This means that companies with 30 June year ends will be required to present IFRS financial reports for the year ending 30 June 2006, with comparatives prepared under IFRS for 30 June 2005. For the preparation of the comparative figures an opening balance sheet from 1 July 2004 is required.

This report, produced by KPMG's Energy and Natural Resources Group, provides a brief analysis of some of the key impacts to the power and utilities industry of the International Financial Reporting Standards (IFRS), due to be adopted by the AASB for reporting in Australia by 1 January 2005, together with the key actions recommended to address those changes.

This report summarises some of the key differences between IFRS and Australian GAAP (AGAAP) specifically impacting power and utility companies.

Key issues for Australian power and utilities companies

First-time application of IFRS

The IASB issued IFRS 1 First-time Adoption of International Financial Reporting Standards in June 2003. The AASB has not advised when IFRS 1 will be issued as an Australian standard. IFRS 1 addresses the initial application of all IFRS by companies required to prepare financial reports under international standards.

Under IFRS 1, a company determines its transition date which is the date of the start of the first comparative period where reports are prepared in accordance with IFRS. IFRS 1 requires that a company's first IFRS financial statements include at least one year of comparative information prepared under IFRSs. If the first IFRS financial statements include more than one year of comparative information and the additional comparative information is not in accordance with IFRS, the company must disclose the basis on which the additional comparative information is prepared.

The one exception to this rule is that the IASB announced recently that IFRS 1 will be amended to permit companies to apply IAS 39 Financial Instruments: Recognition and Measurement from the beginning of the first full period reporting under IFRS, not the start of the comparative period.

Most Australian companies only disclose one year of comparatives within their financial report. However, many companies also provide tables outside the financial report covering longer periods. Where such tables contain information measured on different bases, (eg 10 year financial statistics) companies will need to clarify the basis that has been applied to the information relating to each period.

Under IFRS 1, companies are required to prepare the initial opening balance sheet of their disclosed comparative period as if they had always applied IFRS. This is not as simple as it sounds. For example, a company that elected to recognise all property, plant and equipment at cost would have to measure each asset at cost in accordance with IAS 16 Property, Plant and Equipment and then recalculate accumulated depreciation.

To ease such difficulties with the transition, IFRS 1 contains some exceptions to the general requirement to apply all IFRS as if they had always applied, including permitting:

* business combinations not to be restated;

* an entity electing to recognise property, plant and equipment on the cost basis going forward to use fair value at transition date as deemed cost; and

* existing compound financial instruments not to be separated into their liability and equity components if the liability component is no longer outstanding at the transition date.

Impairment testing (including non-current assets)

IAS 36 Impairment of Assets addresses the impairment of all non-financial assets other than investment properties, inventories, biological assets, deferred tax assets, assets arising from construction contracts and assets arising from employee benefits. The general rule in IAS 36 is that no asset may be carried above its recoverable amount. When recoverable amount is less than carrying value, the expense is recognised in the statement of financial performance. Assets potentially impacted include property, plant and equipment, intangibles (particularly retail and distribution licences) and goodwill.

Impairment tests performed under IFRS are expected to be more rigorous than those currently performed under AGAAP. IAS 36 has been released in Australia as part of Exposure Draft ED 109 Request for Comment on IAS ED 3 Business Combinations; IASB ED of Proposed Amendments to IAS 36 Impairment of Assets and IAS 38 Intangible Assets; and AASB added material recently released by AASB.

Recoverable amount

Under IFRS, an asset is only assessed for impairment if an "impairment trigger" arises. An impairment trigger is an indication that an asset may be impaired and includes external sources of information such as changes in market conditions and internal sources of information identifying that assets are not performing as well as planned. If an impairment trigger is found, the company must determine whether the asset's recoverable amount is such that the asset needs to be written down.

Recoverable amount is defined as the higher of net selling price and its "value in use". Net selling price is the amount that could be obtained by selling the asset in an arm¡¦s length transaction. Value in use is calculated as the net present value of future cash flows generated by the asset.

Discount rate

In determining value in use, the cash flows are discounted using a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset. Many companies are presently assessing assets for impairment using "company-specific" rates rather than market rates, post-tax rather than pre-tax rates and company-wide rates rather than asset-specific rates.

For regulated assets such as networks for distribution companies, companies will need to assess whether the regulated weighted average cost of capital (WACC) meets the discount rate requirements of IAS 36. The selection of the discount rate may be market-sensitive, as IAS 36 requires disclosure of the discount rate where recoverable amount is value in use.

KPMG anticipates that discount rate disclosures will be viewed with interest by the regulator at the time of the next reset and that much lively debate may well ensue as the company manages the competing commercial needs of presenting a healthy position to investors and stakeholders on the one hand, and seeking to maximise the regulated WACC on the other.