Australian Securities and Investments Commission v MYOB Ltd
[2002] VSC 34
•15 March 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7862 of 2000
| Australian Securities and Investments Commission | Plaintiff |
| v | |
| MYOB Limited | Defendant |
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JUDGE: | Hansen J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 5 & 6 February 2002 | |
DATE OF JUDGMENT: | 15 March 2002 | |
CASE MAY BE CITED AS: | Australian Securities and Investments Commission v MYOB Ltd | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 34 | |
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Corporations – Accounting Standard AASB 1015 – Construction – Accounting for assets acquired on reconstruction within an economic entity – At fair value or carrying amount – Adoption of carrying amount as measure of value – Partial disallowance of standard by Senate – Construction and operation of standard in amended form.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. C. M. Scerri Q.C. with Mr. P. H. Solomon | Australian Securities and Investments Commission |
| For the Defendant | Mr. N. J. Young Q.C. with Mr. P. W. Collinson | Freehills |
HIS HONOUR:
The question in this case is whether the financial report and statements of MYOB Limited ("MYOB") for the half year ended 30 June 2000 were prepared in accordance with The Australian Accounting Standard AASB 1015 "Acquisitions of Assets" ("AASB 1015"). The Australian Securities and Investments Commission ("ASIC") brings the proceeding seeking a declaration that MYOB has contravened s 304 and s 305 of the Corporations Law ("the Law"). In each case the contravention is established by the fact, as it is alleged, that the financial statements did not comply with AASB 1015. A failure to prepare a financial report in compliance with an accounting standard constitutes a contravention of s 304. A failure of financial statements to give a true and fair view of the financial position and performance of the disclosing or consolidated entity constitutes a contravention of s 305. MYOB denies any such contravention and opposes the application.
ASIC filed the application on 4 December 2000. This was after MYOB lodged its financial report and statements for the half year ended 30 June 2000, on 31 August 2000, and after ASIC and MYOB corresponded on the issue of whether the report and statements complied with AASB 1015.
In its application ASIC also sought an injunction pursuant to s 1324 of the Law to restrain MYOB from preparing the financial statements for the MYOB consolidated entity in a manner inconsistent with AASB 1015. In respect of such relief it is to be noted that MYOB's subsequent financial reports and statements (for the year ended 31 December 2000 and the half year ended 30 June 2001) were prepared on the basis of the relevant accounting treatment in the report and statements for the half year ended 30 June 2000 (although with notes relating to the matter in issue in this case). However, during the hearing ASIC's counsel stated that the claim for an injunction was not pressed. It was accepted, counsel said, that in relation to the point in issue, MYOB had acted honestly and that it could be expected to so act in future, in accordance with the judgment of the Court.
MYOB
MYOB was incorporated on 18 March 1999. It commenced operation on 1 April 1999, when it purchased a business, and associated assets, in a unit trust. As a result of the purchase, MYOB altered its internal structure. It issued unit holders with shares in MYOB in proportion to the number of units they held in the trust. Quite simply, MYOB was placed between the unit holders and the trust, MYOB acquired the business conducted by the trust, and the associated assets, and the unit holders became shareholders in MYOB.
The acquired assets included intangible assets consisting of copyrights, trademarks, registered designs, brand names, licence arrangements and goodwill. The fair value of these assets at the date of acquisition was $89,360,000 according to the prospectus registered with ASIC in June 1999 and referred to below.
The purpose of the reconstruction was to facilitate a public offering of shares in MYOB. Accordingly, a prospectus was prepared and registered with ASIC in June 1999. Under the prospectus MYOB sought to raise $35M by issuing 17.5M shares at $2 each. In July 1999, MYOB's securities were publicly listed on the Australian Stock Exchange.
