Defence

Chief Finance Officer

Lining up with world standards

Over the next 12 months or so Australian entities, including Defence, will be adopting a local version of global accounting standards.

Shouldn't be too much of a problem... after all, how hard can that be? As usual the devil's in the detail.

The new standards, the Australian Equivalents to International Financial Reporting Standards (AEIFRS) - a mouthful but generally pronounced 'ay-iff-riss', or referred to as 'the Australian Equivalents', are generally the same as the international standards.

Since 1 July 2004, the 'migration' as it's known, has been occurring, with financial statements for the 2004-5 reporting year eventually being prepared under both the old and new accounting standards. That's right - two sets of statements for one financial reporting period.

So why bother?

Convergence with global accounting standards offers a number of benefits to commercial entities, the most notable being easier access to financial markets in other countries.

The benefits for Australian government entities, including Defence, are less obvious and the move presents Defence with some serious challenges.

Global convergence is a stepping stone to convergence between accounting standards and what are known as Government Finance Statistics (GFS) as there are fewer differences between global standards and GFS. Both global accounting standards convergence and harmonisation with GFS are part of the economic policy platform of the current government.

What will the impact on Defence be?

Most Groups across Defence will not notice many changes in either reports or practices between the two sets of standards. Groups that will be more heavily affected are those which manage assets or employee liabilities, noting that:

• AEIFRS requires annual management reviews of all aspects of an asset's economic potential (eg value, useful life, residual value, depreciation method and impairment). This formalises what was previously considered to be 'better practice', but will require additional work in some Defence Groups to ensure compliance.
• AEIFRS also requires early recognition of disposal or end-of-useful-life restoration costs when these can be reliably measured. Groups holding significant assets will need to review those assets and determine whether restoration costs are likely to arise, if so when, and how much will those activities cost.
• AEIFRS makes a number of changes to the measurement and disclosure of employee related obligations, including superannuation entitlements. While the required adjustments will flow through to Group financial information on a distributed basis, compliance with the new requirements will primarily be the responsibility of DPE.

Specific rules have been provided to smooth the transition from the previous framework to the new AEIFRS.

However, those rules presume that senior Defence management will be able to assert that financial statements prepared under AEIFRS are compliant with the requirements of those standards. If Defence management is unable to make such an assertion, then we will lose the right to take advantage of the transitional rules.

If that happens, Defence could be expected to prove the historical cost of all Specialist Military Equipment (a huge task in itself), the calculation of restoration provisions is further complicated, and the rules would be applied as if Defence always prepared financial information under AEIFRS, rather than from 1 July 2004.

The assertion of compliance will rely on the quality of the underlying information. So remediation of the data quality findings listed by the ANAO in its opinion on last year's financial statements will likely determine whether or not such an assertion can be made.

CFO Group is working closely with the Groups responsible for remediating audit findings, with the Department of Finance and Administration to clarify application of AEIFRS in an Australian government context, and with the ANAO to expedite preparation of both sets of 2004-05 financial statements.

Kelly Fenner

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