Adoption of International Accounting Standards

When do International Accounting Standards (IAS) apply?

From 1 January 2005, reporting entities under Australia's Corporations Act will be required to prepare their financial statements according to the standards issued by the International Accounting Standards Board (IASB).  For comparative purposes, many companies will be required to state or restate their accounts in accordance with IAS on and from 1 July 2004.

Although Australia has been harmonising its accounting standards with the IAS for some time, conversion to IAS will have a major impact on many aspects of business.

Why is Australia adopting IAS?

In theory, IAS should provide investors with greater clarity, transparency and comparability of financial information.

The main reason for the change is that Australian government believes that a single set of high quality accounting standards which are accepted in major international capital markets, will greatly facilitate cross-border comparisons by investors, reduce the cost of capital and assist local companies wishing to raise capital or list overseas.   

How will adopting IAS impact organisations?

IAS reporting will challenge the ways in which companies measure performance and communicate with the markets.  Adoption of IAS will impact:

• reported results;

• performance linked remuneration;

• recognition and measurement of assets and liabilities;

• many financial instruments that are not currently recorded in Australian financial statements will have to be recorded at fair values

• proposed changes to the requirements on the classification of financial instruments may result in instruments that are currently classified as equity be reclassified as debt instruments

• requirements goodwill will not have to be amortized, however will be subject to strict impairment testing requirements

• investment properties will be carried at cost and depreciated, or at fair value with changes recognised in income

• dividend policy;

• gearing and borrowing covenants;

• EPS and net asset positions;

• systems including management reporting, treasury, human resources, training and forecasting;

• taxation;

• compliance with contracts that are accounts based;

• the form and content of the annual reports; and

• investor relations.

Companies will need to commence changeover strategies that will include the alignment of internal reporting systems with the new external reporting environment and the development of strategies to prepare analysts and other stakeholders for potentially significant changes to financial reporting outcomes.

Many experts, including large accounting firms believe that the 2 staged approach of adopting IAS by insurers will raise many issues including increased volatility of reported results, varying financial stability, higher cost of capital, additional workloads and they expect insurers to incur significant costs.  The impact of these will vary depending on the implementation timetable.

Who regulates IAS?

The Australian Securities and Investments Commission (ASIC) will be responsible for enforcing compliance with the new standards. If companies fail to meet the January 1, 2005 deadline, they will be subject to penalties imposed by the regulator.

The Financial Reporting Council (FRC) and Australian Accounting Standards Board (AASB) have specific responsibilities for ensuring that a strategy for adoption is developed and communicated to stakeholders at an early stage, and that stakeholders are kept fully informed of progress. The accounting bodies also have a key contribution to make through their programs of professional development and their influence on accounting education.

What you need to do?

Companies must start planning their implementation of IAS now.   As a minimum, we recommend organisations the following IAS implementation strategy:  

• · Analyse the impact of IAS - identify changes to accounting policies or disclosures throughout the transition to IAS

• · Start converting prior years numbers to new IAS

• · Inform the board & senior management of potential impact of IAS

• · Start early briefings for analysts and investors on the impact of the conversion on your financial statements

• · Establish a project team to assist implementation

• · Set a realistic budget

• · Document all key areas, especially complex issues that need resolution

• · Consider impact of IAS on other reporting requirements

• · Align internal management reporting systems with the new rules

• · Re-engineer business processes & documentation

• · Assess staff training requirements and commence an appropriate training plan

The European experience of IAS implementation has shown that the work involved in the conversion process should not be underestimated.  Therefore companies need to allow sufficient time to be adequately prepared. Lack of time and lack of trained staff were mentioned as the biggest barriers to conversion.

According to ASIC and FRC, company preparedness is critical to a smooth transition and represents the key risk in 2005 adoption.