The AASB-Important and significant player, or toothless tiger with no real future?
Abstract
The AASB was introduced in Australia with the sole objective of harmonization the Australian
standards with International Accounting Standards. The AGAAP was mostly concerned with the
Australian standards that were applicable before the AASB was introduced. The Adopted AASB
standards and the earlier versions of the AGAAP actually differ in small areas and which mostly
relate to the reorganization of figures, presentation formats of financial statements and the
positions of entries like fixed assets which have also been renamed as non-current assets in IAS.
Other assets and liabilities that have been rearranged to comply with the basic structure of the
international accounting standards are shareholders equity, current assets and liabilities. The only
cost cutting measures that the government of Australia stands to benefit from are the results of
the provisions relating to employment of workers and their remuneration benefits and the need to
constantly rewrite financial statements to comply with the host countries requirements when
dealing with foreign countries. This paper looks at the differences and the applications of the
former and the current accounting standards which apply to the standardized AASB standards as
the adopted new accounting standards in Australia that’s recognized internationally compared to
The AASB-Important and significant player, or toothless tiger with no real future? 2
the former Standards that related only to Australia. The provisions of AASB 1004 and AAS27
that relates to contributions and the reporting standards for local governments and other non-
profit making organizations largely relate to the domestic market. The effect of AASB on foreign
transactions, foreign currency exchange and the applicable rate of foreign currency in cases of
hyperinflationary economic conditions in host countries in international markets and the impact
of the AASB 12 on other transactions as it relates to the functional currency to be used in foreign
currency translation or other foreign exchange transactions (Metha and Thapa, 1991).
Introduction
The Australian Accounting Standards Board or the AASB is a department of the Australian
government that is responsible for the development and maintenance of the financial reporting
standards that’s generally applicable to all the entities in Australia both in the public and the
private sectors of the Australian economy. The AASB has contributed immensely to the
development and implementation of the global reporting standards in the financial world besides
facilitating the participation and contribution of the Australian private and public community in
the global financial standards settings (CPA Australia, 2006). The major functions and powers of
the AASB are outlined in the Australian Securities and Investments Commission Act of the year
- These functions are to develop and implement a conceptual financial framework for the
main purpose of evaluating the standards set. To develop accounting standards as required by
section 334 of the Australian Corporations Act of the year 2001. AASB has also been charged
with the responsibility of formulating accounting standards that are required for other purposes
and also to participate and contribute to the research develop or advice on the application of a
The AASB-Important and significant player, or toothless tiger with no real future? 3
single global accounting standard that would be applicable worldwide. AASB finally is charged
with the overall responsibility of advancing and promoting the main objectives of the ASIC Act
as outlined in part 12 that include reduction of the overall cost of capital, facilitating Australian
entities worldwide to compete effectively and also to promote and maintain the investors’
confidence in the Australian economy (International Accounting Standards Board (IASB), 2006).
AASB visualizes itself as an international center of excellence and strives to deliver distinctive
and effective contribution to the development and implementation of very high quality reporting
standards in the financial world. Its mission generally is to develop and implement a conceptual
financial framework that’s acceptable to all sectors in Australian economy, making contributions
through leadership, talent and development of financial reporting standards globally and also
including the Australian community in the processes of setting the standards.
The government can save greatly when implementing long term strategic development of capital
projects that require colossal amounts of funding to construct in order to improve the country’s
infrastructure (AASB, 2013). An entity in the utilities industry may receive funding from private
individuals for the construction of megaprojects and which may later again require more funding
either from the government or the same private financiers. Depending on usage of the property,
the government may continue to benefit from the additional amounts that are payable on the use
of the facility by the current and new users.
Recognition of capital assets at fair value understates the return on assets value and it makes it
creates a scenario where the government assets are unprofitable while the recognition of assets at
cost value may also overstate the value of the return on assets but the provisions created for
depreciation can weigh in the cost effects of the capital asset.
