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«AASB 30-31 August 2016 ITC 34 Sub 1 Agenda paper A.1 (M153) ITC 34 Sub 2 Kris Peach Chair Australian Accounting Standards Board PO Box 204 Collins ...»

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27. In relation to NIM, we understand there are differences arising from alternative treatments of trading book securities, the inclusion or not of margins arising from RMBS and conduit entities, and the effect of bank bill rediscounting. Similarly in retail, differences in when old and new stores are dropped and included impact same store and sales per square metre metrics, while gross margins are affected by diverse treatment of slotting and line fees and advertising contributions.

28. As many of these metrics are derived from financial reporting numbers, we are of the view that the AASB, in conjunction with ASIC, need to review key industry performance metric, determine the existence of diversity in practice, and issue appropriate authoritative measurement guidance.

6. IFRS post-implementation review Use of the IFRS designation

29. IFRS is the global financial reporting language. It is time to remove the AASB designation for profit-seeking entities. It is recognised, inter alia, changes to the Corporations Act will be required.

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30. Not-for-profit entities in the public and private sectors would continue to use AASB designation based on IFRS.

Alternative performance measures

31. We are concerned with post-IFRS the incidence of use alternative performance measures (APMs) to report ‘profit’ from an entity perspective other than profit determined in accordance with accounting standards has risen alarmingly. We are of the opinion that such APMs overshadow statutory profit and users of financial statements are misled.

32. While pre-IFRS there were attempts to “game” profit figures by the use of extraordinary items (while they existed) and abnormal items, the adoption of IFRS has seen an increase in the number of adjustments to IFRS profit resulting in such reporting terms as underlying profit or cash earnings.

33. As part of the post-implementation review of IFRS, we believe the AASB be should determine if there is correlation between the perceived increased use of APMs and what aspects of IFRS has resulted in the observed behaviour. It is our view that APMs should not be permitted.

Australian specific guidance

34. The post-implementation review of IFRS needs to consider whether the AASB’s current approach of making no supplements to IFRS is in the interests of Australian investors and users and the broader public interest.

35. We believe that if current IFRS requirements do not meet investor or public interest needs the AASB has a responsibility to appropriately supplement IFRS. This responsibility also extends to addressing diversity in implementation that arises in Australia.

36. The post-implementation review should also examine the extent and manner by which other jurisdictions have dealt with amendments to IFRS.

7. Public accountability for Not For Profits

37. AASB 1053 Application of Tiers of Australian Accounting Standards in Appendices A and B deals with public accountability in relation to the NFP private sector. However, the AASB has not addressed the issue public accountability in relation to the NFP sector. The AASB should.

38. We believe consideration on the inclusion of definition of public accountability for NFPs needs to be addressed by the AASB as matter of urgency. In considering, the definition the application of the

public accountability concept to NFPs the AASB should include:

 The receipt of funds, assets and grants from government (Commonwealth, State or Local), and  The receipt of donations or bequests from the public.

39. In such circumstances, many NFPs should prepare general purpose financial statements.

8. Alternative reporting and forward looking statements

40. We strongly support the AASB in the issue of the Reporting Service Information for NFPs exposure draft and consider that the AASB should being expanding its responsibility beyond historical financial information.

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41. We believe the AASB should include in its projects:

 Integrated reporting – the AASB should monitor the development of integrated reporting with a view of the application of the principles to for-profit and NFP sectors  Management Discussion and Analysis (MDA) – see 9 below, and  Forward looking statements – the AASB should consider the development of standards

covering forward looking statements by both the for-profit and NFP sectors including:

o Pro-forma information included public offer documents including the application of AASB measurement standards to forward looking information o Preparation of forecast information for the inclusion in public offer documents including the basis of measurement and the extent AASB recognition and measurement requirements are to apply, and o Budget and Forward expenditure estimates prepared by governments including Commonwealth and State Budgets. It is arguable particularly at the whole of government level that Budgets receive more interest than historical financial results (other than the overall deficit/surplus), as such the basis for their preparation should be subject to an independently determined criteria.

9. Management commentary

42. We are of the opinion that financial statements without adequate Management Discussion and Analysis (MDA) does not provide sufficient information to assess the financial performance of an entity.

