Accounting for Budget proves big hurdle

Sky City has calculated after taking into account the reduction in corporate tax the net effect of changes will cost the company $2 million. Photo / The Aucklander

Accounting changes that will hit corporate headline profits by hundreds of millions of dollars have been condemned by tax experts and forced at least one company to the brink of a technical breach of banking covenants.

Listed companies are releasing calculations on the effect of provisions stemming from Budget rule changes on deferred tax liability adjustments - which will not affect underlying profits - but are also being forced to grapple with the net impact of the removal of building depreciation and the reduction in the corporate tax rate.

The depreciation changes are part of a series of Budget measures that will cost businesses an estimated $1.6 billion over the next four years, even after the reduction of corporate tax to 28 per cent.

Those companies that have disclosed deferred tax liability provisions have calculated a $16 million to $80 million hit on their balance sheets. All say they are one-off accounting entries for this year only that are non-cash and will not affect dividend payouts. However, they face a challenge explaining these large provisions to investors when they unveil annual results.

PricewaterhouseCoopers partner John Shewan, a member of the Government's Tax Working Group, said the obligation was unexpected.

"No one saw this coming over the horizon.

"It's fair to say that lots of people are shaking their heads in disbelief that this particular entry is required."

The recently introduced International Financial Reporting Standards require the establishment of this liability now that buildings are no longer depreciable for tax purposes.

"The consequence is that over time you'll be paying more tax and the accounting standard requires that extra tax to be recognised now in the current accounting," said Shewan.

"Ironically none of this tax charge will ever be paid to Inland Revenue."

Analysts will adjust for it but it would technically impact on some companies' banking covenants.

"I'm aware of at least one company that will be pushed over their covenants and that's what they're discussing with their bank - the bank, of course, will recognise that it's a non-cash item."

Although he was an architect of tax changes he said the requirements of IFRS had led to this unforseen "quirky" scenario.

"It's like trying to explain rugby rules - no one understands what they are but nobody likes to admit they don't understand."

Managing tax partner at Deloitte, Thomas Pippos, said the new requirements were a headache for companies.

"At a minimum you've got to explain it away. You have to get analysts on board then you have to get the public on board.

"As an extreme example an uninformed investor may think profitability is affected in a negative way and raise questions about future cash flow," he said.

"In some respects it's adding insult to injury in terms of the tax policy change."

While the deferred tax liability adjustments were producing the biggest numbers, it is the ongoing net impact of the removal of building depreciation that is of most concern to analysts.

SkyCity has calculated after taking into account the reduction in corporate tax the net effect of changes will cost the company $2 million.

While Auckland International Airport has forecast underlying tax impacts as neutral, it says the removal of depreciation on property could discourage investment in what was a crucial part of the tourism sector.

Brian Gaynor, Milford Asset Management executive director, said analysts were looking for more information on the real impact of Budget changes.

"Companies should be telling us about the deferred tax provision and then about how they're affected during future years."

He said the complex changes came at a bad time for many businesses.

"This will confuse rather than help them. It must be taking up a lot of cost in a company having someone look at this and it's not productive."

Paper Hits

Accounting impact of deferred tax liabilities:

* Auckland International Airport - $80m

* SkyCity - $60m

* Fletcher Building - $30m

* The Warehouse - $23m

* Vector - $21m

* Goodman Fielder - $16m

Real Hits

Tax impact of depreciation regime changes:

* SkyCity - $2m

* Fletcher Building 'small increase'

This story has been corrected from an earlier version, which said the changes would cost Vector $1 million. This was incorrect.