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Note 2: Adoption of Australian Equivalents to International Financial Reporting Standards from 2005–2006

The Australian Accounting Standards Board has issued replacement Australian Accounting Standards to apply from 2005-06. The new standards are the Australian Equivalents to International Financial Reporting Standards (AEIFRS). The International Financial Reporting Standards are issued by the International Accounting Standards Board. The new standards cannot be adopted early. The standards being replaced are to be withdrawn with effect from 2005-06, but continue to apply in the meantime, including reporting periods ending on 30 June 2005.

The purpose of issuing AEIFRS is to enable Australian reporting entities reporting under the Corporations Act 2001 to be able to more readily access overseas capital markets by preparing their financial reports according to accounting standards more widely used overseas.

For-profit entities complying with AEIFRS will be able to make an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRS) as well as a statement that the financial report has been prepared in accordance with Australian Accounting Standards.

AEIFRS contain certain additional provisions that will apply to not-for-profit entities, including Australian Government agencies. Some of these provisions are in conflict with IFRS, and therefore Customs will only be able to assert that the financial report has been prepared in accordance with Australian Accounting Standards.

AAS 29 Financial Reporting by Government Departments will continue to apply under AEIFRS.

Accounting Standard AASB 1047 Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards requires that the financial statements for 2004–05 disclose:

• an explanation of how the transition to AEIFRS is being managed;
• narrative explanations of the key policy differences arising from the adoption of AEIFRS;
• any known or reliably estimable information about the impacts on the financial report had it been prepared using AEIFRS; and
• if the impacts of the above are not known or reliably estimable, a statement to that effect.

Where an entity is not able to make a reliable estimate, or where quantitative information is not known, the entity should update the narrative disclosures of the key differences in accounting policies that are expected to arise from the adoption of AEIFRS.

The purpose of this Note is to make these disclosures.

Management of the transition to AEIFRS

Customs has taken the following steps for the preparation towards the implementation of AASB Equivalents:

• The Agency’s Audit Committee is tasked with oversight of the transition to and implementation of the AASB Equivalents to IFRSs. The Chief Finance Officer is formally responsible for the project and reports regularly to the Audit Committee on progress against Customs IFRS implementation plan.

The plan requires the following key steps to be undertaken and sets deadlines for their achievement:

• All major accounting policy differences between current AASB standards and AEIFRS were identified by 30 June 2004.
• System changes necessary to be able to report under the AEIFRS, including those necessary to capture data under both sets of rules for 2004-05 were completed on 18 August 2004. This included the testing and implementation of those changes.
• A transitional balance sheet as at 1 July 2004, under AEIFRS was completed and presented to the Audit Committee on 15 March 2005.
• An AEIFRS compliant balance sheet as at 30 June 2005 was also prepared during the preparation of the 2004–05 statutory financial reports.
• The 2004–05 Balance Sheet under AEIFRS will be reported to the Department of Finance and Administration in line with their reporting deadlines.
• The plan also addresses the risks to successful achievement of the above objectives and includes strategies to keep implementation on track to meet deadlines.

Major Changes in accounting policy

Customs believes that the first financial report prepared under AEIFRS i.e. at 30 June 2006, will be prepared on the basis that Customs will be a first time adopter under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. Changes in accounting policies under AEIFRS are applied retrospectively i.e. as if the new policy had always applied except in relation to the exemptions available and prohibitions under AASB 1. This means that an AEIFRS compliant balance sheet has to be prepared as at

1 July 2004. This will enable the 2005-06 financial statements to report comparatives under AEIFRS.

A first time adopter of AEIFRS may elect to use exemptions under paragraphs 13 to 25E. When developing the accounting policies applicable to the preparation of the 1 July opening balance sheet, no exemptions were applied by Customs.

Changes to major accounting policies are discussed in the following paragraphs.

Management’s review of the quantitative impacts of AEIFRS represents the best estimates of the impacts of the changes as at reporting date. The actual effects of the impacts of AEIFRS may differ from these estimates due to:

• continuing review of the impacts of AEIFRS on agency operations;
• potential amendments to the AEIFRS and AEIFRS Interpretations; and
• emerging interpretation as to the accepted practice in the application of AEIFRS and the AEIFRS Interpretations.

Property Plant and Equipment

It is expected that the 2005–06 Finance Minister’s Orders (FMOs) will continue to require property plant and equipment assets to be valued at fair value in 2005–06.

Borrowing Costs

It is expected that the FMOs for 2005–06 will elect to expense all borrowing costs under AEIFRS. Customs borrowing costs are currently expensed. Accordingly, there are no adjustments required due to the transition to AEIFRS. The impact of bringing to account the decommissioning, restoration and make-good provision below may have an impact on borrowing costs, however this impact is still being assessed.

