March 2014 - Inside Your Institute - Policy Update

A monthly review of the Australian Institute of Company Directors’ policy and advocacy team’s key projects and issues.

Superannuation

In February, we lodged a submission to the government’s discussion paper, Better regulation and governance, enhanced transparency and improved competition in superannuation.

Broadly speaking, we expect the proposed governance-related measures discussed in the paper to generally lead to a marked improvement in the governance practices of superannuation funds.

In our comments, we noted that the regulatory framework adopted for the governance of super funds needs to recognise and address a number of key differences that exist between the corporate structures of super funds and listed entities, and also between super funds and other financial institutions.

One way of addressing these differences would be to require super funds to provide greater disclosure of their governance arrangements.

It would also be logical for governance standards to be introduced through amendments to the Australian Prudential Regulation Authority’s prudential standard that applies to super funds relating to governance.

We believe independent directors can make a valuable contribution to super fund boards. There should be enough independent directors appointed to a board to genuinely influence and affect its decisions.

It is widely accepted that at least a majority of the directors on a board should be independent. We also believe the chairman of a super fund’s board should be independent.

The processes for appointing directors, board and director assessment and board renewal are already adequately addressed under the current prudential standard for super funds.

Financial Reporting

In January, we lodged a submission regarding the Conceptual Framework for Financial Reporting released by the International Accounting Standards Board (IASB).

Because Australia adopted International Financial Reporting Standards (IFRS) for all private sector reporting entities (listed and unlisted) in 2005, the quality and relevance of the accounting standards are of keen interest to Australian directors.

We did not provide specific comments in response to the questions in the discussion paper, but we did make general comments.

We noted that the additional purposes of the Conceptual Framework should be cited, including that it continues to be relevant and useful.

This is especially so with respect to the role it plays in assisting preparers, auditors and users of financial statements in understanding the underlying concepts that form the basis of the recognition, measurement, presentation and disclosures in the financial statements.

We stated that the Conceptual Framework needs to be a statement of clearly set out principles, without trying to detail myriad potential complexities.

It also needs to be redrafted in plain language to enable the users to easily understand the key accounting concepts included therein.

The discussion paper is overly focused on narrowly resolving current issues rather than providing a suitably aspirational forward-looking foundation for the development of accounting standards.

As a result, it has delegated a number of key conceptual issues into standard level projects, rather than in the revision of the Conceptual Framework where they would be more suited.

Given the concern regarding the increasing complexity of financial statements, we encouraged the IASB to consider how the revised framework may assist in reducing this complexity.

The IASB needs to consider the changing definitions for assets, liabilities and equity and the effect and potential costs that may be incurred by entities when applying the revised framework and in capturing these items into accounting records. 

We also noted that the proposals relating to disclosure of future net cash flows are contrary to current views on prospective information and reliable measurement.

As such, they represent a significant shift in the entity’s reporting responsibilities and lift the potential liability of the entity and its directors, given the uncertain nature of forward-looking disclosures, particularly with the lack of adequate and appropriate safe harbours in many jurisdictions. 

We recommended that the IASB provide a detailed explanation of the potential changes and the usefulness of such information needs to be debated by all key stakeholders.

A definition and detailed conceptual discussion of going concern also needs to be included in the framework.