On 6 March 2000, MYOB lodged with ASIC its audited financial report for the nine months commencing 1 April 1999 and ended 31 December 1999. The report, signed by the directors, was dated 14 February 2000. It included the financial statements of MYOB and the consolidated financial statements of the economic entity, being MYOB and its controlled entities. In the statements, the assets acquired on 1 April 1999 were measured at the amounts at which they were then carried in the books of the vendor. As a consequence, the report recorded total intangible assets of $16.6M, of which only $3.1M represented goodwill. The contrast between the carrying value of the intangible assets acquired and the far higher figure calculated on a fair value basis is striking. In this respect I note that the prospectus included the report of an independent accountant which referred to these differences in value and to a change in AASB 1015 which, if actually made, would permit MYOB to value the acquired assets at their then carrying value rather than at their fair value at the date of acquisition. The independent accountant's report stated that if this change was not adopted by the date of MYOB's first annual reporting year end MYOB "will record the assets acquired at their fair value rather than their book written down value as recorded by the pre-reconstruction entities. The increase in the value of assets in the MYOB Ltd consolidated balance sheet would be $89,360,000 and a substantial proportion of this will need to be amortised over an appropriate period".
Accounting Standards – the legislative framework
On 4 November 1999 the Australian Accounting Standards Board ("AASB") issued AASB 1015. I refer to the provisions of AASB 1015 later. For the moment I refer to the relevant legislative provisions under which the accounting standard was made and with which compliance was required.
The AASB was established by the Australian Securities and Investments Commission Act 1989, s 226 ("the ASIC Act"). The main objects of the ASIC Act are stated in s 224(1). They include the development of accounting standards that require the provision of financial information that is, amongst other things, relevant and reliable, facilitates comparability, and is readily understandable.[1] The functions of the AASB are set out in s 227(1). The functions include making accounting standards under s 334 of the Law for the purpose of the "national scheme laws",[2] which means the legislation embodying the national corporations scheme and the ASIC Act. The expression "accounting standard" is defined in s 9 to mean an instrument in force under s 334, or a provision of such an instrument which has the effect of an accounting standard. Section 110B(1) further provides that an expression in an instrument made, granted or issued under the Law has the same meaning as in the Law.
[1]S 224(1)(a)(iv), (v) and (vi).
[2]Defined in s 5(1).
The ASIC Act further provides that in interpreting an accounting standard made by the AASB, a construction that promotes the objects of Part 12 (in which the above provisions are contained) or the purpose or object of the standard, is to be preferred to a construction that does not promote those objects.[3] That is so in the case of a standard, even if the purpose or object is not expressly stated in the standard.
[3]S 228(1) and (2).
I turn now to the provisions of the Law. Section 334(1) authorised the AASB to make accounting standards for the purposes of the Law. An accounting standard applies to periods ending after the commencement of the standard or periods ending, or starting, on or after a later date specified in the standard (s 334(4)).
Sections 304 and 305, under which ASIC seeks declaratory relief, are contained in Part 2M.3 of Chapter 2M of the Law concerned with Financial Reports and Audit. Sections 304 and 305 are directed at half year financial reports[4] and require:
(a)that the financial report must comply with the accounting standards (s 304); and
(b)without affecting the obligation to comply with accounting standards, that the financial statements and notes must give a true and fair view of the financial position and performance of the disclosing or consolidated entity (s 305).
[4]Ss 296 and 297 make like provision for the full year.
This overview of the legislation is sufficient for present purposes save for reference to one further provision of the Law. Section 334(2) provides that s 46A of the Acts Interpretation Act 1901 of the Commonwealth applies to a standard made under s 334(1) as if it were a disallowable instrument for the purposes of that section. It is to be noted that for the purpose of the national scheme, the Corporations (Victoria) Act 1990 provided that the Acts Interpretation Act applied as a law of Victoria in relation to the Corporations Law and Regulations in Victoria, and that the Victorian Interpretation of Legislation Act 1984 did not apply.
As a standard is a disallowable instrument, ss 48, 48A, 49 and 50 of the Acts Interpretation Act apply. A standard is to be treated as though it is a regulation and liable to be disallowed by either House of the Parliament, as provided in s 48(4). A regulation so disallowed "thereupon ceases to have effect" (sub-s (4)). The further point to note is that "the disallowance of the regulation . . . has the same effect as a repeal of the regulation" (sub-s (6)). It is then pertinent to note s 50(a), which provides, in summary, that the repeal of a regulation shall not affect any right acquired or accrued under any regulation so repealed. Among other things, MYOB relies on s 50.
AASB 1015 - Acquisitions of Assets
I referred earlier to the fact that this standard was issued by the AASB on 4 November 1999. I now refer to its provisions in so far as they are relevant to this case. They are:
"1Application
1.1This Standard applies to each entity which is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Law and which:
(a)is a reporting entity; or
(b)holds those financial reports out to be, or form part of, a general purpose financial report.