Intangible Assets

Customs intangibles comprise internally developed software for internal use and purchased software. These assets are carried at cost. Purchases of intangibles are recognised initially at cost in the Balance Sheet, except for purchases costing less than the threshold specified below, which are expensed in the year of acquisition (other than when they form part of a group of similar items which are significant in total).

Customs existing capitalisation policy recognises research expenditure and training as an expense as it is incurred. Costs associated with the development of the projects such as design and testing are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Software is amortised on a straight-line basis over its anticipated useful life.

Impairment of Intangibles and Property, Plant and Equipment

Under AEIFRS these assets will be subject to assessment for impairment and, if there are indications of impairment, an assessment of the degree of impairment. (Impairment measurement must also be completed, irrespective of any indications of impairment, for intangible assets not yet available for use).

The impairment test is that the carrying amount of an asset must not exceed the greater of (a) its fair value less costs to sell and (b) its value in use. ‘Value in use’ is the net present value of net cash inflows for cash generating units of the Agency and depreciated replacement cost for other assets which would be replaced if Customs were deprived of them.

An impairment assessment of Custom’s assets indicated that no adjustments will be required.

Decommissioning, Restoration and Make-good

When assessing the accommodation leases for the preparation of the opening balance sheet, Customs had determined that an adjustment would be required to account for the make-good at year end. As at reporting date, Customs has made an initial assessment of an obligation for decommissioning, restoration or make-good for the period ended 30 June 2005. Although the estimated impact has initially been assessed as a $1.7m decrease against retained earnings, this amount is still subject to further review and may differ to the final amount expected to be reported to the Department of Finance and Administration in line with their reporting deadlines.

Inventories

Inventories of seized and surrendered goods are brought to account at net realisable value. The new Australian Equivalent standard will require inventory held for distribution for no consideration or at a nominal amount to be carried at the lower of cost or current replacement cost.

An assessment was made and it was found that in all instances the current replacement cost of inventory was equal or greater than the original cost. Therefore no adjustment is required.

Employee Benefits

The provision for long service leave is measured at the present value of estimated future cash outflows using market yields as at the reporting date on national government bonds.

The 2003-04 Financial Report noted that the AEIFRS standards may require the market yield on corporate bonds to be used. The AASB has decided that a deep market in high quality corporate bonds does not exist and therefore national government bonds will be referenced.

AEIFRS require that annual leave that is not expected to be taken within 12 months of balance date is to be discounted. Consequently, there will be an adjustment for the non-current annual leave. As at reporting date, Customs has made an initial assessment of an obligation for employee benefits for the period ended 30 June 2005. Although the estimated impact has initially been assessed as a $0.1m increase against retained earnings, this amount is still subject to further review and may differ to the final amount expected to be reported to the Department of Finance and Administration in line with their reporting deadlines.

Financial Instruments

AEIFRS includes an option for entities not to restate comparative information in respect of financial instruments in the first AEIFRS report. It is expected that the Finance Ministers Orders will require entities to use this option. Therefore, the amount for financial instruments presented in the Customs 2004–05 primary financial statement are not expected to change as a result of the adoption of AEIFRS

Customs will be required by AEIFRS to review the carrying amounts of financial instruments at 1 July 2005 to ensure they align with the accounting policies required by AEIFRS. It is expected that the carrying amounts of financial instruments held by Customs will not materially change as a result of this process.

Reconciliation of Impacts – AGAAP to AEIFRS

		30 June 2005*	30 June 2004
		$’000	$’000
Reconciliation of Departmental Equity
Total Departmental Equity under AGAAP		276,605	198,112
Adjustments to accumulated results		(1,575)	(12)
		275,030	198,100
Reconciliation of Departmental Accumulated Results
Total Departmental Accumulated Results under AGAAP		60,270	23,189
Adjustments:
Leasehold improvements asset		-	6,132
Leasehold improvements deferred expense		(1,686)	(2,625)
Deferred expense (makegood provision)		-	(3,507)
Annual leave current and non current split		111	(12)
Total Accumulated Results under AEIFRS		58,695	23,177
Reconciliation of Departmental Reserves
Total Departmental Reserves under AGAAP		15,430	15,398
Total Departmental Reserves under AEIFRS		15,430	15,398
Reconciliation of Departmental Contributed Equity
Total Departmental Contributed Equity under AGAAP		200,905	159,525
Total Contributed Equity under AEIFRS		200,905	159,525

* 30 June 2005 total represents the accumulated impacts of AEIFRS from the date of transition.

 

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