Judgement has just been handed down
by Justice Peter Vickery of the Victorian Supreme Court in a case that we were involved in, ICM Investments Pty Ltd v San Miguel Corporation and another.  It pulls together the law in a number of useful areas, including commercial contracts and the payment of dividends.

View a summary of the case here.

SBR could completely change the face of financial reporting.

It is based on an international taxonomy, XBRL, or eXtensible Business Reporting Language, and is already used in many countries for financial and statistical returns to government.  A more elaborate version, iXBRL also has the facility for producing human-readable reports as well as just coded data.

In its options paper, Treasury is canvassing making SBR mandatory in Australia for the lodgement of financial reports.  It is currently optional and few organisations have chosen to do it and the potential benefits are untested in Australia.  With the increasing complexity of financial information, a core of audited tagged data that can then be used by regulators, analysts and other users, is the way of the future and so our submission and detailed answers to the Treasury's questions support mandating SBR for listed entities.

Current practice has demonstrated that SBR does not provide preparers of financial information with sufficient benefits to cause them to voluntarily adopt its use and so far analysts have not provided sufficient demand to cause preparers to adopt SBR.  Presently the only likely pressure for the adoption of SBR will come from analysts (principally those with experience of its use in the UK and USA). If compulsion is seen as good policy, providing the means by which Australian companies maintain their access to global capital markets, then SBR should be mandated for listed companies or companies seeking listing. There is presently no commercial rationale for the compulsory use of SBR by unlisted companies.

If the real drivers for the use of SBR are the efficient operation of government bodies, the only way to achieve adoption at present will be through compulsion. That compulsion needs to be aligned with the creation of software accessible and affordable to the range of businesses that will be affected by SBR based lodgement.

The IAASB's proposals to revise ISA 720
"The Auditor's Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor's Report Thereon" will extend the auditor's responsibilities to consider other accompanying information and presents challenges to the profession, in terms of balancing risk against the need to provide a useful assurance service.

The time is right to consider this accompanying information, because of the increased use of the internet as a tool for publishing financial information and reliance by investors on reports from analysts.  The number of shareholders who rely directly and exclusively on the statutory financial report for their information about their investment would be very small.

Westworth Kemp's submission on the proposals suggests that whilst the proposed ISA seeks to define a process that does not, in audit parlance, give assurance, or at least assurance comparable to an audit or review, the general reader is likely to see any form of report as giving them comfort that the matter upon which the auditor is commenting is suitable for their (the general reader’s) use.  This is the essence of the expectation gap.  Care must be taken not to widen that expectation gap, especially when a discrepancy between other information and the audited financial statements may be a matter of tone rather than hard facts.

This is not, however, a reason for not providing the proposed forms of report.

Effective management of the risk implicit in the giving of the proposed report requires careful consideration by the auditor. Whilst the provision in the standard of steps that can be taken when dealing with the other information may provide the auditor with some protection, ultimately the review of other information under the proposed ISA 720 would have to be undertaken by senior audit executives. Inherent in the work is the exercise of judgement and understanding of the client, which cannot be delegated to junior staff.

The AASB's controversial ED Australian Additional Disclosures - Investment Entities

is worth a read.  Not many exposure drafts are issued including two Alternative Views.  Because it imposes on Australian investment entities significant disclosure requirements over and above what is required by the IASB, it is worthy of attention.

Westworth Kemp have lodged a submission that is highly critical of the AASB's proposals.

Our submission together with detailed answers to the AASB's questions expresses our grave concern with the tenor of the exposure draft.  In 2002, the FRC decided that Australia should adopt IFRS, a decision that was implemented by the AASB issuing a “stable platform” of converged Australian standards in 2004, the application of which resulted in compliance with IFRS.  At that point, Australia ceded its sovereignty in terms of standard-setting for publicly accountable private sector entities and the role of the AASB became the role of a commentator and lobbyist in an international forum. Shortly after the changeover to AIFRS took place, the few optional treatments permitted under IFRS were reinserted into the standards and many of the remaining Aus paragraphs were removed to ensure, as far as possible, complete convergence.  Australian entities then had access to all the accounting treatments permitted under IFRS overseas.  To insert significant new Australian disclosure requirements now and to delay the adoption of a standard that was passed by the IASB in October 2012 is in our view a retrograde step.  Furthermore Australian investment entities are being prejudiced in an international context by being prevented from early-adopting the October 2012 amendments.

