Note 2 Adoption of AASB Equivalent to IASB Standards from 2005–2006

The Australian Accounting Standards Board has issued replacement Australian Accounting Standards to apply from 2005–06. The new standards are the Australian Equivalent to International Financial Reporting Standards (AEIFRS). The International Financial Reporting Standards are 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 The standards being replaced are to be withdrawn with effect from 2005–06 but continue to apply in the meantime, including reporting periods ending on 30 June 2005.

The purpose of issuing AEIFRS is to enable Australian reporting 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 AEIFRS will be able to make an explicit and unreserved statement of compliance with IFRS as well as a statement that the financial report has been prepared in accordance with Australian Accounting Standards.

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 that the financial report has been prepared in accordance with Australian Accounting Standards.

AAS 29 Financial reporting by government departments will continue to apply under AEIFRS.

Accounting Standard AASB 1047 Disclosing the impact of adopting Australian Equivalents to International Financial Reporting Standards requires that the financial statements for 2004–05 disclose:

• an explanation of how the transition to the Australian Equivalents is being managed
• a narrative explanation of the key policy differences arising from the adoption of AEIFRS
• any known or reliably estimable information about the impacts on the financial report had it been prepared using AEIFRS
• if the impacts of the above are not known or reliably estimable, a statement to that effect.

The purpose of this note is to make these disclosures.

Management of the transition to AEIFRS

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

• The department’s Audit Committee is tasked with oversight of the transition to and implementation of AEIFRSs. 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 AEIFRSs
  • identification of systems changes necessary to be able to report under AEIFRS, 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 for opening balance purposes
  • preparation of an AEIFRS 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 AEIFRS.

The plan also addresses the risks to successful achievement of the above objectives and includes strategies to keep implementation on track to meet deadlines.

Consultants have been engaged to assist with each of the above steps.

Major changes in accounting policy

Changes in accounting policies under AEIFRS are applied retrospectively (i.e. as if the new policy had always applied). This rule means that a balance sheet prepared under the AEIFRS 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.

Major changes to accounting policies are discussed in the following paragraphs.

Property, plant and equipment

It is expected that the Finance Minister’s Orders will continue to require property, plant and equipment assets carried at valuation in 2004–05 to be measured at 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 2005.

Intangible assets

The department only holds externally purchased software, which is recognised on a cost basis. AEIFRS permits intangibles to be recognised at cost.

Impairment of non-current assets

The department’s policy on impairment of non-current assets is at Note 1.13.

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 depreciated replacement cost for assets which would be replaced if the department were deprived of them.

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.

AEIFRS require that annual leave that is not expected to be taken within 12 months of the balance date is to be discounted. After assessing the staff leave profile, the department does not expect that any material amounts of the annual leave balance will not be taken in the next 12 months. However, the amount will be reflected for this portion.

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.

Also to note, AEIFRS include an option for entities not to restate comparative information in respect of financial instruments in the first AEIFRS report. It is expected that Finance Minister’s Orders will require entities to use this option.