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Accounting bar to be raised

WESTERN Australian businesses have been urged to start planning now for the implementation of international accounting standards in 2005.

The new standards will have a very broad impact, though exporters and importers will arguably be among the sectors most heavily affected.

Mining companies will be affected by a number of changes, as will publishers and other organisations with intangible assets.

The aim of International Financial Reporting Standards (IFRS) is to achieve consistent accounting standards across national boundaries, for the benefit of investors, lenders and regulators.

The changes will apply for financial years beginning on or after January 1 2005.

For most companies this will be the year ending June 30 2006.

However, companies will need comparative data for the previous 12 months, ending June 30 2005.

In order to obtain that data they will need a balance sheet as at June 30 2004 that complies with the IFRS standards.

Hence the need to start planning early.

“People are underestimating the impact the new standards will have,” KPMG partner assurance and advisory Kevin Smout said.

He emphasised that the change was not just a technical accounting exercise but would throw up a range of wider business issues, including for IT systems and reporting processes. That, in turn, could affect training and staff management.

Mr Smout suggested that organisations should start with a ‘gap analysis’ to define the impact of the planned changes.

Oakvale Capital managing director Jim Cunningham shares Mr Smout’s concern about the lack of preparation.

“There is a lot of complacency. People look at it as an issue for 2005,” Mr Cunningham said.

“They should be looking at it now rather than later.”

Mr Cunningham’s concern about lack of preparation for the new accounting standards is backed up by the findings of a survey undertaken earlier this year by CPA Australia.

It found that 69 per cent of respondents were aware that IFRS will replace existing Australian accounting standards from 2005 and 62 per cent were aware that the new standards will apply to all reporting entities, including not-for-profits, unlisted companies and the public sector.

However, only 11 per cent of respondents indicated their business has a strategy in place to manage the transition and only 33 per cent were aware of the need to calculate comparatives from next year.

Mr Cunningham has taken a close interest in the planned move to international accounting standards.

As the managing director of an independent treasury services company, he is well aware that one of the biggest changes is IAS 39, which deals with the recognition and measurement of financial instruments.

This will have a big impact on the treatment of hedging contracts, such as options and swaps, that are used to manage currency, commodity and interest rate risk.

Organisations will need to update their valuations of financial instruments on an ongoing basis.

To use the jargon, they will need to ‘mark to market’.

Mr Cunningham has found that most small and mid-sized organisations do not presently mark to market.

He is also concerned that the spreadsheet-based reporting systems used by 80 per cent to 90 per cent of SMEs will not be adequate when the new requirements take effect.

Organisations will have to either upgrade their internal systems or outsource the task to a bank or some other service provider.

Mr Cunningham said organisations would need to adopt a formal hedging policy.

In addition, they would need to document the reasons for each hedging transaction.

They would also need to perform an ‘effectiveness test’, which would determine whether mark to market adjustments are taken through their balance sheet or income statement.

If the latter applied, organisations would most likely report much higher volatility in their earnings.

This could affect dealings with analysts, shareholders and even banks.

Mr Smout said the adoption of similar accounting standards in the US had led to increased use of simpler hedging products, so that organisations were able to perform their own valuations.

Mineral exploration companies could be affected by the move to international accounting standards, since they may no longer be able to carry forward exploration expenditure.

Depending on their specific circumstances they may have to write off such expenditure.

Another significant change is the treatment of internally generated intangible assets, such as mastheads and brand names, which may have to be written off.

Mr Smout has identified eight different standards that have “major” differences from current standards in Australia.

There are a further 16 standards with “significant” differences and nine standards with minor differences.

This illustrates the potentially very wide impact of the planned changes.

A complication for organisations trying to plan ahead is the uncertainty surrounding the proposed standards.

Final versions of the new standards are not yet available and there is some lobbying over specific standards.

KPMG and Oakvale Capital are presenting a seminar on Monday August 18 on International Financial Reporting Standards. Call 9263 7236 for details.

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