Note 2 Adoption of AASB Equivalents to IASB standards from 2005–06

The Australian Accounting Standards Board has issued replacement Australian Accounting Standards to apply from 2005–06. The new standards are the AASB Equivalent to International Financial Reporting Standards (IFRS) which were issued by the International Accounting Standards Board. The new standards cannot be adopted early. The standards being replaced are to be withdrawn with effect from 2005–06 but continue to apply in the meantime.

The purpose of issuing AASB Equivalents to IFRS is to enable Australian entities reporting under the Corporations Act 2001 to be able to more readily access overseas capital markets by preparing their financial reports according to accounting standards widely used overseas.

For-profit entities complying fully with the AASB Equivalents will be able to make an explicit and unreserved statement of compliance with IFRS as well as with the AASB Equivalents.

It is expected that the Finance Minister will continue to require compliance with the Accounting Standards issued by the AASB, including the AASB Equivalents to IFRSs, in his Orders for the Preparation of Agency financial statements for 2005–06 and beyond.

The AASB Equivalents contain certain additional provisions which will apply to not-for-profit entities, including Australian Government agencies. Some of these provisions are in conflict with the IFRSs and therefore the department will only be able to assert compliance with the AASB Equivalents to the IFRSs.

Existing AASB standards that have no IFRS equivalent will continue to apply, including in particular AAS 29 Financial Reporting by Government Departments.

Accounting Standard AASB 1047 Disclosing the Impact of Adopting Australian Equivalents to IFRSs requires that the financial statements for 2003–04 disclose:

• An explanation of how the transition to the Australian Equivalents is being managed; and
• A narrative explanation of the key differences in accounting policies arising from the transition.

The purpose of this Note is to make these disclosures.

Management of the transition to AASB Equivalents to IFRSs

The department has taken the following steps in preparation towards the implementation of AASB Equivalents:

• The department’s Audit Committee is tasked with oversight of the transition to and implementation of the AASB Equivalents to IFRSs. The Chief Finance Officer is formally responsible for the project and reports regularly to the Audit Committee on progress against the formal plan approved by the Committee.
• The plan requires the following key steps to be undertaken and sets deadlines for their achievement:
  • Identification of all major accounting policy differences between current AASB standards and the AASB Equivalents to IFRSs progressively to 31 December 2004.
  • Identification of systems changes necessary to be able to report under the AASB Equivalents, including those necessary to enable capture of data under both sets of rules for 2004–05, and the testing and implementation of those changes.
  • Preparation of a transitional balance sheet as at 1 July 2004, under AASB Equivalents, by 31 December 2004.
  • Preparation of an AASB Equivalent balance sheet at the same time as the 30 June 2005 statements are prepared.
  • Meeting reporting deadlines set by Finance for 2005–06 balance sheet under AASB Equivalent Standards.
• The plan also addresses the risks to successful achievement of the above objectives and includes strategies to keep implementation on track to meet deadlines.
• The plan requires all major accounting and disclosure differences and system changes to be identified and the system changes to then be tested. The changes are expected to be identified by 31 December 2004 and implemented by 31 January 2005.
• Consultants have been engaged to assist with each of the above steps.

Major changes in accounting policy

Changes in accounting policies under AASB Equivalents are applied retrospectively (i.e. as if the new policy had always applied). This rule means that a balance sheet prepared under the AASB Equivalents must be made as at 1 July 2004, except as permitted in particular circumstances by AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. This will enable the 2005–06 financial statements to report comparatives under the AASB Equivalents also.

Changes to major accounting policies are discussed in the following paragraphs.

Property plant and equipment

It is expected that the Finance Minister’s Orders will require property plant and equipment assets carried at valuation in 2003–04 to be measured at up-to-date fair value from 2005–06. This is consistent with the department’s current asset valuation basis, as all assets were revalued to fair value at 1 July 2002 and are carried at up-to-date fair values at 30 June 2004.

Intangible assets

The department only holds externally purchased software, which is recognised on a cost basis. The carrying amounts include amounts that were originally measured at deprival valuation and subsequently deemed to be cost under transitional provisions available on the introduction of AAS 38 Revaluation of Non-current Assets in 2000–01 and AASB 1041 of the same title in 2001–02.

The AASB Equivalent on Intangibles does not permit intangibles to be measured at valuation unless there is an active market for the intangible. As all the department’s software is externally purchased, there is a current active market for these assets. Accordingly, the department will continue to carry these assets at deemed cost in accordance with the requirements of the current FMOs.

Impairment of non-current assets

The department’s policy on impairment of non-current assets is at note 1.14.

Under the new AASB Equivalent Standard, these assets will be subject to assessment for impairment and, if there are indications of impairment, measurement of any impairment. (Impairment measurement must also be done, irrespective of any indications of impairment, for intangible assets not yet available for use). The impairment test is that the carrying amount of an asset must not exceed the greater of (a) its fair value less costs to sell and (b) its value in use. ‘Value in use’ is the net present value of net cash inflows for for-profit assets of the department (in particular of AUSPIC) and depreciated replacement cost for other assets which would be replaced if the department were deprived of them.

The most significant changes are that, for the department’s for-profit assets, the recoverable amount is only generally to be measured where there is an indication of impairment and that assets carried at up-to-date fair value, whether for-profit or not, may nevertheless be required to be written down if costs to sell are significant.

Inventory

The department recognises inventory not held for sale at fair value based on current market value.

The new AASB Equivalent standard will require inventory held for distribution for no consideration or at a nominal amount to be carried at the lower of cost or current replacement cost.

Employee benefits

The provision for long service leave is measured at the present value of estimated future cash outflows using market yields as at the reporting date on national Government bonds.

Under the new AASB Equivalent standard, the same discount rate will be used unless there is a deep market in high quality corporate bonds, in which case the market yield on such bonds must be used.

Financial instruments

Financial assets and liabilities are likely to be accounted for as ‘held at fair value through profit and loss’ or available-for-sale where the fair value can be reliably measured (in which case, changes in value are initially taken to equity). Fair values will be published prices where an active market exists or by appraisal.

Cash and receivables are expected to continue to be measured at cost information.

Financial assets, except those classified as ‘held at fair value through profit and loss’, will be subject to impairment testing.