Investors reassured over new standards

Investors should not expect big restatements in earnings as companies adopt the new International Financial Reporting Standards, says PricewaterhouseCoopers partner Mike Schubert.

The new standards, adopted as part of international accounting agreements, will make an appearance during the February earnings season.

Many observers have feared the standards, particularly those requiring companies to mark assets to market and take changes in these values through their profit and loss statements, will increase the volatility of company earnings.

But Schubert, who heads the PWC IFRS group, says this is not happening.

"I think a lot of the volatility will be taken out. That is certainly what we are seeing, but the potential for volatility is still there," he said.

Sky City, which last week revealed the impact of IFRS on its half-year accounts when it reports this month, may have set the tone.

Its half-year to December 2005 results will be compared with the previous year's, which were prepared under the old rules. As a result the previous year's would be restated so meaningful comparisons can be made with the new results.

But Sky City said the restatement would boost its 2004 half-year reported net profit only by $2.5 million, from $57.1 million to $59.6 million.

All listed companies and large companies are required to adopt the new standards by the start of next January. But some, such as Telecom, Sky City and Carter Holt Harvey, have adopted the standards early.

The main changes to financial reporting are:

* Companies will no longer be required to write off goodwill, the difference between a company's acquisition price and its net assets. But it will be subject to strict impairment tests. If an asset is written down, or up, the change will be recognised in the income statement. This provision accounts for much of Sky City's profit restatement.

* Financial instruments will have to be recorded at fair value, with changes recognised in the income statement.

* Disclosing cost of sales will be mandatory.

* Companies will be required to measure and recognise a charge in the income statement for the value of shares and options granted to employees and others for services rendered.

* Companies will have to nominate a functional currency and measure its results and financial position in that currency. The functional currency is the one of the primary economic environment in which the entity operates.

Indicators of the functional currency include the one that primarily influences sales, the currency of the country whose competitive forces and regulations mainly determine the price of its goods and services and the currency that mainly influences labour, material and other costs of providing goods and services.

Wood products group Tenon is one company that has adopted US dollars as its functional currency.

The standards have put co-operatives such as Fonterra in a bind.

The IFRS standard dealing with the classification of financial instruments defines a liability as an instrument in which the entity is contractually required to settle in cash or another financial asset.

This could result in many co-operatives' shares being classified as liabilities rather than equity or members' funds. If implemented this would leave co-operatives with little or no equity and so could appear insolvent.

Fonterra has said it has decided to delay implementation of IFRS until the latest possible moment, the year ending May 31, 2008, for this reason.

The matter has been referred to the International Accounting Standards Board, which agrees with Fonterra that the standard creates a problem.

IFRS

* New accounting standards introduced as part of international agreements.

* Companies no longer required to write off goodwill.

* Financial instruments recorded at fair value.

* Disclosing cost of sales will be mandatory.

* Companies recognise the costs of shares and options granted to employees.

* Companies will have to nominate a functional currency.