AASB 2005-6 - Amendments to Australian Accounting Standards - June 2005

Administered by Department of the Treasury

Legislation au F2005L01707 Not in force Legislative Instrument

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Explanatory Statement

AASB 2005-6 Amendments to Australian Accounting Standards

June 2005

EXPLANATORY STATEMENT

Adoption of Australian equivalents to IFRSs

The Australian Accounting Standards Board (AASB) is implementing the directive of the Financial Reporting Council (FRC) to adopt the Standards of the International Accounting Standards Board (IASB), for application to reporting periods beginning on or after 1 January 2005.

The IASB defines International Financial Reporting Standards (IFRSs) as comprising:

(a) International Financial Reporting Standards;

(b) International Accounting Standards (IAS); and

(c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

The Australian equivalents to IFRSs are:

(a) Accounting Standards issued by the AASB that are equivalent to Standards issued by the IASB, being AASBs 1 – 99 corresponding to the IFRS series and AASBs 101 – 199 corresponding to the IAS series; and

(b) Urgent Issues Group (UIG) Interpretations issued by the AASB corresponding to the Interpretations adopted by the IASB, as listed in AASB 1048 Interpretation and Application of Standards.

In implementing the FRC’s directive, the AASB is replacing relevant existing AASB Standards with Australian Standards equivalent to those of the IASB. The AASB has decided it will continue to issue sector-neutral Standards, that is, Standards applicable to both for-profit and not-for-profit entities, including public sector entities. Except for Standards that are specific to the not-for-profit or public sectors or that are of a purely domestic nature, the AASB uses the IASB Standards as the “foundation” Standards to which it adds material detailing the scope and applicability of a Standard in the Australian environment. Additions are made, where necessary, to broaden the content to cover sectors not addressed by an IASB Standard and domestic, regulatory or other issues.

On 15 July 2004, the AASB made the set of Australian Standards equivalent to IFRSs, together with several associated Australian Standards, effective for annual reporting periods beginning on or after 1 January 2005.

AASB 3 Business Combinations was issued at this time and is based on the Australian equivalent to IFRS 3 Business Combinations. IFRS 3 does not apply to business combinations involving entities or businesses under common control. AASB 3 does not exclude those transactions from its scope. Accordingly, AASB 3 includes the defined term “contributions by owners”.

Reasons for Issuing AASB 2005-6

AASB 2005-6 makes amendments to AASB 3.

Since issuing AASB 3, the AASB has become aware of some concerns that the presence of the Australian definition of “contribution by owners” in AASB 3 may give rise to different treatments compared with the treatments under IFRSs.

Main Features of this Standard

This Standard was made by the AASB on 22 June 2005 under section 334 of the Corporations Act 2001.

Application Date

This Standard is applicable to annual reporting periods beginning on or after 1 January 2006 with early adoption permitted for annual reporting periods beginning on or after 1 January 2005.

Main Changes from AASB 3 (July 2004)

The main changes from AASB 3 (July 2004) are:

(a) deletion of the definition of contributions by owners; and

(b) adoption of the IFRS 3 scope exclusion for business combinations involving entities or businesses under common control.

Consultation prior to Issuing this Standard

The AASB considered various options for dealing with the concerns raised by some constituents that the presence of the Australian definition of contribution by owners in AASB 3 may give rise to different treatments compared with the treatments under IFRSs. In March 2005 the AASB issued an Invitation to Comment (ITC). One proposal was to amend AASB 3 by deleting the definition of contribution by owners from AASB 3 and rewriting AASB 3 paragraph Aus56.1.

The majority of respondents supported the proposal to amend AASB 3. In addition, some respondents commented that business combinations involving entities or businesses under common control should not be within the scope of AASB 3 in the same way that these transactions are scoped out of IFRS 3 Business Combinations because the AASB is concerned that the presence of the Australian definition of contribution by owners in AASB 3 may give rise to unintended consequences for IFRS compliance.

