Australian Capital Markets Regulatory Systems - Report Example

Australian Capital Markets Regulatory Systems Table of Contents Executive Summary 3 Introduction 4 Background of Australian Accounting Standard 5 Australian Government Boards for Accounting Standards and Financial Reporting 6 Rules and Regulation for Accounting Standards and Financial Reporting in Australia 10 The Impact of International Financial Reporting Standards on Australia 11 Conclusion 14 Reference 15 Executive Summary This report deals with the capital market of the Australian Economy. The financial regulatory authorities are responsible for forming necessary rules and regulation for the Australian financial market. Accounting standard and financial reporting are one of the crucial factors that influence the financial market. Initially, the Australian Government failed to enforce any effective accounting standards and corresponding policies required for financial reporting. The Australian Government realized the importance of such policies to do away with manipulative practices that prevail in the financial market. In 2000, the Australian Government established a new governing body for developing the accounting standards and financial reporting. After coming into the effect, the Government implemented accounting standards and financial policies. However, later on, it felt the need for establishing International Financial Reporting Standards (IFRS) in its economy, so that it can be at par with the global accounting standards. Australian Accounting Standard Board, Auditing and Assurance Standards Board, Financial Reporting Council and Minister for Financial Market of Australia are the key governing bodies that are responsible for controlling the accounting and auditing standards. These organizations help and work together for maintaining the accounting standards set by the Australian Accounting Standard Board. They have formed a set of guidelines for the accounting standards and financial reporting that must be followed by the public and private sectors. The introduction of the IFRS in the Australian financial market is an important transition period for the Australian economy as there have been significant changes in the financial activities of business organizations including the non-profit organizations. After implementing the IFRS, the Australian business has been adversely affected. However, reliability, transparency and relevance of the financial reports have increased. Introduction Contemporary business has revolutionized the very idea of financial market. This had subsequent repercussion in the entire global economy. Financial market includes different sectors like banking, insurance, capital market, mutual fund etc which have become an inevitable part of the growing economy. Such phenomenon has necessitated the establishment of an authorized body to regulate the financial markets. This report will attempt to discuss the various aspects of the Australian capital market and its regulatory regime with special emphasis on the laws, regulation and other rules that constitute it. In this discussion, different Australian regulatory bodies and their roles in capital market will be analyzed. The primary objective of these regulatory bodies is to ensure the development of a strong financial market by building the trust and confidence of the investors. Hence, this project will chiefly focus on the contribution of various entities to the capital market. The historical performances of their activities will also be figured out. Since the last decades, significant changes have been registered in the Australian capital market which makes it increasingly important to examine the evolution of the modern regulations and rules. Necessary information will be obtained from various government regulatory bodies of the Australian capital market. This will help to generate qualitative findings. The overall findings will be summarized and relevant recommendations for future development will also be proposed. Background of Australian Accounting Standard Before the year 2000, the Australian Government failed to implement any effective accounting standard for financial reporting purposes. The accounting professional bodies of Australia were ineffective in enforcing the necessary compliances in the Australian accounting standards. During the period of 1940 to 1960, the two Australian governing bodies responsible for maintaining the accounting standards were the Institute of Chartered Accountants and the Australian Society of Accountants. These two bodies together formed Australian Accounting Research Foundation (AARF) which was responsible for developing effective accounting standards. However, this authority also failed to establish relevant accounting standards. Dagwell et al commented that “at that time there had been several corporate collapses, and there was public pressure to develop effective standard for reliable financial reporting” (Dagwell, Wines & Lambert, 2007, p.11). Such perplexities continued till 1980s. In order to do away with such encumbrance, the Commonwealth Government of Australia founded the Accounting Standard Review Board (ASRB) and it was given the