Treasury’s proposed changes to accounting standard-setters

Treasury documents and the IPA’s responses

The key Treasury document on the reforms of the AASB, AUASB and FRC is the Consultation Paper – Climate-related financial disclosure, issued in December 2022, particularly pages 17–20.

The Consultation paper proposes three potential standard-setting and oversight structures to ensure that the financial reporting framework is fit for purpose to support climate-related financial disclosures (CFD). 

• Structure 1 – Confirm existing AASB, AUASB and FRC responsibilities.
• Structure 2 – Establish a separate sustainability standards board, similar to ISSB. 
• Structure 3 – Reform existing financial reporting bodies into a single flexible entity, consisting of a government-appointed governing board, supported by a team of permanent staff.

The IPA’s submission in response to the Consultation paper, at the time, commented that:

• Each structure has its costs and benefits. 
• IPA does not have a preference on any of the proposed structures for developing, making and monitoring climate and sustainability-related standards.
• IPA supports a structure where the staff and the boards have the necessary sustainability reporting technical expertise to draft, deliberate and approve the standards for issuance.

Other related documents issued by Treasury include a Bill providing the AASB and AUASB with functions to develop and formulate sustainability and assurance standards for sustainability purposes, and the FRC to have strategic oversight and governance functions over the AASB’s and AUASB’s sustainability standards functions. The legislation has now been enacted.

Recent developments

In November 2023, the Australian Government announced its intention to merge the AASB, AUASB and FRC into a single entity for operation on or after 1 July 2026, subject to the passage of legislation.

Government’s rationale for the merger:

• Making the bodies more efficient, effective and fit for purpose to assist Australia in implementing new climate and sustainability standards
• Stakeholders will benefit from engaging with a single entity, helping to increase regulatory consistency, reduce red tape and unnecessary costs and avoid duplication

Further details are to be finalised as draft legislation for consultation. In the interim, AASB will continue to progress on sustainability standards.

The merged single entity is akin to the proposed structure three above – reform existing financial reporting bodies into a single flexible entity, consisting of a government-appointed governing board, supported by a team of permanent staff. 

It would operate similarly to the New Zealand External Reporting Board (XRB), which consists of a governing board, the XRB, of nine members responsible for governance and oversight functions, and setting accounting and assurance standards. This is broadly similar to the strategic and oversight function of the FRC.

The XRB delegates the standard-setting functions to the NZ Accounting Standards Board (NZASB) and NZ Auditing and Assurance Standards Board (NZAUASB).

The IPA’s position

The IPA supports the merged single-entity structure for the reasons outlined by the Government above.

Additionally, IPA supports the establishment of a separate sustainability reporting standards board (SRSB) to develop, make and monitor climate- and sustainability-related standards.

This is because climate and sustainability-related disclosures are broad and complex areas that require the necessary specialised expertise and resources. This approach is similar to the establishment of the International Sustainability Standards Board (ISSB).

This contrasts with the existing structure where the AASB has a chair and 13 board members, of which three are sustainability reporting experts.

The IPA prefers the new SRSB’s inclusion of a majority of board members with sustainability reporting expertise, complemented by representatives from the AASB and AUASB to ensure all the boards work closely.

The AASB, AUASB and SRSB are technical boards and as such the chair of the board must have the necessary and in-depth technical skills to contribute to board discussions and lead standard-setting in Australia, and contribute to international standard-setting.

The various boards must be adequately resourced, and staff must have the necessary technical skills and attributes for standard-setting.

Board meetings should have robust technical discussions during public sessions, rather than providing merely a forum for members to vote on board decisions.