Australian equivalents of International Financial
Reporting Standards (AIFRS)

Accounting standards set the framework for financial reporting.

Historically, different accounting standards have been developed and used around the world. This can be a problem when using accounting information prepared under different standards, and for some organisations as the different standards can be an additional barrier to doing business and raising capital on global markets.

Australian accounting standards have now been brought into line with international financial reporting standards; this means that Australian financial reporting will move into line with major overseas markets.

The changes mean that companies will be required to prepare their reports in accordance with AIFRS in respect of any financial reporting periods which begin on or after 1 January 2005.

For full-year financial reports, you'll start seeing the new standards applied from 31 December 2005. If a listed company's financial year ends on 31 December, then you'll also see the new standards applied in the company's 30 June 2005 interim report.

In the June 2005 reporting season, some companies reported under the new standards. Those companies published the data from the previous corresponding period (30 June 2004) under both the old and new standards, to help investors understand what changes in the company's reported financial position and performance are a result of changes in accounting treatment, and what changes relate to the actual performance of the underlying business. These financial reports also include an explanation of the changes from the previous basis of accounting.

However - the transition arrangements permit companies to defer the application date of some aspects of the AIFRS, and that may limit the usefulness of comparisons.

The new standards will affect companies in a number of ways, including:

• Changes in the way derivatives, investments, and equity instruments are classified can impact profit, reported borrowings (gearing) and the company's balance sheet.
• Any impact on profit also impacts a company's ability to pay dividends.
• Changes to internally-generated intangible assets, such as brands, customer lists, and newspaper mastheads, will no longer be recognised as assets in the accounts or balance sheet.
• Intangible assets can only be revalued where an active market for that asset exists.
• Companies must adopt the 'balance sheet' approach to determine deferred tax balances, whereas previously they used the 'profit and loss' approach-this may increase deferred tax balances (although this will not impact amount of tax actually payable).
• Changes to accounting for the acquisition of entities.
• The definition of cash is broader under AIFRS, which may impact reporting of net cash flows.
• Share-based remuneration will be recognised at fair value, with the cost expensed over the relevant period of service-this will result in decreased earnings as the expense of, for example, employee share schemes, is recognised.
• Changing the way that investment properties are valued.

There are other impacts, and the magnitude of impact will vary between companies and sectors. Good information sources about AIFRS include:

www.kpmg.com.au
www.fido.asic.gov.au (search 'IFRS')

Industry-wide, financial analysts are grappling with the impact of these new standards. Their impact on the ratios we use to calculate the financial health rating of companies and quantitative aspects of our 9 Golden Rules is as yet unclear. It may affect the advice we provide to you.

It is not yet possible to provide any quantification of these impacts, as they will vary depending on the company concerned. For example, the effect may be greater on companies with high value brands, such as media companies with newspaper mastheads. The full impact of these new accounting standards may not be evident for some years.

Since Stock Doctor was launched in 1997, there have been numerous incremental changes to Australian accounting standards. Our models have continued to perform over this period.

While we acknowledge that AIFRS will impact our proprietary financial health scores and quantitative aspects of our 9 Golden Rules-in fact, we are seeing evidence of this in the current reporting season-we believe that the processes that we have in place, which are outlined below, will ensure that Stock Doctor remains a powerful and credible source of fundamental analysis and data.

In addition, the commencement of AIFRS will not affect our ability to deliver the key financial data we are able to provide to you following the release of a company's results or major announcement.

We have designed and implemented a process to review the financials-and resultant financial health rating-as each company reports. As you can imagine, that is a big task given that we analyse more than 1,300 companies!

In the June 2005 reporting period-as well as the upcoming December 2005 reporting period-companies that are required to report under AIFRS are also required to restate figures from the previous corresponding period as they would have appeared if prepared under AIFRS. Our analysts update this data in Stock Doctor to enable comparison of the two periods. The updating process for prior period results is likely to extend beyond the day we release a company's results.

Our analysts have, to date, noticed some changes to financial health ratings. Generally, but not necessarily in every case, they are tending to become more conservative-for example, where a company had a Strong rating, it has moved to Satisfactory. Where anomalies exist, our team of analysts is reviewing the data to ensure that changes are AIFRS related, and not the result of a negative change to a company's business. Where a significant anomaly is observed, it will be noted in the Analyst Comments screen in the Stock Doctor program.

In 2007 Lincoln, in conjunction with academics from the University of Melbourne, underwent a review of its health model. This saw the inclusion of a number of new ratios added to the calculation of the health score. Though Lincoln is of the opinion that the changes have improved the predictability of the model, all failed company data used to conduct the analysis was prepared under a pre-AIFRS environment.

In time as the size of failed companies grows, this will be less of a concern as these entities will have been reporting under the new AIFRS standards.