2 Scope
2.1This Standard applies to acquisitions, other than exchanges or swaps of goods or services of the same nature and value that do not involve cash consideration.
3Operative Date
3.1 This Standard applies to:
(a) half-years ending on or after 30 June 2000
(b) financial years ending on or after 31 December 2000.
3.2This Standard may be applied to financial years ending before 31 December 2000, and may be applied to half-years within those financial years, where an election has been made in accordance with subsection 334(5) of the Corporations Law.
3.3When operative, this Standard supersedes Accounting Standard AASB 1015 "Accounting for the Acquisition of Assets", as approved by notice published in Gazette No. S 298 on 29 September 1988 and amended by Accounting Standard AASB 1025 "Application of the Reporting Entity Concept and Other Amendments".
4Purpose of Standard
4.1The purpose of this Standard is to:
(a)prescribe the accounting for acquisitions
(b). . .
6 Initial Measurement of Acquired Assets
6.1Subject to paragraphs 6.3 and 6.4, where there is an acquisition, the acquired assets must be measured at the acquisition date at the cost of acquisition.
6.2Subject to paragraphs 6.3 and 6.4, where an entity or operation is acquired, the identifiable assets acquired (and, where applicable, identifiable liabilities assumed) must be measured at the acquisition date at their fair values as at the acquisition date. Any difference between the cost of acquisition and the aggregate of the fair values of the identifiable assets acquired (less, where applicable, the aggregate of the fair values of the identifiable liabilities assumed) must be accounted for in accordance with Accounting Standard AASB 1013 "Accounting for Goodwill".
Reconstructions Within an Economic Entity
6.3Where there is a reconstruction within an economic entity, the acquirer must account for the acquisition:
(a)in accordance with paragraphs 6.1 and 6.2; or
(b)by measuring at the acquisition date the assets acquired (and, where applicable, liabilities assumed) at their carrying amounts determined in accordance with Accounting Standards immediately prior to the reconstruction within an economic entity.
6.4Where there is a reconstruction within an economic entity and the acquirer elects to account for the acquisition in accordance with paragraph 6.3(b), the vendor entity must account for its acquisition of the acquirer's equity instruments by measuring those equity instruments at the aggregate of the carrying amounts immediately prior to the reconstruction within an economic entity of the assets transferred to (less, where applicable, liabilities assumed by) the acquirer.
11 Transitional Provisions
11.1Where practicable and subject to paragraph 11.3, the accounting policies required by this Standard must be applied as at the beginning of the reporting period to which this Standard is first applied. Where this gives rise to initial adjustments which would otherwise be recognised in net profit or loss, the net amount of those adjustments, including any adjustments to deferred income tax balances, must be adjusted against retained profits or accumulated losses as at the beginning of the reporting period to which this Standard is first applied.
11.2Where it is not practicable to determine the initial adjustment referred to in paragraph 11.1, the amounts at which the assets acquired (and, where applicable, liabilities assumed) were initially recognised are deemed to have been determined in accordance with this Standard.
11.3.Where a reconstruction within an economic entity occurred prior to the beginning of the reporting period to which this Standard is first applied, the accounting for that acquisition must not subsequently be adjusted as a result of the application of this Standard.
12Definitions
12.1In this Standard:
acquisition means obtaining control of an asset, group of assets,or net assets in exchange for a cost of acquisition
acquisition date means the date on which an acquirer obtains control of an asset, group of assets, or net assets
carrying amount means in relation to an asset or a liability, the amount at which the asset or liability is recorded in the accounting records as at a particular date."
Although it was put in evidence and referred to, it is not necessary to detail the provisions of the superseded standard AASB 1015. It is sufficient to note that paragraphs 6.3 and 6.4 were new provisions. They had no counterpart in the superseded standard. In particular, the option in paragraph 6.3(b), of measuring assets acquired at their carrying amounts in the vendor's accounting records, was new. MYOB took advantage of this option in preparing the financial report and statements for the period ended 31 December 1999.
Disallowance by the Senate
On 17 February 2000 the Senate passed a resolution disallowing paragraphs 6.3. and 6.4 of AASB 1015, quoted above. The disallowance was effective as at midnight on 16 February 2000. The standard was not otherwise disallowed or amended and, as such, remains in force.
