Changes to accounting standards at Australian companies are being manifested in increased earnings volatility, with several local stocks expecting to post half-year results at odds with earlier forecasts.
Changes to accounting standards at Australian companies are being manifested in increased earnings volatility, with several local stocks expecting to post half-year results at odds with earlier forecasts.
The changes arise from the much-publicised Australian equivalents to International Financial Reporting Standards adopted last year, designed to make it easier to compare Australian companies with their foreign counterparts.
One of the biggest changes under AIFRS is the treatment of hedging instruments and unrealised investment properties, now recognised in company bottom lines.
Crying foul over the new standards are gold miners Resolute Mining Ltd and Croesus Mining NL, who have been forced to recognise large hedge losses on their income statements.
The stacked hedge books of both producers mean they will struggle to collect much benefit from a gold price that is now at 25-year highs.
Hardest hit has been Resolute, which last week forecast an unrealised $49 million December 2005 half loss thanks to the new accounting treatment of its hedge book.
Resolute chief executive Peter Sullivan said the application of AIFRS would have the potential to produce “considerable income statement volatility for the company in the future and produce results not indicative of its underlying operating earnings”.
The hedge loss reported by Resolute appears on its income statement because it does not qualify as an ‘effective hedge’ under AIFRS, meaning the financial instruments used do not “accurately offset changes in the underlying commodity”.
This followed the recent forecast of an $18 million pre-tax half year hedge loss at Croesus, now also included in the bottom line.
But making matters worse for the miners is that, should a financial instrument be considered an ‘effective hedge’, it is buried on the balance sheet, appearing as a change in equity, rather than appearing on the income statement.
Accounting experts say this puts the hedging blunders of financial managers under more investor scrutiny, while effective hedges are more likely to be overlooked.
However, at listed stockbroker and fund manager Euroz Ltd, the new standards have had a more slight effect, according to executive chairman Peter Diamond, who says the changes are purely cosmetic.
Euroz posted an unaudited half year net profit after tax of $6.37 million, including some $682,000 from unrealised investments that would not have been incorporated prior to AIFRS.
“I have a very strong opinion that it’s a change that wasn’t needed,” Mr Diamond said.
“Before, anyone could have looked up the figures in notes to the accounting statements.”
In any case, Mr Diamond said, Euroz had a policy of paying its dividends from realised earnings, rather than building in the unrealised profits reported under AIFRS.
He said that, for the most part, the changes meant more consulting fees to bring companies’ management accounting practices into line with the new standards.
Great Southern Plantations managing director John Young said in a recent market update, that despite a strong sales result, a forecast small half-year loss could be exacerbated by fair value adjustments on land now considered investment properties under AIFRS.
An Ernst & Young analysis report last month on the impact of AIFRS on the 100 highest valued Australian listed companies found that accounting for investment properties, financial instruments and impairments was likely to have the greatest impact on earnings volatility because the adjustments from these areas were typically outside the control of the company.
