summary for the week - please reply, page-12

Dont think people understand the huge negative impact the new IFRS has on the accounts of property trusts. It is an ill conceived one size fits all thing. It produces a set of accounts that are spurious.

As a simple example imagine you are a farmer. You have $15,000 cash and borrow $35,000 from the bank.
You buy a hundred yearling heifers for $500 each at the sales, intending to grow and fatten them for twelve months, then sell them as finished cattle at the sales. Your target is a long term average sale price of $1000 for a finished animal. Three months later the market for cattle gets quiet and the price you would pay would be $350.
Spot prices move up and down all the time.

The fact that you could buy the same animal for $350 at balance date is probably a bit frustrating, but your accounts have always been based on reality. Your profit/loss estimate is the price you sold it for less what you paid for it.

Along come the mysterious faceless "accountants" of IFRS.
You are now required to use their rules. Govt says so.

You are now required to write down the value of your cattle, even though no transaction has taken place, by $150 per head. Value, $35,000. $15,000 lower.
Then you are required to deduct this from your income,
and your assets.
You already had a sizeable loan from the bank to get you through the drought, secured by your farm. Now you have to supply the bank with a copy of your accounts at the balance date. Your income from last years herd, another $50,000, has to be reduced by the "writedown" of your cattle, to $35,000. On top of this you have to write down the carrying value of your stock to $35,000. Then tell the bank manager.
The bank manager then looks at it sees his loan at risk from your lower "income" and "assets" secured by the loan, gets worried. You are put on foreclosure watch.
Your interest rate is increased. Any income you may get is now demanded to pay down the loan. Forget about money to live on.

When you sell the cattle, after nine months of hell, including all sorts of dramas with creditors and the wife,
You get the expected $50,000 profit. Your income for the year. The bank is paid the $35,000 borrowed, plus interest, but the interest is a lot higher, compunded daily. The bank manager demands all whats left of the $50,000 to pay down your drought loan. Because if your reduced income expectations based on past years earnings, further credit is refused. You are out of business. Sold up.
All over a non cash adjustment that was academic at best and based on transitory conditions, having no relevance to your real activity.

Under the pre-IFRS standards, your last years profit was $50,000 based on income less cost, this year's is $50,000 based on same, bank happy. You are in business. You're paying the bills.

The new IFRS emperor has no clothes. The IFRS is destructive nonsense and is destroying the world economy. Its time to get rid if them before we are all in the soup kitchen lines. It is sheer craziness. All because some geek academics from places unknown were allowed to set the rules for the real world. Of course our dopey government not one of whom are accountants or probably have any training in it, agreed because it has "International" written in front of it. Cant have anyone thinking we are hayseeds can we? Tteasury OK'd it. None of them ever ran a business in their lives, of course.

Good management practices (See Total Quality Control) say that when you have a new plan, you set out what you want it to do. Then at intervals you look and calculate if it is doing what you intended. If it isnt, you try to get back on course by making suitable modifications or changes. If it fails completely, you dont just let it run on. It isnt better because it is new. Its just that the new rules are an Edsel. A new Edsel. IFRS is rubbish. Especially for property trusts, who invest long but are now required to adjust their accounts fully for short term fluctuations. What is happening to the property trusts is what is happened to our farmer.

But wait...GMG has an agreement that does not take these academic non cash estimates such as "mark to market" of derivatives which are not going to be closed out, to maturity, into consideration in calculating gearing ratios. Says so in the half year report. But the market is behaving as if they do.

Sooo...GMG will ride this out, very likely. Very strong, so what a bargain. Totally mispriced by Mr Magoo, ooops..I mean, Mr Market.....

Cmon Rudd, here you can fix a blunder by the previous Govt. But truly dont think youre mob are any better at this. Happy to be proven wrong, before we all end up in the bankruptcy courts.