The AASB-Important and significant player, or toothless tiger with no real future? 4
According to AASB (2013) BC19 In accordance with paragraph 13 of IAS 18, the
IFRIC decided that the Interpretation should require that when more than one
service is identified the fair value of the total consideration received or receivable
for the agreement should be allocated to each service and that the recognition
criteria of IAS 18 should be applied to each service. The IFRIC noted that IFRIC
12 Service Concession Arrangements and IFRIC 13 Customer Loyalty
Programmers provide guidance on how to allocate the fair value of the total
consideration received or receivable for the agreement to each component (see
paragraph 13 of IFRIC 12 and paragraphs 5–7 of IFRIC 13). Therefore, the IFRIC
concluded that this Interpretation should include only a reminder in paragraph 19
that such allocation is required if more than one service is identified.
BC20 If a separately identifiable ongoing service is part of the agreement, the
entity must identify the period over which revenue should be recognized.
Paragraph 20 of D24 stated that ‘although the period over which an entity has an
obligation to provide access to a supply of goods or services using a contributed
asset may be shorter than the useful economic life of the asset, it cannot be
longer.’ Some respondents asked the IFRIC to clarify whether that period may be
determined by the terms of the agreement and why that period cannot be longer
than the economic life of the contributed asset.
BC21 The IFRIC clarified that the period over which revenue should be
recognized for the ongoing service is generally determined by the terms of the
agreement with the customer. If the arrangement does not specify a period, the
IFRIC reaffirmed its view that the revenue should be recognized over a period no
The AASB-Important and significant player, or toothless tiger with no real future? 5
longer than the useful life of the transferred asset used to provide the ongoing
service. This is because the entity can only use the transferred asset to provide
ongoing access to a supply of goods or services during its useful life. Any
obligation that exists after the asset is replaced does not arise from the original
transfer but from the terms of the entity’s operating license or other regulation.
BC22 Almost all respondents disagreed with paragraph BC22 of D24 that the
time value of money should be taken into account when measuring revenue. The
IFRIC agreed with respondents and noted that paragraph 11 of IAS 18 requires
taking the time value of money into account only when payments are deferred
(p.18)
Prior to the year 2000, the accounting standards in Australia were being regulated under the
Australian Accounting Standards and mostly applied to the entities that were not generally
regulated under the Australian Corporations Law and the Public Sector Accounting Standards
Board (PSASB). The AAFR or the Australian Accounting Research Foundation regulated most
of the Accounting standards and regulations frameworks in Australia on behalf of all the
professional accounting bodies. The original standards of the AASB Standards (AASs) applied
before 2005.
Until the year 1999, the initial Australian Accounting Standards Board and the PSASB (Public
Sector Accounting Standards Board (PSASB) joined efforts that developed the AASB standards
that regulates the entities under the Australian Corporations law and the AAS standards that also
applied to the rest of the entities. From the year 2000, the AASB standards issued applied to
The AASB-Important and significant player, or toothless tiger with no real future? 6
generally all entities while the AAS standards series has been almost phased out and only AAS
25 that deals with superannuation plans is still in existence (Barrett, 2003).
Standards Applying After 2005
In the year 2002, the Australian Financial Reporting Council directed the Board to take strategic
direction towards the adoption of standards that are similar to the ones issued by the International
Accounting Standards Board for implementation and application under the Corporations Act
2001 for all the accounting periods effective from January 1 2005.
The Board, in July 2004, issued the first Australian equivalents to the IFRS that applied from the
year 2005. These equivalents comprise of;
a). The Australian Accounting Standards Board has adopted the following standards that are
similar to the International Accounting Standards Board. These are AASBs from 1 to 99 which
correspond to IFRS while AASB from 101 to 199 corresponds to IAS standards.
The interpretations that have been issued by the AASB and which also corresponds the IASB
adopted interpretations that have listed under the AASB 1048 as interpretation of standards.
From January 1 2005, all the Australian equivalents to the IFRSs have generally superseded all
the pre-2005guidelines in Australia.
