The Chair
Australian Accounting Standards Board
PO Box 204
Collins Street West
Victoria 8007

Submission on ED 262: Fair Value Disclosures of Not-for-profit Public Sector Entities

We do not support the proposed reduction in disclosures for certain assets within the scope of AASB 116. Nor do we support the truncated due process employed for this issue. We recommend that the proposals not be proceeded with.

We note that the usefulness of the disclosure provisions now proposed to be excluded has been previously vetted through IASB and AASB due processes, and that the AASB is not now questioning that basic usefulness. However, the AASB is trying to make the case that not-for-profit entities in the public sector are a special case that merits exemption.

The reasons given are:

(a) revaluations are common in the public sector in Australia and generally the disclosures would be greater for the public sector than for the private sector;

(b) the costs of providing the information are likely to be greater for public sector entities than private sector entities but the benefits would not be as great having regard to the number of specialised assets and wide range of inputs within each class for which disclosure is made;

(c) a lack of understanding of required disclosures in practice; and,

(d) the assets in question are asserted to be held primarily for service potential and not to generate future net cash inflows. We do not see any of these reasons as being adequate justification for the proposed disclosure exemptions. Indeed, they may even heighten the need for those disclosures.

More fundamentally, we are concerned that the AASB seems to be adopting an ad hoc approach to varying a fundamental principal of transaction neutrality and to be short-cutting and varying required due process in terms of the time given for comment and the instruction to those submitting comments to only submit adverse comments with detailed reasoning.

Detailed Reasons for Adverse Submission

Technical Reasons

The premise underpinning the disclosures required at present is that more information is needed when unobservable inputs are used in determining fair value. The greater the incidence of using such inputs the greater is the need for the disclosures. The proposed disclosure exemptions do not decrease the task of measuring assets at fair value. Moreover, the disclosures will be readily available as a result of undertaking that task.

A private sector entity engaged in a business combination may well have very diverse and complex assets to deal with, when compared to an administrative department in the public sector. Again if that is so, the disclosures are even more important.

We are not convinced that the purpose for which the assets are held, ie for their service potential or to generate cash flows, is a valid basis for proposing differential disclosure requirements. The particular disclosures relate to the measuring the assets at their fair values. If the measurement basis is correctly specified in the standard, and we believe it is, then the disclosures play an important role in providing information to users of the financial statements about how that measurement is achieved. Selectively depriving users of potentially useful information is a significant decision that, in our view, requires strong justification.

We would also ask the Board; if the rationale relating to the purpose for which the assets are held is valid, why would the scope of the amendments be limited to the public sector and not be extended to private sector not-for-profits? It seems to us that providing the exemption only on the basis of incidence is flawed standard setting, when, for any one entity, materiality could be in play.

At a more fundamental level, we do not accept that there is an absence of cash flows in the public sector for the assets in question. Budget dependent entities receive appropriations (from the Government in lieu of end user payments) which are treated as revenue. Government business enterprises generate revenue directly from end users. Both types of entity aim to meet Government objectives in terms of the provision of services. They can employ the very same types of assets. We believe the distinction is false and that it risks perpetuating the inappropriate line of thinking evident in public sector impairment issues.

Appealing to a lack of understanding of the required disclosures also does not seem to us to be a valid argument. We do not accept that the disclosures are that difficult to understand. But even if they were, it would be a reason for delay not exemption. If the AASB genuinely believes the disclosures are difficult to understand then we suggest providing further examples and guidance.

The Board’s overriding justification for proposing the disclosure exemptions is a perceived imbalance in the cost/benefit equation. We do not believe the Board has demonstrated such an imbalance. We wonder if the Board’s failure in this regard is symptomatic of its disagreement with the underlying measurement basis, or perhaps with the requirement to measure periodically at fair value, rather than an inability to convincingly articulate the bases for its conclusion.

Due Process Reasons

We are very concerned that transaction neutrality is dismissed as important for the disclosures in question, on bases which we think are not valid, and yet a very short time is given for the exposure process. Any relief to preparers is likely to be welcomed by them whether or not justified. The danger is that users and other interested parties will not even have noted the existence of the proposals until it is too late to comment. In our opinion, the ED is far too rushed.

The restriction of the call for comment to adverse comments is a very unusual exhortation for a standard setter. Does the Board really not want submissions that would strengthen the arguments provided or otherwise improve the final Standard? The restriction implies that the Board will process its preferred view unless some fatal flaw is identified. In our view that is not a proper use of an exposure draft. We are also concerned with the use of early, ad hoc and partial post-implementation reviews. They can undermine a new standard and they can cause confusion if they interplay with the IASB or interpretive activity on the same topic.

We would be pleased to elaborate on our views.

Kevin M Stevenson & Warren J McGregor

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