TOFA amendments bypass IASB standards

A new branch of law-making is developing in Australia. It involves making changes to our accounting rules without having to deal directly with the body that now administers the accounting standards, the International Accounting Standards Board.

In September Macquarie Bank announced that the federal government had agreed to amend the Corporations Act to help Macquarie get around accounting standards that would have led to some unintended and unwelcome consequences from its transition to a non operating holding company.

Macquarie is applying to the IASB to change its interpretation of the standard but if that fails the government will legislate the problem away.

The latest example involves the taxation of financial arrangements. In the last Parliamentary session the government introduced a tax law amendment bill that sets out the methods under which gains and losses from financial arrangements (such as hedge contracts) will be brought to account for tax purposes.

There is a mismatch between the accounting rules affecting financial arrangements and their tax-timing treatment. This mismatch results in added complexity, additional compliance and cost.

The explanatory memorandum accompanying the amendment bill says: "Under the current law, accruals rules, which spread gains and losses from financial arrangements over time, have been narrowly focused. Outside their purview, tax treatments do not adequately take into account the time value of money or provide for an appropriate allocation of economic income over time."

Apart from hedge contracts the amendment covers foreign exchange contracts and cross-border structured finance. The government moved to amend the tax law because it recognised that tax law had not kept pace with the development of new financing and risk management techniques.

The government could have amended the tax law by making the tax treatment the same as the accounting treatment, in other words by requiring that the taxation arrangements conform to the relevant IFRS standard.

That was the outcome the banks and other affected organisations were looking for but the government has taken a less direct approach, preferring to reproduce the bulk of the IFRS standard in tax legislation.

By doing this it avoids having to go to the IASB for interpretation of the standard or to seek changes to it.

One outcome of this approach is that there are some aspects of the amendment that do not conform to the accounting standard. Not all the complexity and additional compliance has been removed.

A spokesman for one of the accounting bodies said: "We would have preferred the amendment to be a mirror of the standard. We got 90 per cent instead of 100."

It is the second time this year the government has drafted legislation that has the effect of by-passing the IASB.

A problem for Macquarie Bank in its move to a non operating holding company structure was that retained earnings transferred from Macquarie Bank to Macquarie Group would no longer be classified as retained earnings. The new company would not be able to use them to pay dividends.

A memorandum published in September that outlines Macquarie's proposed NOHC structure says: "MGL (Macquarie Group) has sought a modification to the requirements of Section 254T of the Corporations Act, so that pre-restructure profits of the banking or non-banking groups will be available for distribution as a dividend to MGL shareholders.

"The International Accounting Standards Board is currently considering the accounting treatment for restructures where a holding company is inserted at the top of a group.

"At their July 2007 meeting the IASB indicated they would issue an exposure draft proposing that such transactions be accounted for using previous book values and to not reset investments in controlled entities to fair value.

"The potential effect of such a change to the accounting rules would mean that Macquarie Group may no longer need to rely on the modification (to the Corporations Act) noted above."

The reason for side-stepping the IASB is that the introduction of international accounting standards has involved difficulty interpreting standards.

The technical director of the Australian Accounting Standards Board, Angus Thomson, said problems of this nature were anticipated when Australia moved to international standards.

Thomson said: "You are shipping your decision making offshore. The IASB is going to be cautious about fiddling with something that might help Australia but then causes problems in another country. The easiest thing for it to do is nothing."

Thomson said the caution and slow pace of deliberation at the IASB was much greater than anticipated.