Some respondents also suggested that the definition of contribution by owners should be deleted from AASB 1004 Contributions (which applies to not-for-profit entities) and UIG Interpretation 1038 Contributions by Owners Made to Wholly-Owned Public Sector Entities (which applies to not-for-profit entities). The AASB investigated making these changes but decided that requirements and guidance in IFRS is presently inadequate to deal with the relevant issues in the context of not-for-profit entities.

A Regulatory Impact Statement has been prepared in connection with the revision of this Standard..

Overview

The AASB 2005-6, enacted in 2005, addresses the issue of discrepancies in treatment between Australian and international accounting standards, specifically within the context of business combinations. This was achieved through the amendment of AASB 3 Business Combinations to align it more closely with IFRS 3 Business Combinations. The Australian Accounting Standards Board (AASB) took this action in response to concerns that the Australian definition of "contributions by owners" in AASB 3 might lead to different accounting treatments compared to those under IFRSs. The AASB's goal was to ensure consistency and compliance with international standards while accommodating the unique aspects of the Australian business environment. This amendment was made under the authority of the Corporations Act 2001 and is applicable to annual reporting periods beginning on or after 1 January 2006, with early adoption allowed for periods beginning on or after 1 January 2005.

Scope and Application

The AASB 2005-6 Amendments to Australian Accounting Standards, implemented under section 334 of the Corporations Act 2001, applies to annual reporting periods beginning on or after 1 January 2006, with early adoption permitted from annual reporting periods beginning on or after 1 January 2005. This Act pertains to entities subject to the Corporations Act 2001, primarily focusing on for-profit and not-for-profit entities, including public sector entities, that need to comply with the accounting standards set by the AASB. It targets business combinations, particularly addressing the definition and scope of contributions by owners. The Act aligns Australian accounting standards with International Financial Reporting Standards (IFRSs) by removing the Australian definition of "contributions by owners" and adopting the IFRS scope exclusion for business combinations involving entities or businesses under common control. These amendments aim to ensure consistency and compliance with IFRSs while addressing concerns raised about potential divergent treatments. The application of these standards is nationwide, aligning with the jurisdictional reach of the Corporations Act 2001.

Key Provisions

AASB 2005-6 Amendments to Australian Accounting Standards (AASB 3) introduces significant changes to the accounting treatment of business combinations, specifically addressing the treatment of contributions by owners. This legislation mandates that Australian Accounting Standards Board (AASB) Standards be aligned with International Financial Reporting Standards (IFRS), while also incorporating additional details pertinent to the Australian context. The primary operative sections of AASB 2005-6 include the deletion of the definition of "contributions by owners" from AASB 3 and the adoption of the IFRS scope exclusion for business combinations involving entities or businesses under common control. These changes aim to ensure consistency with international practices and avoid divergent treatments between Australian and IFRS accounting standards. The Act imposes specific obligations on entities subject to the AASB Standards. Companies and other entities must adhere to the revised AASB 3, which now aligns more closely with IFRS 3, particularly in the treatment of business combinations. This includes ensuring that transactions involving entities under common control are excluded from the scope of AASB 3, thereby aligning with IFRS practices. Entities must ensure their accounting policies and practices are updated to reflect these changes to comply with the new standards. The Act also stipulates potential consequences for non-compliance. While the Explanatory Statement does not explicitly outline penalties, breaches of accounting standards can lead to significant civil and criminal liabilities under the Corporations Act 2001. Companies that fail to comply with the AASB Standards may face financial penalties, legal action, and reputational damage. Additionally, directors and officers of companies may be held personally liable for non-compliance, potentially facing fines and disqualification from managing corporations. It is crucial for entities to ensure their accounting practices comply with AASB 2005-6 to avoid these adverse outcomes.

Area of Law: Accounting & Auditing
Instrument: Regulation
Concepts: Definitions & Interpretation; Repeal & Amendment; Compliance Obligations

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