To recapitulate on the chronology, MYOB's directors signed their report for the accounts to 31 December 1999 on 14 February 2000, a mere two days before the disallowance became effective.
The evidence
There were two exhibits, being a Court Book of two volumes and a set of MYOB financial statements. The Court Book included the affidavit in support sworn by an officer of ASIC and the exhibits thereto, statements of evidence of two expert witnesses (one for each side), and several accounting standards.[5]
[5]Which were augmented by others provided by counsel during the hearing.
The expert witnesses were called and cross-examined. I received their evidence subject to objection. That was because the evidence of each included inadmissible commentary and opinion, in particular on matters such as the proper construction of the standard. For the sake of expedition, and with the concurrence of counsel, it was preferable to deal with the evidence in that way. It is unnecessary now to undertake an analysis of the evidence of the respective expert witnesses and rule as to what was admissible. It makes no difference in the ultimate analysis.
The issues
The case turns on the proper construction and operation of AASB 1015.
It is accepted by ASIC that in preparing its financial report and statements for the period 1 April to 31 December 1999, MYOB was entitled to apply the standard as it stood at 14 February 2000 and, in doing so, to bring the assets acquired to account under paragraph 6.3(b). It is accepted that it did so apply the standard. It is conceded that those financial statements were properly prepared in accordance with the standard as it stood at that date. The report and statements are not attacked in any way.
ASIC's attack is upon the subsequent report and statements for the half year ended 30 June 2000. It contends that they were required to be prepared on the basis of AASB 1015 as it stood on 30 August 2000, when the directors' report was signed. At that time the standard required that the assets acquired be measured under paragraph 6.1 or 6.2, which required the assets to be accounted for at their cost or fair value (there being no contest that in this case either basis of measurement would produce the same value). MYOB denies that the standard operates in this way and contends that it is entitled to maintain the values recognised in the accounts to 31 December 1999. ASIC is concerned that if those values remain uncorrected MYOB will not bring to account the difference between the carrying amount and the fair value of the intangible assets and, in consequence, amortisation will be (and presently is) understated to the extent of almost $91M, and net profit will be overstated. The differences are significant and materially affect MYOB's financial statements. ASIC is also concerned that MYOB's financial statements be comparable to those of other corporations, MYOB being, according to counsel for ASIC, the only corporation to have taken advantage of the opportunity of applying paragraph 6.3(b) of the standard.
I now refer more fully to the submissions of counsel.
The commencing point is ASIC's submission that MYOB was required to comply with AASB 1015 in preparing the financial statements for the half year ended 30 June 2000. ASIC submitted that AASB 1015 is to be applied in each reporting period. The requirement is that "the standard has to be looked at each time to see what it requires in the particular case". It is a matter of construction of AASB 1015 as to what it requires to be included in the financial statements. Hence, MYOB's report and statements for the period ended 31 December 1999 were proper and correct under the standard as it stood when the directors signed that report. But, ASIC submits, when the directors signed their report for the six months ended 30 June 2000, paragraphs 6.3 and 6.4 had been disallowed and the report and statements were, accordingly, required to be prepared in accordance with AASB 1015 as it then stood. The standard then operated to require MYOB to restate the value of intangible assets and make adjustments to figures in the statements for the preceding period. That is because, in the absence of paragraphs 6.3 and 6.4, the standard required the relevant intangible assets to be measured under paragraphs 6.1 or 6.2 at the cost of acquisition or fair value (on either basis the figure being the same).
ASIC's counsel described the issue thus raised as "very much a simple construction issue" as to what the standard requires. That, he said, "is the controversy before the court".
According to MYOB's counsel, ASIC’s submission misapprehended the true operation of the standard. The submission of MYOB's counsel is that the standard is concerned with the first time acquired assets are measured in the books in accordance with the standard. Once that measure has been made the standard is spent, it does not apply again. The revaluation of non-current assets is dealt with by another standard, AASB 1041.
There was some evidence and discussion as to the extent to which MYOB's accounts would require adjustment if ASIC's submission was correct. I informed counsel that if I concluded in favour of ASIC I would not rule on the detail of the adjustments required. In the first instance at least, the parties should confer on that aspect. The parties concurred in that course.
