Company financial statements have over the past couple of years reported major swings in their numbers that rival anything Glenn Miller and his band could pull off, and the ANZ’s market announcements released yesterday are no exception.
New accounting standards were adopted by the Big Four bank for the financial period ending September 30 - and the change observed is marked.
One of the big shifts is represented by the new leasing standard that was implemented by the bank and the impact of that standard is that it bulks up assets and liabilities on corporate balance sheets because of a different way of thinking about how leased assets are used to get future cash flows into a business.
“Consequently on 1 October 2019 the Group recognised an increase in lease liabilities of A$1.7 billion, a right-of-use lease asset of $1.6 billion, an increase in deferred tax assets of $37 million and a net reduction to opening retained earnings of $88 million,” the bank observed.
These shifts can baffle those unfamiliar with developments in the accounting debates on leasing over the years. Accounting professionals and others have had to discard their previous knowledge of operating and finance leases, which created an artificial distinction between things a company used to make money.
It also discourages the practice of companies trying to shove assets off balance sheets by trying to fabricate sale and leaseback arrangements that were previously the subject of a great controversy.
Go back in history far enough and you will find the approach of booking all leases irrespective of their nature on the balance sheet would have been mandatory under the statements of accounting concepts developed by the then Australian Accounting Research Foundation under the auspices of the two professional accounting bodies, CPA Australia and what was then the Institute of Chartered Accountants in Australia.
The leasing industry squealed, the standard setters were forced to not have the statements of accounting concepts as being mandatory. What they ended up doing, however, was embedding the definitions of assets and liabilities throughout the legal backed accounting standards.
The ANZ tells the readers of its market information and its accounts that it includes information that is not strictly compliant with accounting standards, which is information that must comply with ASIC guidance on how non-accounting standard figure are used, and in the next paragraph jumps to explaining the notion of cash profit.
This numerical critter involves a company like a bank stripping back stuff it believes isn’t useful for the assessment of performance. It also means rather interestingly that the cash profit will be greater than the statutory result. Consider the difference between a statutory profit of A$3.58 billion to $3.76 billion as the cash profit.
It is interesting to note that cash profit figure that people will have dangled before them in the media and elsewhere as a performance measure is not subject to audit in its own right but that the ANZ’s audit firm “informed the audit committee that cash profit adjustments have been determined on a consistent basis across each period”.