Before the year 2005, AASB1 adopted for the first time the Australian Equivalents of the
International Financial Reporting Standards that outlines all the reporting requirements for
entities that are under the IAS.
AASB 101
The AASB-Important and significant player, or toothless tiger with no real future? 7
The purpose of this standard was to prescribe the systems and concepts that would guide the
main features, applications, operative date, the purpose of the standard, relevance, reliability and
substance. The others are consistency of Application, comparability, understandability, changes
in accounting policies, accrual basis, disclosures and going concern.
These guidelines have enhanced the effectiveness of the accounting system in Australia. The
convergence to IASB was to facilitate the integration of the accounting standards in Australia
with the rest of the world. These would make it less costly to make comparisons to other
multinational companies in the international market easy. Also it would facilitate mergers and
general expansion to foreign markets to be less complicated and convenient. The Australia
government would save the amounts that are normally used to pay for interpretation and
translation of accounts statements into the IAS format as all the current adopted accounting
standards are already in IAS format. The following are some of the critical sections that have
been adopted by the AASB;
AASB 1047
The AASB 1047 requires that all reporting accounting entities in the years 2003 – 2004 disclose
in their financial statements how the company’s transitional period is being undertaken and the
major differences that the adoption has against the IAS. The AASB number 1047 requires that all
the records between 2005 and 2004 also require all the reporting entities to fully disclose the
impacts of the report during the time mentioned.
The government of Australia’s major input into the process of adopting the new standards as
championed by the International Accounting Standards was generally to improve the general
The AASB-Important and significant player, or toothless tiger with no real future? 8
access to international capital by Australian firms and also basically to reduce the financial
reporting costs incurred by Australian Multinational companies. Under section 227 of the
Australian Securities and Investments Act of the year 2001, the AASB is constitutionally
required to participate and contribute in all the processes of developing accounting standards
globally. The Financial Reporting Council is controlled by the Australian government. In 1997,
the government of Australia issued a paper known as the CLERP 1. The paper was implemented
after extensive consultation and was finally enacted in the year 1999. The key reforms were for
the complete overhaul and setting up of institutional accounting standards. The Australian
Accounting Standards Board was also independently reconstituted and it was mandated to
oversee the operations of the AASB whose first duty was to set its own initial standards together
with the inclusion of the public sector projects while the other major call was to adopt the
Australian International Accounting Standards by the end of 2005.
Before the year 2002, Australia had less than 2% of the world’s total capital market and the
changes that were being directed at the AASB were primarily meant for the new body to
globalized the Australian economy, set a global accounting language with increased cross border
movements in financial capital as facilitated by the new high quality IAAS (International,
Acceptable Accounting Standards) that would also enable the large Australian multinational
companies to compare their performance globally with standard accounting practices that are
acceptable all over the world and at a reduced cost. The ASIC Act which was amended in 1999
ensured that AASB adopted the best standards of international accounting but the act never
specified the particular source of the best international accounting standards that Australia should
adopt i.e. whether the international accounting standards should be from the US Generally
Acceptable Accounting Practice or from the International Accounting Standards Board.
The AASB-Important and significant player, or toothless tiger with no real future? 9
However, the AASB has had a harmonization program with the IASB since the year 1996 and it
has been committed towards improving the accounting quality standards in Australia by adopting
the best practice globally and one which is acceptable worldwide. To ensure uniformity in the
application and interpretation of the IASB, the AASB has also adopted the interpretations from
the International Financial Reporting Interpretations Committee (IFRIC).
Effectiveness and Status of the AASB
The effectiveness of the AASB stems from the provisions that have been included from section
228 of the ASIC Act that requires all the interpretations should be made by referencing to the
main objective of the AASB and the purpose of the standards. This provision ensures the
reinforcement of principle based accounting nature of Australian standards as compared to the
black letter prescriptive approach as applied in countries like the US. The US standards are
susceptible to aggressive accounting techniques that can circumvent the broad definition of the
IASB or even its own GAAP. For example, during the Enron case in the US, special kind of
vehicles were utilized to avoid the common ownership tests that are available according to the
US standards that govern accounting practice in consolidation of account entities. The Australian
tests are more effective and cannot be circumvented easily like the US tests as the Australian
equivalents are based on economic substance and applies capacity control principles that also
subjects the tests to capacity build-up, whether it’s direct or indirect and its effect on control
financial together with its operating policies on individual entities. The United States Security
Exchange Commission together with the Financial Accounting Standards Board (FASB) are
reviewing the US prescriptive based systems to make more effective like the Australian
Accounting Standards Board principle based tests (AASB, 2005).
