Acquisition of Assets - 29 September 1999

29 September 1999

Mr. Ken Spencer
Chairman
Australian Accounting Standards Board
PO Box 132
Caulfield Vic 3162

Dear Ken

Acquisition of Assets

The Group of 100 is extremely concerned about the Board's decision, as announced in Action Alert 26, September 1999, in respect of reconstructions within an economic entity. These concerns are outlined below.

First, the Group of 100 believes that internal reconstructions involving assets/entities which are wholly-owned within the economic entity should not be included in the scope of the proposed Standard. We believe that requiring internal reconstructions on the basis of fair values will serve as a serious impediment to achieving more efficient business structures. For example, the non-exemption would result in different methods of accounting being adopted for internal reconstructions that would occur merely as a result of the way in which the economic entity was organised. If the activities of an economic entity were, for whatever reason, structured in separate wholly-owned corporate vehicles an internal reconstruction involving a shifting of these activities to achieve a more efficient structure would be required to be recognised at fair value. However, if the restructured activities were located in a single corporate entity the internal restructuring would be based on the existing carrying amounts of the net assets. This is an incongruous result when the business objective is to achieve a more efficient organisation of wholly-owned activities.

To require otherwise is to place an unnecessary impediment to the ability of economic entities to undertake internal restructurings and imposes unnecessary costs particularly in view of the fact that the effects of internal transactions are eliminated on consolidation except where all group assets and liabilities are transferred to a new parent entity owned by the same shareholders.

Some of the impediments to internal restructurings that will be created by this requirement are that:

1. payment of dividends by subsidiaries will be restricted to the extent that the amortisation of the fair value of assets acquired internally (eg intangibles) results in reported losses where profits would otherwise have been reported. This results in franking credits being "locked-up" in subsidiaries in the Group;

2. the selection of corporate structures will be influenced by accounting outcomes. The most efficient restructure will not necessarily occur because of an 'artificial' accounting result. The Board would be aware that Banking Regulations required a clear separation of banking activities. The Wallis Committee recommended the removal of this impediment to restructuring of banking and financial services. The Board's decision, if retained, would provide a significant deterrent to banking entities undertaking internal restructurings to respond to the changes in market arrangements;

3. the internal consolidation process for a group following a restructure will be more complex. Groups will have to unnecessarily concern themselves with maintaining records of pre-reconstruction profits and permanent consolidation entries and adjustments. In addition, duplication of reporting systems will result from the need to keep separate information for management reporting and performance assessment and the preparation of reconciliations of financial reporting information based on consolidated results and the reporting in respect of the separate entities; and

4. significant costs of valuation and related audit and legal fees will be incurred with no apparent benefits. It is our understanding that the Board is required to evaluate the cost-benefit profile of its project. We believe that it essential that the Board explicitly deal with the costs and benefits of its proposals.

The fair value revaluations within a company that will result from an internal restructure effectively recognise internally generated goodwill, for example, brand names, management rights, etc. which is not permitted by AASB 1013 "Accounting for Goodwill".

The Group of 100 strongly believes that internal restructurings should be recognised on the basis of the existing carrying amounts of the net assets. We note that, in the majority of cases, internal restructurings are occurring as a matter of course as economic entities adapt to changing circumstances.

Second, the Group of 100 is concerned about the process involved. We find it difficult to understand why a "fatal-flaw", if one exists was not identified until this stage of the due process. The Group of 100 believes that in the interests of transparency the views of ASIC, its reasons and the basis of the presentation by ASIC staff, and the reasons why the Board has responded this way, should be made publicly available. The Group of 100 is somewhat bemused by the ASIC position on this issue. We are aware that a recently listed entity issued a prospectus containing information prepared on the basis of the proposed changes to AASB 1015 "Acquisition of Assets". If ASIC has such serious concerns that the Board responds by reversing an earlier decision then, without the benefit of those views, it is difficult to reconcile those views with the position adopted in respect of a prospectus. We believe that making those views publicly available is essential to the credibility of the due process in respect of this issue.

Yours sincerely,

Bryce JH Denison
National President