Reporting standards to boost investment

Telecom's reported profits will get a boost next year after New Zealand yesterday committed to adopting 48 international financial reporting standards (IFRS).

The standards will replace New Zealand Generally Accepted Accounting Principles for companies with more than 50 staff or annual revenue of $20 million and assets of $10 million.

They must be adopted by January 1, 2007, but firms such as Telecom and Carter Holt Harvey are adopting them from next year, in line with Australia and the European Union.

Telecom says adopting IFRS will increase its earnings because goodwill will no longer be written off over up to 20 years.

Instead, goodwill will be subject to an annual impairment test to be signed off by company auditors. Any impairment will be recognised immediately in earnings.

However, accounting changes that require companies to value foreign-exchange contracts and include them in their balance sheets, will make profits for exporters such as Carter Holt Harvey and Fonterra's more volatile.

Another change likely is the growth of tax balances for assets and liabilities.

Auckland International Airport chairman Wayne Boyd has said his company would have to provide for deferred tax on property revaluations.

Boyd said 33 per cent of revaluation gains would be reclassified as deferred tax liability, even though New Zealand had no tax on such capital gains.

The airport's revaluation reserves stand at $422 million, 33 per cent of that is $139 million, so shareholders' funds will fall by that amount.

IFRS have been established through the London-based International Accounting Standards Board (IASB), partly due to the collapse of American energy trader Enron and its auditor, Andersen, in 2001. However, the United States and Japan are not adopting IFRS.

Issues for New Zealand co-operatives, including Fonterra, are still being finalised. This is because IFRS could see redeemable co-operative shares, which have been classed as equity, reclassified as debt.

Warwick Hunt, chairman of the New Zealand Accounting Standards Review Board, is working on this issue with the IASB.

Hunt had "absolutely no doubt" adopting IFRS would encourage foreign investment into New Zealand.

IFRS critics, including Shareholders' Association chairman Bruce Sheppard, an accountant, argue the standards are too prescriptive and adopt a one size fits all mentality.

He suggests IFRS are being enforced by the preparers of financial statements, groups who make money out of them, rather than by the users of financial statements.

Another critic, John Milne, an accountant and Contact Energy director said forestry and wine companies, horse breeders and orchardists would have to value inventory at market value instead of at cost.