The AASB-Important and significant player, or toothless tiger with no real future?
10
AASB Accounting Standards
Where financial improprieties have been raised, then it’s prudent to distinguish between the
weaknesses that have been identified in the accounting standards given that also require
independent standard setter and situations that are been occasioned by non-compliance with the
international accounting standards or have been associated with an audit failure. The Australian
Accounting Standards have been internationally acknowledged as being of high quality.
Business Consolidations
The Australian accounting standard relating to account consolidation of special needs entities
that also include the control tests are substantially more stronger than the US tests equivalents.
The need for special purpose accounting vehicles and the wider concept of the off balance sheet
funding are fully addressed by the AASB and also as part of the IASB convergence on business
combination (Barrett, 2004).
Insurance Accounting
The accounting for the reinsurance contracts has been given more prominent especially in
context to the collapse of the HIH. AASB has adopted the IASB insurance accounting contracts
while also monitoring and participating in field testing processes.
Financial Instruments
AASB has designed its measurement and the recognition of company derivatives as part of its
IASB convergence that relate to financial instruments.
The AASB-Important and significant player, or toothless tiger with no real future?
11
Revenue Recognition
AASB has adopted revenue recognition concepts in line with its harmonization and convergence
exercises with the IASB global standards.
Accounting For Company Stock Options
The use of stock compensation is more extensive in Australia as a form of compensation for
senior executives. The US GAAP accounting standards does not recognize the stock option
recognition expense and it results in overstated earnings. Proponents of expensing have defended
the expense option as a cost to the company and its inclusion discourages the overstatement of
earnings hence better and accurate information would be available to the market (Accounting
Standard (AASB), 2007).
But those who oppose the expensing option argue that the market is already well informed and
they already have all the information they require to value the stock required together with its
share price. Difficulties in measurement and also the other negative effects of generally
expensing in high tech companies that literally minimize their initial capital costs by using the
expensing options. Section 300 and also 300A of the Australian Corporations Act stressed the
importance and requirements of the disclosure components in AASB standards especially as
concerns the executive compensation that includes the stock options. The details of the granted
options together with the remunerations of five highest paid officers in the company must be
disclosed in the company’s annual report. Section 300A requires all the nature and amount of
each emolument payable is included in detail in the company’s annual report for that financial
period for all listed companies. The director’s salary, the executive and other senior company
The AASB-Important and significant player, or toothless tiger with no real future?
12
officials must disclose all the total value of equity-based company compensation benefits that
should also be calculated on the net fair value of the stock. The calculations and methodology
used to arrive at the value of the equity should be used. The conditions and terms of the options
or grants issued must also be included on the company’s document.
The IASB share based payment principle requires that expensed options be made on the
company’s fair share value and the grant date estimated. IASB does not require the details of the
valuation methodology however all the entities would be required to basically disclose all the
models that the company has used together with the inputs that have been added to it.
To reveal the effectiveness of the AASB, some companies in Australia have already reviewed
their stock option plans to reflect the market’s needs and also to affirm their transparency and
their fare executive compensation policies (AASB 1, 2007). These measures will enable efficient
collection of taxes by the government of Australia as more accountability and transparency has
been emphasized on executive pay and stock option plans.