due authority to execute the standard accounting system. Later during early 1990’s, Commonwealth Government set up a new governing body called the Australian Accounting Standard Board (AASB) which replaced the existing ASRB. As the entire administrative for accounting standards changed, it again led to dissatisfactory results in Australia (Dagwell, Wines & Lambert, 2007, p.11). However, AASB finally was able to issue and implement Australian accounting standards in 2000. Finally in 2005, in order to comply with the world of business, Australian government adopted the International Financial Reporting Standards which is regulated by AASB. Australian Government Boards for Accounting Standards and Financial Reporting Australian Accounting Standard Board (AASB) is the primary governing authority responsible for establishing the accounting standards in Australia. Specifically, it is a government agency as per the Australian Securities and Investments Commission Act 2001 (ASIC act) which is responsible for maintaining the financial reporting standards in Australia. These financial reporting standards are followed by both the Australian public and private sectors. According to the Act of Securities and Investments Commission, AASB have certain functions that aim to develop effective accounting standards. The mission statement of AASB provides a clear idea of its primary objectives. It has developed two mission statements. These are to “develop and maintain high-quality financial reporting standards for all sectors of the Australian economy” and to “contribute, through leadership and talent, to the development of global financial reporting standards and to be recognized as facilitating the inclusion of the Australian community in global standard setting” (Australian Accounting Standard Board-a, n.d.). According to the mission statement, AASB concentrates on developing global accounting standard for the Australian business organizations. Another regulating body responsible for setting accounting standards and financial reporting is the Financial Reporting Council of Australia. Like AASB, it is also a legal body under the ASIC act 2001. The primary areas of functioning of Financial Reporting Council (FRC) include the development and evaluation of the accounting standard and auditing standards. According to ASIC act 2001, FRC can act only within the particular framework mentioned in the act. The core objective of this organization is to facilitate the framing of reliable and relevant accounting and auditing standards (Financial Reporting Council, 2005). The Auditing and Assurance Standards Board (AUASB) is another governing body operating under the Australian Government. It is an independent, statutory agency of the government that is responsible for formulating, implementing, evaluating and maintaining the auditing and assurance standards. It is responsible for ensuring “public interest, high-quality auditing and assurance standards and related guidance” for enhancing “the relevance, reliability and timeliness of information provided to users of auditing and assurance services” (Auditing and Assurance Standards Board-a, n.d.). Australian Government believes that it is important to develop the auditing and assurance standards based on public standard as the trust of the users of financial reports, for example, the investors, are of paramount importance. These three governing bodies of the Australian Governments are the prime statutory organizations that enforce the law for the accounting and auditing standards in Australia. The primary objectives of these three statutory bodies are the same and in order to meet these objectives, they work together to enforce the necessary laws and regulations. The role of Australian Federal Treasurer and Australian Securities & Investment Commission (ASIC) in shaping the efficient policies for accounting standards and financial reporting is very crucial. These two governing body are responsible in controlling the financial affairs for the Australian economy. The Federal Government & Treasurer is the apex authority regulating the financial and economic policies like monetary policies, national investment and interest policies etc. The Federal Government & Treasurer has developed Standard Business Reporting system that reduces the complexities of the financial reporting system. “SBR has been co-designed by Australian, state and territory government agencies in partnership with software developers, business, accountants, bookkeepers, tax agents and payroll professionals” (Australian Treasury, n.d.). The ASIC has been assign by the Federal Government & Treasurer to develop the investors’ confidence in Australian financial system. The primary focus of the ASIC is to maintain the quality and transparency of the published financial reports and statements. It also evaluates the auditing process followed the business organizations (Collier, 2003). The Corporation Act of 2001states the role of the ASIC in maintaining the accounting standards and other necessary regulations for accounting standards and financial reporting. The Australian Government has developed an inter-organizational relationship among the three