43. We believe the AASB should include a project to upgrade the existing IASB Management Commentary Practice Statement to enable it to form the basis of an MDA standard. The ASIC regulatory guide RG 247 Effective Disclosure in an operating and financial review could also be an input along with other existing guidance available. In due course, we envisage this regulatory guide would be unnecessary.

10. Profit Announcements

44. We believe the Annual Report as the primary source of financial information has been supplanted by the profit announcement (e.g. ASX preliminary final report). The profit announcement often precedes the annual report by as much as two months and has the potential to effect markets in an entity’s securities emphatically than a three month old annual report.

45. While there are requirements such as ASX listing rule Chapter 4 Periodic Reporting and Appendix 4E Preliminary final report, we are the view a more comprehensive approach to reporting in profit announcements is warranted.

46. Such a review should build upon the existing Appendix 4E requirements (including examining the existing requirements for continued relevance or enhancement), address the use of industry performance measures, APMs and the nature and extent of MDA to be included.


47. The AASB should be the lead domestic standard-setter.


–  –  –

4 May 2016 Kris Peach Chair, Australian Accounting Standards Board By email: kpeach@aasb.gov.au Dear Kris AASB Work Program - Regnan Perspectives Thank you for our recent discussion. This letter reiterates and expands on key points.

Remuneration Guidance We observe there has been significant innovation in, and enhancement to, remuneration disclosure since the two strikes rule was introduced, but this has all occurred ‘voluntarily’ and on individual company initiative, rather than in response to any particular framework. Principles based guidance could be useful in driving further improvement if it highlighted good practice and provided a conceptual framework for what constitutes ‘good’ disclosure. While there are other possible fora or organisations that could undertake this work, none clearly have a mandate for it or active plans to our knowledge. The AASB appears to have relevant skill sets to undertake such work. On the basis that broad consultation with all relevant stakeholders would be central to the approach, we are supportive of the initiative.

Voluntary Tax Transparency Code Since we met, the federal government confirmed in the 2016 budget that the Voluntary Tax Transparency Code, proposed by the Board of Taxation, will be adopted, with the AASB to have a role in relation to guidance on effective tax rates.

Regnan considers that achieving meaningful and informative tax disclosure is a significant challenge.

The Board of Taxation consultation to date appears to have been focused on a small number of potential reporters. Few user voices are evident. We would welcome the AASB reaching out to a broader group as it contributes to the next phase of this work.

Regnan - Governance Research & Engagement Pty Ltd ABN 93 125 320 041 AFSL 316351 Level 9, 387 George Street Sydney NSW 2000 Australia Phone +61 2 9299 6999 Fax +61 2 9299 6799 www.regnan.com Intangible Assets Regnan is concerned at the growing gap between market valuations and net book value recognised in financial accounts – intangible assets are an important component of this difference. Regnan has been active in the development of integrated reporting - via participation in the International Integrated Reporting Council investor network - and in advocating for the uptake of the (now finalised) integrated reporting framework which, in part, seeks to address this gap. In this context, we consider that there may be value in the IASB reactivating is work on intangible assets as a means to contribute to the conversation on how reporting entities should communicate with report users on intangibles – both booked and unbooked.

Other Priorities Regnan staff are regular users of financial statements in our work, researching environmental, social and corporate governance related sources of risk and value for S&P/ASX200 stocks.

We observe a surprising diversity in financial statement disclosure, even among the large listed stocks that are our focus. We would be pleased to contribute to efforts by the AASB to narrow the diversity of practice toward the better end, especially in the areas of related party transactions, provisions, contingent liabilities and asset impairment.

We note the recent trend among leading companies to adopt simplified financial statements. We would value any efforts the AASB made toward wider adoption of this practice.

I look forward to continuing our dialogue on shared interests.

Sincerely Alison George Head of Governance About Regnan Regnan – Governance Research & Engagement Pty Ltd was established to investigate and address environmental, social and corporate governance related sources of risk and value for long term shareholders in Australian companies.

Its research is used by institutional investors making investment decisions, and also used in directing the company engagement and advocacy it undertakes on behalf of long term investors with $82 billion, or ~5.5%, invested in S&P/ASX200 companies (at 31 Dec 2015).

Regnan was launched in 2007 having operated previously as the BT Governance Advisory Service. It is owned by institutional investors:

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