Yet the matter of the nature and extent of the adjustments required was raised and relied on by counsel for MYOB to support their submission as to the proper construction and operation of AASB 1015. The accounting experts’ evidence dealt with the matter of the adjustments required. Whereas paragraph 11.1 required the initial adjustments to be made to retained profits or accumulated losses at the beginning of the reporting period to which the standard is first applied, on ASIC's case adjustments would now be required to the profit and loss statement for the six months ended 30 June 2000, and the later statements, including to the provision therein for dividends and recorded profits. Counsel for MYOB submitted that adjustments of this nature were not intended by the standard.
Counsel for MYOB made an alternative submission based on the transitional paragraph 11.3. The submission was made on the premise that ASIC's argument that the standard can be applied a second time is correct. The submission is that paragraph 11.3 operated to preclude the application of paragraphs 6.1 and 6.2. According to counsel for MYOB, the expression "this Standard" in paragraph 11.3 can mean either AASB 1015 as a whole or a provision of it.[6] Such a reading would accord with the substance of the matter and recognise that following the Senate disallowance the standard is substantively different from that previously applied, and would allow the transitional provision to operate in the context of the revised standard.
[6]See s 9 and s 110B of the Law.
Neither paragraph 6.1 nor 6.2 was applied in the first reporting period to which the standard was first applied. Thus the reconstruction occurred prior to the beginning of the reporting period (1 January 2000) to which paragraph 6.1 or 6.2 was to be first applied. Therefore, paragraph 11.3 applies and the accounting for the acquisition cannot be adjusted.
ASIC's counsel submitted that paragraph 11.3 could not operate in this way, and advanced several reasons for the submission. First, the expression "this Standard" in paragraph 11 and elsewhere in AASB 1015 means the standard as a whole. Where there is reference to a particular provision, the reference is to the specific paragraph. Secondly, the scheme of the standard is that it is applied as a whole and, on such application, compliance with a particular provision will have a certain effect or result. That effect or result obtains from the application of "this Standard" as a whole. Hence it is understandable that paragraph 11 referred to the first application of "this Standard". Thirdly, the proper construction of "this Standard", in its context in paragraph 11, is not assisted by the definition of "accounting standard" in the Law.
These are construction arguments. To these ASIC added some further submissions of a different kind. The first point is based on the fact that in the financial statements for the period ended 31 December 1999, MYOB had brought to account under paragraph 6.1 or 6.2 other assets acquired in that period. The application of those paragraphs in that period took away an essential step in MYOB's submission. It meant that paragraphs 6.1 or 6.2, as well as 6.3 or 6.4, had been applied in the reporting period in which the standard was first applied. Therefore, ASIC argued, MYOB's submission must fail.
In reply, MYOB's counsel countered that this submission of ASIC was flawed for several reasons. First, the intent of paragraph 11.3 is to deal with accounting for reconstructions within an economic entity. The treatment of assets otherwise acquired is irrelevant. Secondly, following the disallowance, paragraphs 6.1 and 6.2 had a substantively different operation in that the exceptions to them no longer existed. Hence, the expression "this Standard" should be taken as referring to the standard as it stood prior to the disallowance, and subsequently. If one were to take the approach advocated by counsel for ASIC, one would apply a substantively different standard at the earlier time from that applied at the later time. This approach would rely not on the definition of "accounting standard", but on s 10 of the Acts Interpretation Act under which a reference to an Act or regulation is to the Act or regulation as amended at the relevant time.
Counsel for ASIC advanced one further submission against MYOB's reliance on paragraph 11.3. It was submitted that the purpose of paragraph 11.3 was to prohibit acquisitions that had been accounted for at fair value under the earlier 1998 version of AASB 1015 being measured at the carrying value in the vendor's books. There are several difficulties with this submission. First, the alleged purpose is not stated in paragraph 11.3. Secondly, as MYOB pointed out, there may be entities which had accounted for reconstructions on a carrying basis. It is unnecessary to pursue this particular point further. In my view the submissions of MYOB's counsel on this point are sound. I do not accept this part of ASIC's submission on the application of paragraph 11.3.