Disclosure Risks
The risks that surround the disclosed financial statements under IASB should be accompanied
with a summary of all the relevant accounting policies that may have influenced the financial
statements and the judgments made thereof. All the entities that have been disclosed in financial
reports must also contain important notes that have the essential information and key
assumptions made especially about the future and other uncertainty that may occur in business
operations especially the risks that may necessitate material adjustment to the value of carrying
amounts in terms of assets and liabilities during the financial year where the notes include their
The AASB-Important and significant player, or toothless tiger with no real future?
13
nature and also the carrying total amounts as at the end of the financial year according to the
balance sheet. The AASB monitors all the details as explained and interpreted by the IASB for
its own implementation (AASB, 2005).
Accounts to be True and Fair
Company’s annual financial statements must be able to reflect a true and fare view of the
company’s financial position and its performance as per section 297 of the corporations Act
together with its consolidated entity. Section 296 of the same act does not exempt companies
from complying with all accounting standards. Other informative notes must also be included in
financial statements to make them more accurate and reliable as per section 295(3) (c) of the Act.
True and fair accounts will result in an increase in the collection of taxes as all the revenue
generated by the business entities would have to be accounted for.
The AASB ensures consistency, reliability as well as comparability of all the financial
information as well as ensuring that all the financial statements give a true and fair picture of the
company. The following are the critical areas that have been covered by the adoption of the IFRS
in the Australian Accounting Standards Board (CPA Australia, 2006).
Institutional arrangements
The Financial Reporting Council is an Australian government body that oversees the operations
of the AASB. FRC ensures that AASB strives to achieve its objective of participating and
contributing towards the development and implementation of a single set of global accounting
standards that have a worldwide application. The FRC provides the strategic direction for AASB
The AASB-Important and significant player, or toothless tiger with no real future?
14
which are also guided by the legislative process and are subject to parliamentary approval or
disallowance. All the entities involved are restricted to the provisions of the Australian
Corporations Act of the year 2001 and they must apply the AASB Standards and also comply
with the Australian Securities and Investments Commission requirements. AASB mandate
covers all the listed companies in Australia, private and public sector entities together with
charities.
Decision to adopt the IFRS
The FRC provided the strategic direction to adopt the IFRS in the year 2002 to practically adopt
the IFRS from January 1 2005 that was tentatively in line with the EU adoption timetable. The
key benefit was to attract foreign capital to Australia and also to lower the cost of capital. The
other benefit was to reduce the cost of account preparers, internal and external auditors and other
users of multinational companies as there would no need to recast the financial statements into
IAS. The Australian GAAP also needed some amendments such as in financial instruments that
required policy changes.
Costs of adopting the IFRS
Australia suffered the loss of the AGAAP guidance like the policies that applied to employee
benefit accounting. Introduction of optional policies on accounting treatments meant less
comparability and also loss of space or freedom to develop and research on self profit entity
standards. The other costs were related to the implementation processes and costs of changes.
IFRS adoption process
The AASB-Important and significant player, or toothless tiger with no real future?
15
The adoption process for the IFRS retained major features in insurance and also extractive
entities in Australian standards. These were IFRS 4 and 6.
Key policy decisions
The major decisions made was to ensure that the adoption of the IFRS was also reflected in the
Australian accounting circles hence the new Australian Accounting Standards came into being
Outcomes
Australian entities financial statements and reports are more applicable internationally and are
also readily understood globally. Synergies in accounts preparation, audit (internal or external)
and other financial analysis of Australian reports and statements from subsidiaries of
multinational companies. Existing gaps that existed in AGAAP were also sealed mostly in
financial instruments measurement and recognition. The costs that were incurred during the
adoption processes especially during the implementation of the IAS 39 that applied to banks and
other financial institutions like insurance companies were significant. The pace or rate of change
has being significantly affected by various amendments that are mostly not related to any factors
in Australia. The major issues or concerns of Australian may also not be the pressing issues
globally like for instance the emission trading rights.
Current Challenges and future prospects
Moving from developing domestics standards to being one of the international advisers on
international standards is challenging. The AASB has reinvented itself and it also carries out
research in developing standards for intangible assets and extractive activities. AASB has also
The AASB-Important and significant player, or toothless tiger with no real future?
