Need for field testing on standards; Duty to know the needs of shareholders.
Need for field testing on standards
I am particularly keen that Australia makes a worthwhile contribution to the international debate on the recently issued Joint Working Group of Standard Setters Draft Standard on Financial Instruments. This Draft Standard was issued late last year by the AASB as an invitation to comment. Because of immediate reactions to the Draft Standard's fair value approach, I believe there is a grave danger that there will be a high level rejection of the proposals without adequate supporting research. I would like to have some field testing done in areas that are of particular significance to Australian corporates, especially in relation to hedging, given the significance of Australian importing and exporting activities and the significance of hedging to the gold industry and securitisation. As you are no doubt aware the Draft Standard proposes the abolition of hedge accounting. Many corporates involved in such activities have various degrees of hedging activities, though many are, of course, quite extensive and often viewed as being integral to the operations.
I therefore urge the AICD and in particular the Accounting and Financial Advisory Committee, use its influence to encourage specific corporates to review and field test the proposals in relation to hedging. The sort of questions I would like examined are:
• How would reported results change under the proposed standard? Would corporate actions change under the proposed standard? If so, why?
• Should presentation changes be made to the Statement of Financial Performance (Statement of Profit and Loss) to make the impact of hedging on the reported results more understandable?
• If there is disagreement with the JWG proposal to eliminate hedge accounting, would the hedge accounting rules in FAS 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by FAS 138 be acceptable?
No doubt there are other questions. I would be pleased to offer some high level staff advice and liaison to corporates who are willing to engage in such an examination of the draft standard. The AASB is also particularly interested in the derecognition of asset proposals as they relate to securitisation, as it is likely that the AASB will commence a separate project on this topic, given the increasing securitisation activity within Australia. Hence, some field testing of the proposals in this area would also be most useful.
Australian Accounting Standards Board
Editor: This letter was originally sent to Michael Coleman chairman of the AICD Accounting and Financial Advisory Committee. AICD members are invited to comment.
Duty to know the needs of shareholders
Law Reporter (January) considered the question as to whether directors of certain large companies (such banks, insurance companies and telecommunication companies) owe a duty to the community. The writer concluded that "until the law is changed, it is both erroneous and quite mischievous for politicians, newspapers and others to suggest that the duties of these directors are wider than the traditional standards expected of them – they must act in the best interest of shareholders". I fully agree with this conclusion and also with the writer's comment that "if directors are expected to run the activities of their companies with the interests of the community at the forefront of their obligations, then they must have adequate protection in the law". I do not advocate any such changes in the law. It seems incumbent upon directors, however, to consider how best to inform themselves of what is "in the best interest of their shareholders", particularly in the longer term. I would suggest that an integral part of any such process is to identify the various groups who, in addition to their shareholders, are stakeholders in the company and are legitimate, and often competing, interests in its activities and its ongoing success.
The significance of the individual stakeholder groups will vary from one company to another but will normally include employees, customers, suppliers and community groups. I believe that the duty of directors to their shareholders is best served by ensuring that the management of their companies recognise the importance of consultation with the relevant stakeholders groups, listening to their concerns and responding as appropriate. This does not mean putting the interest of community groups or other stakeholders first. It may mean, however, giving greater attention to issues of sustainability.
Tim Potter FAICD
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.
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