MYOB relied on a further alternative submission based on s 50 of the Acts Interpretation Act. This is the accrued rights argument. The contention of MYOB is that in preparing the financial report and statement for the period ended 31 December 1999, MYOB exercised a right given to it by paragraph 6.3 prior to disallowance of that provision by the Senate. But for that disallowance MYOB had the right to maintain the December 1999 acquisition values in its subsequent accounts. If ASIC is correct in contending that the standard can be applied a second time with a different result, the Senate's disallowance of paragraphs 6.3 and 6.4 will negate or adversely affect that accrued right. In practical terms, and this is confirmed by ASIC's expert witness, on ASIC's case the 30 June 2000 accounts should state a different value for the acquired assets as at the same date in the previous accounts. That would produce a different or contradictory value for the assets as at the same date. There would also have to be catch up adjustments as the expert evidence demonstrated. In other words the adjustments reached back into the prior period in which, it is conceded, the accounts were properly prepared. The experts said such adjustments may be made by applying paragraph 7.1 of AASB 1018 which deals with the correction of errors in a prior accounting period.
MYOB's counsel submitted that the vice in ASIC's case is apparent if one has regard to what the position would be if the AASB had replaced the standard with a new standard that was otherwise identical to that left in force by the Senate. In that situation, MYOB's rights would have been preserved by paragraph 11.3. It is a twist of fate, given the events that have transpired, that the disallowance was not accompanied by an appropriate provision, transitional or otherwise, that addressed the present situation. Counsel for MYOB referred to several cases in support of the proposition that it enjoyed a right within the meaning of s 50; see Esber v The Commonwealth of Australia[7], ACI PET Operations v Comptroller-General of Customs[8], Repatriation Commission v Keeley[9], Repatriation Commission v Gorton[10], Ku-Ring-Gai Municipal Council v Attorney‑General for the State of New South Wales[11] and Azavedo v Secretary, Department of Primary Industries and Energy[12]. Further, on the matter of retrospectivity, MYOB's counsel referred to Victrawl Pty Ltd v Telstra Corporation Limited[13].
[7](1991-1992) 174 CLR 430
[8](1993) 118 ALR 114
[9](2000) 98 FCR 108
[10][2001] FCA 1194
[11][1957] 99 CLR 251
[12](1992) 35 FCR 284
[13](1995) 183 CLR 595
ASIC's answer to this submission is that while MYOB acted as it was entitled to do in preparing the 31 December 1999 accounts, in respect of subsequent accounting periods it was required to report (and comply with the obligations in ss 304 and 305) in accordance with accounting standards as they were at the time of reporting. It was no more than a hope or expectation that AASB 1015 would remain in force in the same terms and with no subsequent change that might require a change in the accounting treatment in relation to the assets acquired. In acting as it was entitled to, MYOB did not acquire or accrue a right within the meaning of s 50. Counsel referred to Transport Accident Commission v Lanson[14] and Kentlee v Prince Consort[15].
[14][2001] VSCA 84 at [60]
[15][1998] 1 Qd R 162
This is a sufficient reference to the issues and submissions presented by counsel. I have not mentioned every point, although I have read the written submissions and the transcript and materials provided and take account of all that was put before me. I turn now to resolution of the primary point of construction.
Construction of AASB 1015
It was in the area of construction that the evidence of the accounting experts trespassed into the domain of the judge. Nevertheless, I have read and already made some reference to what they say. The expert called by ASIC ventured an opinion that paragraph 6.1 is applicable to MYOB's half year (to 30 June 2000) financial statements including all amounts arising from acquisitions included therein. He concluded that the fair value method of measuring an acquisition as specified in AASB 1015 applies to all acquisitions whether occurring before or after the first date of commencement of the standard. He based that conclusion on several matters. The use of the present tense "is an acquisition", "is acquired" and "is a reconstruction" in paragraph 6, in contrast to the past or future tense, indicated an intention that the standard apply "where such an acquisition is reflected in the financial statements, i.e. where there are account balances created or affected by an acquisition". He considered that the intention to direct the application of the standard to past or future transactions is contained in the transitional provisions, that is, in paragraph 11. Paragraph 11.1 provides for initial adjustments which indicates that the standard applies to all account balances arising from acquisitions, including balances arising from acquisitions in prior financial periods. This often occurred in accounting standards. His comments on paragraphs 11.2 and 11.3 supported this view. The expert's discussion considered other matters which I do not need to set out. It should be clear that counsel did not contend that I should accept these views of the so-called expert as opinion evidence. Nor did counsel for MYOB contend that I should accept views of the sort presented by the expert called by MYOB. Each counsel did not do so for the reasons mentioned. I have referred to the evidence above because it was directly and critically reflected in the submissions of counsel for ASIC.
