ACCOUNTING STANDARDS REFORM—WILL THERE BE HAVOC?

Abstract

Australia’s corporate regulatory authorities have been extensively lobbied during the last 10 years to move to adopt an international set of accounting standards that the major nations of the world have evolved. Following the establishment of the International Accounting Standards Board (IASB) in the UK, that body has moved to promulgate a broad range of accounting standards. Australia has been a member of the IASB from its early days.

The IASB has moved to promulgate some accounting standards. The Australian Accounting Standards Board (AASB) has moved to adopt these same standards. In effect, the intent of those standards has been converted to Australian terms. The bulk of these new accounting standards (AASBs) will be effective for the first time to accounts of reporting entities for the years after 1 January 2005.

The intention of the adoption of these standards has been to provide a consistent platform for the preparation of accounts in all of the major countries of the world. The expectation is to promote consistent reporting and more ready comparability between participants in various industries and between industries and from year to year.

For a number of oil and gas listed companies, however, the short to medium-term is likely to produce the exact opposite in results and comparability terms. Accounting results for years prior to the adoption of the new AASBs will in certain circumstances bear results so dissimilar that their usage will be misleading.

The conversion effort from the old standards to the new standards will involve considerable effort by all participants in the oil and gas industry; this should have started months ago.

There will also be spin-off problems causing many legal documents, including borrowing agreements and performance bonus agreements that will need to be re-written. There will only be havoc in an administrative context if those oil and gas companies have not prepared themselves well and in a timely fashion. There may be financial havoc if the changes in accounting policies via the International Financial Reporting System (IFRS) make it difficult to raise new capital or cause problems under existing borrowing covenants.