Contact: Vessa Playfair
Deloitte
Director of Communications
+61 2 9322 7576

Contact: Debbie Hankey
Deloitte
Partner (Technical) - Assurance and Advisory
Tel: +61 (2) 9322 7665

Companies that declare their intended dividend payouts before they announce their 30 June 2006 end-of-year profits may be tripped up by the onset of international financial reporting standards, according to global professional services firm Deloitte.

Deloitte Partner Debbie Hankey says companies may be forced to review their dividend policies in the face of greater expected volatility in profit results.

Ms Hankey said the introduction of Australian equivalents to International Financial Reporting Standards (A-IFRS), to be fully implemented by 30 June 2006 but earlier for December year-end entities, could have a significant effect on reported profits. 

However, the introduction of A-IFRS should not affect underlying cash flows unless companies change their behaviour as a result of the impacts of the new standards on reported profits and the balance sheet.

“Shareholders should brace themselves for more volatility in reported profits, purely because A-IFRS will place more emphasis on fair value measurement for certain elements of the statement of financial performance,” she said.

Ms Hankey said A-IFRS could have a major effect on companies that promoted their dividend payout ratio, which is based on a calculation involving dividend per share and earnings per share.

In the past, shareholders, investment advisers and funds managers have used the dividend payout ratio as a benchmark for shareholder value.

“But companies may become reluctant to publicly declare their dividends before their profit results are announced, because such profits are subject to greater volatility under the new regime,” she said.

“The Corporations Act 2001 requires dividends to be paid out of profits, so companies may find it more prudent under A-IFRS not to forecast dividends before they report their profits.  A-IFRS requires restatement of prior year comparatives, which could make dividend payments in the comparative period imprudent where A-IFRS has a negative impact on prior year profits,” she said.

Deloitte has released on its website its latest guide to the key differences between the existing Australian GAAP and the new Australian equivalents to International Financial Reporting Standards (A IFRS).

Ms Hankey said companies had a major task in conditioning the investor community on the potential impact of A-IFRS on earnings and dividend policies well before the full implementation of the new standards. 

The Australian Accounting Standards Board requires companies to start this process through disclosures required in their annual reports for the current reporting season.  Although most entities would only be giving narrative disclosures at 30 June 2004, there is an expectation that quantitative disclosures will be given by June 2005.

Ms Hankey said the changes would have greatest commercial impact on companies where hedging strategies did not meet the more stringent requirements of A-IFRS.  Those companies with significant defined benefit plans could also have earnings impacted by volatility in the share market.