Counsel for ASIC submitted that the principal error in MYOB's central contention that AASB 1015 governed measurement once only is that it confused a balance in a financial statement with the transaction or event that gave rise to the balance. It was the former and not the latter which was the critical consideration. Then, relying on the evidence of the expert, counsel submitted that it is normal for accounting standards, including standards which speak to the measurement of an asset or liability, to affect the measurement of that balance in each financial report in which the balance is included. I accept that there is such provision in some standards, but it is important to remember that the issue with which I am concerned is the proper construction and operation of AASB 1015, considered on its terms. That is the case put to me for decision. Moreover, I am not in a position to evaluate a range of accounting standards, not all of which were before me, as an aid to construing AASB 1015 as amended.
The fundamental point argued by ASIC's counsel is that the standard did not have a once only application of measuring a value at the date of acquisition. It applied to relevant balances as they are from time to time. The position of MYOB was directly to the contrary. As stated earlier, MYOB's position is that once the assets acquired were bought into the accounts at a value measured under paragraph 6 the standard had done its work.
I referred above to the reliance placed by ASIC's expert on the transitional provisions in AASB 1015. Counsel for MYOB accepted that the transitional provision in paragraph 11.1 has the effect that the standard will require an initial adjustment to the value of assets acquired in a prior accounting period. To that extent the standard can apply to past events. But paragraph 11.1 is a transitional provision and it is in the nature of such a provision that it provides how the past is to be treated at the commencement of the new accounting regime. Paragraphs 11.2 and 11.3 provide for an acceptance of the relevant amounts or values at the commencement of the standard. To the extent provided for, the transitional provisions state the retroactive application of the standard. But that does not mean that the standard as a whole is to be reapplied to a relevant balance in successive accounting periods.
Save for those transitional provisions, the language of AASB 1015 clearly indicated a scheme that the standard apply to acquisitions on a date in the applicable accounting period. Hence the use of the present tense "is". Where there is an acquisition within the meaning of the standard the acquired assets "must" be measured at the acquisition date. The use of the words "Initial Measurement" in the heading to paragraph 6 is consistent with the standard being concerned with measuring the value of the assets at the date of acquisition. That is, the standard is concerned with that measure.
Counsel for MYOB submitted that, so understood, the scheme of AASB 1015 is supported by the structure and language of other accounting standards, namely AASB 1001 Accounting Policies especially paragraphs 6.1 and 6.2 and AASB 1041 referred to above which provides for the revaluation of non-current assets. I was provided with a copy of those and some other standards. I have regard to these standards but consider it unnecessary to set out the provisions contained in them.
Having considered the submissions of counsel I conclude that the construction contended for by MYOB is that which truly reflects the intention of the standard. I accept the submissions of counsel for MYOB on the construction issue and conclude that the intention is apparent in the terms of AASB 1015 that the task it requires of measuring and recording the value of acquired assets is undertaken once, and once only, under that standard. Whether the standard is considered as a whole, or any part of it in isolation, or by reference to any other accounting standard or matter, in my view it does not disclose an intention, either express or arising by necessary implication, that the standard apply to balances in relation to prior acquired assets in successive years. No such intention is stated or is otherwise to be discerned, so long as there remains a relevant balance, producing different values for the acquired assets as at the original acquisition date. In truth, as it seems to me, the construction favoured by ASIC seems to be driven by a desire to have MYOB's accounts brought into line with the accounts of other corporations. This desire is understandable, but the issue with which I am concerned is one of construction of the terms used in the instrument.
Further, I note the following points.
Let us take the first occasion on which AASB 1015 is applied following an acquisition of assets within the meaning of paragraph 6. At this time paragraphs 6.3 and 6.4 are part of the standard. The process of application would include consideration of the transitional provisions and, in particular, whether any of them applied. Assume that pursuant to paragraph 11.1 a corporation determined that it was not practicable to apply the accounting policies in the standard, and applied paragraph 11.2. On ASIC's submission the corporation would have to consider the relevant balance in the financial statements for the succeeding period. MYOB submits that the corporation could not then apply paragraph 11.2, as the transitional provisions were spent in the previous year on the first application of the standard. On ASIC's submission, in the second year the corporation would have to deal with the relevant balance by applying (what would then only be) paragraph 6.1 or 6.2 of the standard, and to the extent necessary restate its accounting for the prior period acquisition even though it had initially been impractical to do so. This possibility would give rise to somewhat awkward results in terms of consistency of approach, and comprehension, of the accounts from one accounting period to another. It tends to suggest that the construction favoured by ASIC is not correct.