governing bodies for better synchronization of financial activities. Figure 1 and 2 presents the relationship of statutory bodies and other governing groups in enforcing the accounting standard law. Figure 1: Organizational Structure of Auditing and Assurance Standards Board (Source: Auditing and Assurance Standards Board -b, n.d.) Figure 2: Organizational Structure of Australia Accounting Standards Board (Source: Australia Accounting Standards Board-b, n.d.) As per the organizational structure of both the governing bodies, The Ministers for Finance Services, Superannuation and Corporate law; is the apex authority that regulates the financial activities of Australian economy. The chairman of Financial Reporting Council, Australia Accounting Standards Board and Auditing and Assurance Standards Board is accountable to the Minister for financial services. Every statutory body has its own role in developing the accounting standard in Australia. The FRC is responsible for the appointments of board members for AASB and AUASB. The FRC also provides strategic advice to the board of these governing bodies. Both organizational structures include project advisory groups and consultative group. These supporting groups help in developing the agenda materials by working with AASB and AUASB. The Australian structure for controlling the accounting standards is quite well developed and organized. This has led to the successful adoption of International Financial Reporting Standards in 2005. Rules and Regulation for Accounting Standards and Financial Reporting in Australia The Australian Accounting Standard Board had adopted International Financial Reporting Standards in 2005 and thereafter significant changes were registered in the accounting standards of Australia. The primary objective of the Australian Government in implementing the new accounting standard was to make the financial reports more reliable, relevant, neutral and comparable. The Department of Finance and Deregulation is responsible for publishing the latest report on the accounting policies guidance. According to this guidance, all the necessary costing, evaluation, account recording, the financial disclosure methods etc are required to be mentioned. As per the guidance, the organizations must publish their financial reports by the end of the year i.e. on December 31. The financial reporting and the structure of the financial statement should be easy to understand and must include the primary financial statements like income statement, balance sheet, cash flows etc. The necessary notes for better understanding of the financial adjustments must be shown below the financial statements. The language of the financial statements and reports must be in Australian English and currencies must be in Australian dollar. For investors’ as well as shareholders’ interest, the financial statements must include the comparative statements, including the previous years’ financial statements. The financial assets in the balance sheet should be calculated as per the fair value as it is appropriate for the valuation of a company. An organization can adopt either AAS or AASB Interpretation but it must get an approval from the Australian Government (Department of the Finance and Deregulation, 2009-2010). The business organizations and other entities are liable to follow the rules and regulations of the Australian accounting standards. Any violation of these rules and regulation by any public of private sector will lead the Australian Government to take necessary steps against it. The Australian Government may cancel the business license by filing a suit against the entity responsible for violating the rules. The Impact of International Financial Reporting Standards on Australia In order to comply with the global business and accounting standard, Australian Accounting Standard Board took the decision to enforce the International Financial Reporting Standards on January 1, 2010. According to a report presented by Deloitte, differences exist between the International Financial Reporting Standards (IFRS) of IFRS Foundation and International Financial Reporting Standards of AASB. Discrepancies are also found in the amendments of these two accounting standards. For example unlike IFRS, the Australian accounting standard requires the additional disclosures of financial statements (Deloitte, 2005). The primary feature of the Australian equivalent accounting standard to the International Financial Reporting Standards is to provide useful, reliable and relevant information to investors and shareholders. The adaption of this accounting standard has made a significant impact on the financial performances and positions of the business units including the non-profit organization. This accounting standard is enforced in all the entities that prepare their financial reports as per the Corporations Act of Australia. There are certain areas on which the impact of the Australian IFRS can be notified. According to the IFRS treatment, the research cost has been separated from development phase of business and therefore the development cost are capitalized due to some restrictions. Prior to 2005, the goodwill of a