16
developed close relationship with their counterparts New Zealand’s FRSB and also to reconsider
the differential reporting standards framework.
The view of other players in financial reporting can be noticed when the standards effect on the
entities in the market is analyzed. The process of implementing the Australian equivalent
standards to IFRS that are known as the Australian IFRS (AIFRS) actually replaced the AGAAP.
In 2004, AASB issued the AASB 121 that dealt with the changes associated with the effects of
foreign exchange currency on foreign transactions and which was later replaced by the AASB
1012 that also deals in foreign exchange translation and which governs all the foreign currency
translation that also deals with the consolidation processes. AASB 129 standards refer to the
nature of reporting standards on economies that are experiencing hyperinflationary conditions.
The IFRS 21 or the IAS 21 that was later revised in the year 2003 that also corresponds to the US
GAAP together with the SFAS (Statement of Financial Accounting Standards (SFAS). During
hyperinflationary conditions, it’s normally very difficult to apply the right exchange rate or
determine the effects of favorable or unfavorable rates of exchange on the shareholders equity or
net income (IAS 29, 1988). AASB 121 standards utilize the entities financial statements to
actually determine the functional currency while the AIFRS and AASB treatment of functional
currency on hyperinflationary conditions are quite different (Metha and Thapa, 1991). The
process of translating accounts during hyperinflationary conditions can lead to differences in
accounting standards that can result in non-comparability of company financial statements.
To conclude, the AASB pre-2005 standards mostly concentrated on the integration of the
international accounting standards in Australia while post-2005 major concern for adopting the
International Accounting Standards was generally to improve the general access to international
The AASB-Important and significant player, or toothless tiger with no real future?
17
capital by Australian firms and also basically to reduce the financial reporting costs that are
usually incurred by Australian Multinational companies abroad (AASB, 2005). The major
objective that companies prepare financial statements is to provide information on the overall
financial position and the performance of the company’s cash flows as the information is useful
to other users of accounts. The functions of the AASB make it effective in implementing the
policies and recommendations of accounting practices in Australia. The constitutional backing
that the institution enjoys under the constitution of Australia gives AASB some teeth when its
implementing its policies in and out of the country. AASB has enjoyed some successes in its
implementation processes as well global recognition in its contribution to research and
development of accounting standards internationally. The future of AASB is very bright and its
successes are immeasurable.
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References
AASB (2013) Framework for AASB Amended Framework for the Preparation and Presentation
of Financial Statements
AASB (2005) Impact Statement – AASB 1047, Disclosing the Impacts of Adopting Australian
Equivalents to International Financial Reporting Standards, [Internet document] [cited
Accounting Standard (AASB) (2007) AASB 1047, Disclosing the Impacts of Adopting
Australian Equivalents to International Financial Reporting Standards, [Internet
document] [cited 10 April 2007], available from
http://www.aasb.com.au/public_docs/aasb_standards/AASB1047_04-04.pdf
The AASB-Important and significant player, or toothless tiger with no real future?
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Barrett , P. (2004) Auditing in an Evolving Environment (A focus on Auditing Standards and
Framework), Institute of Certified Public Accountants & CPA Australia, CPA Forum
2004, Singapore 20 August 2004
Barrett, P. (2003) Implications of Harmonization of Proposed International Standards for the
Public Sector, including an Audit Perspective, Speaking notes for CPA National Public
Sector Congress, Perth WA 19 November 2003
CPA Australia (2006) Accounting Handbook 2007, Pearson Australia Group Parliamentary Joint
International Accounting Standard 29 (1988) “Financial Reporting in Hyperinflationary
Economies”, (International Accounting Standards Board)
International Accounting Standards Board (IASB) (2006) “Framework for the Preparation and
Presentation of Financial Statements,” (International Accounting Standards Board
Retrieved August 25, 2006
Metha, D. and Thapa, S. (1991) “FAS-52, functional currency, and the non-comparability of
financial reports,” International Journal of Accounting (26 (2) pp. 71-84.
