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| Subject: they come into effect in 2005-06amortisation of goodwill for acquisitions. | |
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Author: US GAAP as much as possible with IAS. |
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Date Posted: 23:41:40 12/31/02 Tue http://www.smh.com.au/articles/2002/12/30/1041196596053.html ----------------------------------------------------------- New standards better by all accountsDecember 31 2002 ----------------------------------------------------------- Investors should be better protected, although no system is infallible, writes Anthony Hughes. ----------------------------------------------------------- Just when you thought it was safe to open an annual report again, new international accounting standards (IAS) may have a few surprises in store for investors and companies alike as they come into effect in 2005-06. ------------------------------------------------------------ These standards could dramatically change the way many companies report their profits to investors. ------------------------------------------------------------ The good news, according to the chairman of the Australian Accounting Standards Board, Keith Alfredson, is that investors should get higher quality reporting and better transparency. Basically, it should be much harder for companies to get away with the rorts that were exposed by the spate of corporate collapses here and in the US in recent years. ------------------------------------------------------------ One of the best examples, according to Mr Alfredson, is the new requirement that companies recognise hedging instruments (such as derivatives and foreign currency exposures) on their balance sheet - a requirement that could have alerted investors sooner to the troubles last year at collapsed miner Pasminco. ------------------------------------------------------------ "If [Pasminco's foreign currency hedges] were on the balance sheet, it would have been more transparent and it would have raised questions at an earlier date," he said. ------------------------------------------------------------ The issue of derivatives will also be a big challenge for banks. ------------------------------------------------------------ They provide some disclosures already in their accounts, but valuing them on the balance sheet is taking things a step further, given that they are such an integral part of their daily operations. ------------------------------------------------------------ IAS will hopefully also make it harder for companies to abuse the two most obvious ways to manipulate accounting profits, by reducing or deferring expenses, and by playing with methods of revenue recognition. ------------------------------------------------------------ Such manipulations are common elements in recent corporate collapses. Witness Worldcom's deferral of billions in expenses as it convinced investors for many years its profits were rising to underpin a rising share price. And Xerox's fines this year for improper accounting techniques to accelerate the recognition of equipment revenue. ------------------------------------------------------------ The other big change will be an end to amortisation of goodwill for acquisitions. Rather than gradually writing off the goodwill over up to 20 years, companies will have to do an "impairment test" each year that will basically seek to justify the price paid for acquisitions. ------------------------------------------------------------ "If you have an impairment, it's sending a pretty major signal to someone you have [bought] a bit of a dud," Mr Alfredson said. ------------------------------------------------------------ Companies will have to do some fast explaining about why the acquisitions did not work. ------------------------------------------------------------ The goodwill issue is one reason the "smoothing" of profits - reporting a steady profit year after year by holding some back for the tougher years (perfected by the banks particularly) - might also be harder. ----------------------------------------------------------- Reported profits - the bottom line that the average investor first looks at to determine a company's health - might better reflect underlying profits, which professional investment analysts already look at to test whether a company can continue to perform. ------------------------------------------------------------ But PricewaterhouseCoopers says the "no goodwill amortisation" rules might actually aid takeover activity, because, as financial reporting standards partner Jan McCahey says, when companies "project the earnings and include the goodwill amortisation charge, you are not getting enough earnings accretion" to justify the acquisition. ------------------------------------------------------------ Other important changes under the new standards include a prohibition on recognising internally generated goodwill (like this very masthead), stricter treatment of intangibles generally, recognition of liabilities in company pension funds, and, perhaps most famously, the expensing of executive options. ------------------------------------------------------------ It's not all smooth sailing to this new investor utopia. With IAS, there's a certain amount of mights, coulds and ifs because there is still some way to go to settle on the standards and get all countries to agree on how they are implemented. ------------------------------------------------------------ The US, for instance, already has its very detailed and precedent-based Generally Accepted Accounting Principles, or US GAAP, which has some material differences to IAS. ------------------------------------------------------------ IAS represents more of a principle-based approach, which could be validly criticised if the principle is so wide that it is virtually inviting abuse. ------------------------------------------------------------ "All the signals are good but in the end the [test] is going to be can the IAS get their guideline standards in place, which they are aggressively working on but they have a lot of work to do," Mr Alfredson said. ------------------------------------------------------------ "Some of these countries follow international standards but if they don't like something they are a bit quick to cut it out." ------------------------------------------------------------ Mr Alfredson said it would be important for Europe to successfully take on the standards, because this would put a lot of pressure on the US to come on board as it seeks to harmonise US GAAP as much as possible with IAS. ------------------------------------------------------------ Even under the new regime, there are pitfalls. International interpretations could yet vary slightly, but importantly, just as some words are interpreted slightly differently in different languages. But this will still be an improvement on the situation whereby a major accounting firm in Turkey may be prepared to sign off on accounts there, whereas they would not in Australia. ----------------------------------------------------------- But the main point is that countries (and their companies) that don't move to the standards or use US GAAP will likely be marked down by investors, which helps explain why many developing countries have been the first to agree to harmonisation. ------------------------------------------------------------ Some companies are not waiting until the standards come into effect and are already adopting them to soften any potential shock. Westpac has given investors a taste of what is to come through several write-offs (including a $160 million charge for higher superannuation obligations) designed to get its accounts in shape by the time the standards come into effect in 2005-06. Westpac has also soothed investor concern about certain accounting treatments such as the deferring of IT expenses by capitalising them, and taken a more conservative stance. ------------------------------------------------------------ In fact, most of the banks this year have decided to write down their capitalised expenditure balance, which, in the main, is spending on software. ------------------------------------------------------------ The banks have for many years argued that this is not an upfront expense but an asset - the only problem being that many of these software projects either don't work or quickly run out of date, therefore being of no value to anyone. The effect has been to inflate reported profits, not in a big way, but perhaps enough to ensure they deliver on the market's growth expectations. ------------------------------------------------------------ So perhaps it has been more than a coincidence that banks have all at once decided to write off these "assets" rather than seeking to justify why they are something more than an ordinary expense in running the business. ------------------------------------------------------------ Others have also moved to more conservative accounting treatments, as evidenced this month by Woodside's decision to write off some $800 million of exploration costs, which it would previously have amortised to again defer the cost. ------------------------------------------------------------ Woodside didn't directly cite a move to new accounting standards, but Mr Alfredson said the move was a fair indicator that the energy group expected future accounting standards would require it to expense more of its exploration expenditure. ------------------------------------------------------------ Of course, it's a big call to expect mere accounting standards to save investors from fraud and executives who set out to break the law. ------------------------------------------------------------ After all, US accounting principles are supposed to be the best in the world, and yet they didn't stop the spectacular Enron and Worldcom collapses from occurring. ------------------------------------------------------------ "I think in the case of Enron a lot of people would say or infer, but we never know, that [Enron] were largely non-compliant rather than compliant with rules that gave them the wrong answer," Mr Alfredson said. ------------------------------------------------------------ "A bit like as in this country, often in these situations, when the chips are all down it's more about non-compliance than poor accounting standards." ------------------------------------------------------------ [ Next Thread | Previous Thread | Next Message | Previous Message ] |
| Subject | Author | Date |
| Re: they come into effect in 2005-06amortisation of goodwill for acquisitions. | IAS represents more of a principle-based approach | 23:44:26 12/31/02 Tue |