As I understood ASIC's submissions on the application of the transitional provisions, MYOB applied the standard in preparing the financial statements for the period ended 31 December 1999 and the transitional provisions applied at that time. In the next period, MYOB was required to apply the standard to the relevant balance and make the adjustment to reflect an acquisition at fair value. That meant applying paragraph 6.1 or 6.2 for, by that time, the Senate had disallowed paragraphs 6.3 and 6.4. Further, MYOB was required to apply or observe the standard in relation to any relevant balance in subsequent periods. On all occasions subsequent to the first application of the standard, the transitional provisions did not apply.[16]
[16]See paragraph 35 of ASIC's written submission.
Further, assuming that MYOB was entitled to apply the transitional provisions in respect of the six month period ended 30 June 2000, I am of the view that in the circumstances those provisions were not applicable.
There was some reference to the question of whether the disallowance would have the effect of creating a new standard. If a new standard was created, it would support a conclusion that the transitional provisions applied to MYOB when it prepared its financial statements for the period ended 30 June 2000. But as I understood the submissions, counsel took the view, I think correctly, that the disallowance operated by way of an amendment and not so as to produce an entirely new standard as though by a further and separate act of the AASB. The standard continued in force in its amended form.
In concluding as I have on the construction issue I have taken account of the submissions of each party regarding the requirement to construe the standard in the manner required by the ASIC Act.[17] The rival points are set out in the written submissions to which counsel spoke. It is unnecessary to set out all that was said. MYOB emphasised the practical consequences of ASIC's view of the operation of the standard, said to produce confusing and unworkable results, and argued that its accounts were in fact presented in a relevant, reliable and comparable way. Counsel for MYOB also pointed out that MYOB had acted bona fide. ASIC emphasised, correctly, that consideration of the consequences MYOB would bear if ASIC's preferred construction is applied cannot influence the proper interpretation of the standard. ASIC emphasised that MYOB was the only corporation which took advantage of paragraph 6.3, and that the comparability of financial statements would be enhanced if MYOB's financial statements were prepared on the same basis as all other corporations’ financial statements are prepared. The substance in that point is tempered by the explanations in MYOB's accounts, the notes to which indicate the difference between accounting for assets acquired at a cost value and at a fair value. Further, the point cannot govern what is otherwise found to be the correct interpretation of the standard on a consideration of its terms. I might add that at times it was also said by counsel for ASIC that any difficulties in the preparation of MYOB's accounts, or any confusion in the accounts, that might obtain as a result of being required to prepare its financial statements in accordance with the standard in its amended form should be regarded as a product of MYOB's decision not to comply with the standard in preparing its accounts for the period ended 30 June 2000. It is sufficient to say of such statements that, while directed at meeting MYOB's contentions as to confusing and unworkable results if it was now required to account under paragraph 6.1 or 6.2, it does not meet the question of construction which is the issue presented to me for decision. The fact is that MYOB acted in accordance with the law as it was. Further, in my view, MYOB continues to act in accordance with the law. That is not to deny the wisdom of MYOB including notes making clear the exceptional basis on which the acquired assets were brought to account. But be that as it may, having considered all that counsel submitted, I am of the view that a clear intent is discernible from the terms of the standard that it apply once to the initial measurement and recording of the value of acquired assets.
[17]See [10]
It follows from these reasons that ASIC has failed in its case. Apart from the issue of construction no separate point was raised concerning ss 304 and 305. ASIC’s case depended entirely and simply on succeeding on the construction issue.
Having regard to the conclusion I have reached on the primary issue of construction, it is not necessary to deal with other submissions of the parties including the alternative submissions of MYOB referred to above on the application of paragraph 11.3 and s 50. I merely record without elaboration that the submissions of ASIC are to be preferred on those alternative submissions.
The application will be dismissed.
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