exposure draft does not contain proposals mirroring the ‘Tier 2’ requirements in AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards Arising from Reduced Disclosure Requirements. Many of the disclosures proposed for transfer by ED 200B would be ‘shaded’ under the ‘Reduced Disclosure Requirements’ (RDR) and so would not be applicable to entities applying the RDR. The AASB has requested input on which of the transferred disclosures should be subject to the RDR. More information about the RDR can be found in Accounting alert 2010/08.

The requirements of AASB 2010-2 and AASB 1053 only apply on a mandatory basis to annual reporting periods beginning on or after 1 July 2013. In contrast, the proposals in ED 200A and ED 200B are proposed to apply to annual reporting periods beginning on or after 1 July 2011. Accordingly, the AASB may need to consider the inconsistency between these application dates and how any RDR requirements might be applied, particularly where entities wish to early adopt the RDR.

Not all differences will be eliminated

In addition to the consolidated financial statements issue noted above, there are a number of other areas where the Boards have not sought to achieve convergence. Some items have been left out of the initial proposals on the basis the IASB is undertaking a project in the area. Others have been excluded on the basis of differences in approach, legal framework or philosophy between the Boards.

Key areas where differences will remain include:

  • Projects being undertaken by the IASB - Framework for Preparation and Presentation of Financial Statements, insurance accounting, employee benefit accounting
  • Consolidation - The AASB and FRSB have not specifically considered modifications to the exemption from consolidation should be made for intermediate parent entities (i.e. the requirements for an intermediate parent that is the ultimate Australian or New Zealand parent to prepare consolidated financial statements)
  • AASB 6 Exploration for and Evaluation of Mineral Resources – as an ‘interim’ standard, this carries forward pre-IFRS practice
  • AASB 7 Financial Instruments: Disclosures – the AASB has chosen to defer consideration of whether to permit some disclosures to be made outside the financial statements
  • Superannuation fund reporting – New Zealand and Australia have taken different approaches to retirement benefit plan reporting (New Zealand adopts the IAS Standard, Australia has a country-specific Standard)
  • Related party disclosures – the AASB has deferred consideration of the Australian specific disclosures for individual key management personnel
  • Interpretations – the AASB is to undertake a separate review of Australian-specific Interpretations
  • Special types of financial statements – concise financial reports, prospective financial statements and summary financial statements (outside the scope of IFRSs).

Later phases of the convergence project will focus on differences between the differential reporting frameworks and not-for-profit and public sector entity requirements.

More information

More information about the developments discussed in this document, see the following:

  • AASB ED 200A Proposals to Harmonise Australian and New Zealand Standards in Relation to Entities Applying IFRSs as Adopted in Australia and New Zealand (from the AASB website, PDF 567kb)
  • AASB ED 200B Proposed Separate Disclosure Standards (from the AASB website, PDF 228kb)
  • Accounting alert 2009/10 – joint Board initial discussions on convergence.

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Related links

  • Monthly Roundup - May 2011
    Financial reporting developments during May 2011. Highlights include new batch of standards forming the 'next wave', new Accounting alerts and the first instalment in Trans-Tasman convergence.
  • Accounting alert 2010/13 - December AASB meeting
    The AASB closed out 2010 with agreement to finalise a number of pronouncements early in 2011 – Trans-Tasman convergence standards, superannuation exposure draft, consolidation suite of standards and a revised Conceptual Framework.
  • Accounting alert 2010/09 - Trans-Tasman convergence
    The Australian Accounting Standards Board (AASB) and New Zealand Financial Reporting Standards Board (FRSB) propose to harmonise Australian and New Zealand Standards in relation to entities applying IFRSs as adopted in Australia and New Zealand.
  • Accounting alert 2010/12 - October AASB meeting
    The two day meeting included a joint meeting with the New Zealand FRSB. Discussion included trans-Tasman convergence, various IASB proposals (including rejecting the stripping cost proposals).
  • Accounting alert 2010/11 - September AASB meeting
    This two day meeting largely consisted of the AASB considering its responses to numerous exposure drafts from various bodies. Also discussed were long service leave accounting, audit fee disclosures and superannuation.
  • Accounting alert 2010/10 - July AASB meeting
    Partially a joint meeting with the NZ FRSB, the meeting saw the AASB agree on exemptions from preparing consolidated financial statements and progress on the superannuation project.
  • Accounting alert 2010/03- March AASB meeting highlights
    Highlights include a forthcoming ED to align Australian and NZ standards and possible amendments to AASB 127 to allow more entities to gain exemption from consolidation.

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