Reference no: EM13755883 , Length: 2000 Words

Assignment requirements.

Read the following article and adopting a Positive Accounting Theory perspective, consider the following issues:

1. If a new accounting standard impacts on profits, should this impact on the value of the firm, and if so, why?

2. Will the imposition of a particular accounting method have implications for the efficiency of the organization?

Foster's: less goodwill, higher earnings

The challenges facing investors seeking a true picture of a company's earnings during the impending profit reporting season were underlined again on Friday when Foster's flagged it would report a $1.2 billion reduction in net assets under new accounting standards.

The transition to international financial reporting standards (IFRS) means Foster's net assets will fall from $4.6 billion to $3.37 billion based on its last reported balance sheet, mainly as a result of the internally generated goodwill on brand names not being recognized.

The other major contributor to the reduction is the requirement to allow for deferred tax liabilities based on the difference between the carrying values of assets and their cost base.

Despite skepticism about the likely success of Foster's recent $3 billion acquisition of winemaker Southcorp and Foster's ability to extract sufficient merger synergies, the changes to the reported accounts do not relate to any issues with that acquisition.

The brewing and winemaking group told analysts the balance sheet adjustments wouldn't affect its cash flow or ability to pay dividends. But reported profits will be higher than they otherwise would be because of the removal of goodwill amortization charges. Under the standards, goodwill is instead subject to an annual "impairment test", with the elimination of amortization expenses boosting reported profits. If the new standards were applied to Foster's half-year accounts to December 31, 2004, the company would have made a net profit of $783.2 million versus the $757 million reported.

The reduced asset base reported by companies such as Foster's will also means they will report more favorable returns on these written-down asset values. The transition to new standards has raised concerns that companies will announce potentially misleading profit numbers and will be reluctant to predict future profits because of the uncertainty around some aspects of the standards. There is also
concern about how credit ratings agencies will react to such wild swings in balance sheet values. But the adoption of the standards will make it easier for investment analysts to compare companies to their global peers. In Foster's case, this means investment analysts will be able to better discern whether it is outperforming or underperforming global wine and brewing peers such as Diageo and Pernod Ricard.

ABN Amro Asset Management's Mark Nathan said: "It differs by company and industry. There will be some concern over whether the new standard result in a less realistic portrayal of what's happening than the current Australian standards, by and large its an improvement." However, Goldman Sachs JBWere said in a note to clients that given the shortened period in which companies must now report their results, the new standards "would only add to the data overload during the last two to three week of August." Foster's closed 2 cents higher at $5.46.