Because the proposals are so at odds with IFRS, they do not fall within the provisions of IAS 1 (AASB 101) paragraph 15 which allows the inclusion of additional information to allow fair presentation. To run that argument would be to argue that the standards set by the IASB, which specifically exempt investment entities from consolidating, do not give a fair presentation. Such a view undermines the whole principle of international harmonization, achieved by using IFRS as the basis for Australian financial reporting and is at odds with the powers of AASB set out in s227 of the ASIC Act.  Consequently, if ED 233 is issued as a standard, Australian companies complying with the standard would therefore not be able to make the unequivocal statement of compliance with IFRS required by AASB 101 (IAS 1) paragraph 16.

We understand that control based consolidation has been a key feature of Australian financial reporting for a long time and has stood Australia in good stead, but in our view there are circumstances where the nature of the investor relationship is better portrayed by accounting for the investment at fair value.

The life and times of the Financial Reporting Panel

Stephanie and UNSW academic Jeffrey Knapp have had their article The Life and Times of the Financial Reporting Panel published in the Company and Securities Law Journal, Vol 30/8 November 2012.  We can't post the article here, but it is available through academic libraries.

The abstract reads: "On 1 January 2005, the Financial Reporting Panel was established at law amid high expectations that, as an alternative to the courts, it would prove to be a useful accounting dispute resolution body.  On 23 August 2012, the Panel was effectively closed with the passage through both Houses of Parliament of the Corporations Legislation Amendment (Financial Reporting Panel) Bill 2012 (Cth). The reason proffered for the Panel's closure is that its ongoing existence could not be justified on the ground of cost-benefit, given a history of few referrals and rare use.  This article is the first to consider how the Panel has operated and to narrate its history from origination to closure.  The article also analyses why the Panel was underused and failed to meet its original expectations."

Our wish list for Christmas and going forward into a new year that could be a period of increasing uncertainty, confusion and, ultimately, for directors, auditors and their advisers, risk, is:

Let’s understand what is really needed in financial statements and strive for clear communication with stakeholders;

Let’s understand how continuous disclosure interacts with reporting generally;

Let’s continue to evolve practical working guides to cover the whole plethora of information released by companies to the markets

Let’s co-ordinate the wide variety of regulatory developments currently in train many of which have merit to ensure that we don’t just overregulate; and

Let’s get a clear idea of the roles of the several gatekeepers responsible for corporate governance and reporting.

We wish you all the best for the festive season – and the web links in our footnotes will keep you provided with holiday reading if you run out of novels!

[1] The speech: http://www.ifrs.org/Alerts/PressRelease/Pages/AICPA-Dec-12.aspx

[2] Media coverage of the PCAOB vs China saga: http://retheauditors.com/2012/12/04/auditors-diss-us-regulators-regarding-china/

[4] IASB project page http://www.ifrs.org/current-projects/iasb-projects/leases/Pages/leases.aspx, including a Snapshot of the initial proposals and reports on the progress of the project

[6] FRC paper on reducing irrelevant information http://www.frc.org.uk/Our-Work/Codes-Standards/Accounting-and-Reporting-Policy/Cutting-Clutter.aspx , EFRAG paper on a framework for note disclosures: http://www.efrag.org/front/p169-1-272/proactive---a-disclosure-framework-for-the-notes-to-the-financial-statements.aspx  etc

http://westworthk.staging.thewebconsole.com/blog/improving-the-auditor-s-report?preview=1

[9]ASIC’s news item on audit inspections:  http://www.asic.gov.au/asic/asic.nsf/byheadline/12-301MR+ASICs+audit+inspection+findings+for+2011-12?openDocument

Westworth Kemp’s submission (see PDFs below) supports these moves and also encourages standard setters with related projects to work together to reduce the volume of disclosures and improve the quality of financial communications.

Disclosure framework response.pdf

• Is it supposed to provide information to analysts?

• Is it supposed to be for the benefit of sophisticated investors such as fund managers?

• Is it supposed to provide information for a broad spectrum of non-analyst investors?
   
• Should it not also be directed towards creditors or employees as users?

In our view if these questions were addressed, the answers to a number of the questions express or implicit in this paper would be answered including:

• How detailed should the commentary be;

• How could it best be presented and through what medium; and

• The extent of the unreasonable prejudice exemption.

     To see the full details of our submission, click on the PDFs below:

ASIC Regarding Operating and Financial Review.pdf