business used to amortize after a period of 20 years. However, now there is no rule for amortizing the goodwill. Some of the intangible assets like customer list, brand mastheads are excluded from the financial reports and such assets cannot be recognized as assets in balance sheet. Besides, other intangible assets can be revalued if it has proper value in market. The share based payment becomes recognized and it will be included in the income statement as expenses. The treatment of the financial instruments has been revised. The increased value of the any asset will be treated as profit (Pawsey, n.d.). A survey on Australian IFRS after four years from implementation, has disclosed important facts. Figure 4 represents the impact of the IFRS on Australian business. Figure 3: Impact of the IFRS on Australian business (Source: Thornton, 2009) The above pie chart reveals the mixed result that IFRS generated. Nearly 38% of the Australian people have found it positive for their business and other 38% of people found it negative. Figure 4 shows the overall negative impact of IFRS on business by organization. Figure 4: Overall negative impact of the IFRS on business by organization (Source: Thornton, 2009) The above graphical representation indicates the negative effect of IFRS. The smaller accounting firms are more affected. Conclusion Since 1950, the Australian Government had been trying to implement an effective accounting standard that would help the economy to understand the financial activities of various business organizations. Additionally, the Government also realized that accounting standard is necessary from the perspective of the user of financial reports, like the investors and shareholders. After many unsuccessful attempts, the Australian Government was able to develop a governing authority body responsible for evaluating accounting standards and financial reports. AASB, FRC and AUASB are major authorities for accounting and auditing standards. AASB adopted IFRS accounting policies in order to standardize financial reporting systems and to make it at par with the global business. After the implementation of the IFRS, significant changes in accounting records and financial reporting were reported. However, the Australian Government has modified this accounting standard by introducing some new amendments. According to a survey, the Australian business has been adversely affected after the implementation of IFRS. The financial performances and positions have declined and small organizations were the worst sufferers. However, IFRS has indeed strengthened the confidence of the users of financial reports. The process has become more transparent and the investors are more equipped to take a financial decision. Reference Australian Accounting Standard Board-a. (No date). About the AASB. Retrieved on September 3, 2010 from http://www.aasb.com.au/About-the-AASB.aspx. Australia Accounting Standards Board-b. (No date). Organisational Structure. Retrieved on September 3, 2010 from http://www.aasb.com.au/About-the-AASB/Organisational-structure.aspx#a. Auditing and Assurance Standards Board-a. (No date). About the AUASB. Retrieved on September 3, 2010 from http://www.auasb.gov.au/About-the-AUASB.aspx. Auditing and Assurance Standards Board-b. (No Date). Organisational Structure. Retrieved on September 3, 2010 from http://www.auasb.gov.au/About-the-AUASB/Organisation-Structure.aspx. Australian Treasury. (No date). Standard Business Reporting. Retrieved on September 3, 2010 from http://www.treasury.gov.au/content/sbr.asp?ContentID=1789&titl=Standard%20Business%20Reporting. Collier, B. (May 20, 2003). ASIC: Policing acceptable standards of auditing and accounting practices. Retrieved on September 5, 2010 from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Audit&acctg_standards_0503.pdf/$file/Audit&acctg_standards_0503.pdf. Dagwell, R. Wines, G. and Lambert, C. (2007). Corporate Accounting in Australia. (4th Edition). UNSW Press. Deloitte. September 2005. A-IFRS vs IFRS: Differences between Australian equivalents to International Financial Reporting Standards (A-IFRS) and International Financial Reporting Standards (IFRS). Retrieved on September 3, 2010 from http://www.iasplus.com/au/0509differences.pdf. Department of the Finance and Deregulation, (2009-2010). Requirements and guidance for the preparation of financial statements of Australian government entities for reporting periods ending on or after 1 July 2009. Retrieved on September 3, 2010 from http://www.finance.gov.au/publications/finance-ministers-orders/docs/FMOs-Financial-Reporting.pdf. Financial Reporting Council. (2005). Core objectives of the FRC. Retrieved on September 3, 2010 from http://www.frc.gov.au/about/objectives.asp. Pawsey, N.L. (No date). Australian Preparer Perceptions towards the Quality and Complexity of IFRS. Retrieved on September 3, 2010 from http://apira2010.econ.usyd.edu.au/conference_proceedings/APIRA-2010-199-Pawsey-Australian-preparer-perceptions-of-IFRS.pdf. Thornton, G. (June 2009). IFRS Survey: Four years on – where to from here?. Retrieved on September 3, 2010. from http://www.grantthornton.com.au/files/gt_ifrs_survey_0509-final.pdf. Read More