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Country Energy will apply the Australian Equivalents to International Financial Reporting Standards (AIFRS) from the reporting period beginning 1 July 2005.

(i) Managing the transition

The transition to the new standards will be managed by allocating internal resources and engaging consultants to analyse the pending standards and Urgent Issues Group Abstracts to identify key areas regarding policies, procedures, systems and financial impacts affected by the transition.

As a result of this exercise, the following steps have been taken to manage the transition to the new standards:

• The Audit and Risk Committee is overseeing the transition. The Group General Manager, Finance and Business Development is responsible for the project and reports regularly to the Committee on progress against the plan.

47

COUNTRY ENERGYANNUAL REPORT 2003–2004

Notes to the Financial Statements

for the year ended 30 June 2004

• Consultants have been appointed.

• A preliminary analysis has been carried out to identify the differences between GAAP and AIFRS.

• A project plan has been prepared to resolve these differences and assist with the transition.

• The plan identifies the steps required to design and implement the necessary processes, procedures and policies to achieve transition.

The plan has been structured into three areas of significance which are listed below, together with the plan’s steps.

1: Financial Instrument Standards AASB 132 and AASB 139 AASB 132: Financial Instruments: Disclosure and Presentation

AASB 139: Financial Instruments: Recognition and Measurement Standards – Review accounting treatments of major contracts under AASB 139 – Undertake a quantitative analysis of portfolio management practices – Develop a systems strategy to support AASB 139 adoption

– Implementation of a hedge effectiveness framework – Review debt management arrangements

– Review foreign exchange management arrangements – Evaluate hedge instrument valuation methodologies – Review and draft amendments to existing policies

2: Non-Financial Instruments Standards

– Review the basis of measuring capitalised costs – Confirm fair value methodologies with NSW Treasury – Redesign asset register if necessary

– Identify Cash Generating Units (CGUs) – Assess investment properties

– Construct taxation calculation models – Assess intangible assets

– Assess methodologies for determining revenue – Review joint ventures

– Review provisions and contingent assets – Review employee benefits and superannuation – Review leases

3: General Matters

– Assess options available under AASB 1: First-time Adoption of Australian Equivalents to International Financial Reporting Standards – Determine the impact of AIFRS on Key Performance Indicators (KPIs)

– Determine the impact on all other reporting requirements – Review all other accounting policies

– Define and document the processes and reports within the financial reporting systems, this includes dual reporting within the comparative year

– Produce initial AIFRS reports which includes restating the 1 July 2004 opening balance sheet, the 2005 actuals and the statements required under AASB 1047: Disclosing the Impacts of Adopting Australian Equivalents to International

Financial Reporting Standards – Design appropriate training

NSW Treasury is assisting Country Energy to manage the transition by developing policies, including mandates of options; presenting training seminars; providing a website with up-to-date information to advise of any new developments; and establishing an IAS Agency Reference Panel to facilitate a collaborative approach to manage the change.

(ii) Key differences in accounting policies expected to arise from adopting AIFRS

Country Energy has identified a number of significant differences in accounting policies that will arise from adopting AIFRS. Some differences are because AIFRS requirements are different from existing AASB requirements. Other differences could arise from options

48

Notes to the Financial Statements

for the year ended 30 June 2004

within AIFRS. To ensure consistency at whole of government level, NSW Treasury have advised the options that it is likely to mandate, and will confirm these during 2004-05. This disclosure reflects these likely mandates.

Country Energy’s accounting policies may also be affected by a proposed standard designed to harmonise accounting standards with Government Finance Statistics (GFS). This standard is likely to change the impact of AIFRS and significantly affect the presentation of the income statement. However the impact is uncertain, because it depends on when this standard is finalised and whether it can be adopted in 2005-06.

Based on current information, the following key differences in accounting policies are expected to arise from adopting AIFRS:

• AASB 1 requires retrospective application of the new AIFRS from 1 July 2004, with limited exemptions. Similarly, AASB 108:

Accounting Policies, Changes in Accounting Estimates and Errors requires voluntary changes in accounting policy and correction of errors to be accounted for retrospectively by restating comparatives and adjusting the opening balances of accumulated funds.

This differs from current Australian requirements, because such changes must be recognised in the current period through profit or loss, unless a new standard mandates otherwise.

• AASB 110: Events after the Balance Sheet Date states that only dividends “declared” or appropriately “authorised” before the reporting date can be recognised. This is more restrictive than the current approach which is based on “valid expectations”.

However this change is not expected to impact on dividend recognition as the signing of the Statement of Corporate Intent before the reporting date to which it relates, “authorises” the dividend and any change in the amount of the dividend after the reporting date constitutes an “adjusting event after the reporting date”.

However the amount of the dividend may be affected by other AIFRS, such as AASB 139 and AASB 119: Employee Benefits (refer below) as these standards may impact on retained earnings (on first adoption) and the amount and volatility of profit/loss.

• AASB 112: Income Taxes requires a balance sheet approach where the entity must identify differences between the accounting and tax value of the assets and liabilities. The previous approach was to account for tax by adjusting accounting profit for temporary and permanent differences to derive taxable income. The AASB 112 approach may alter the quantum of tax assets and liabilities recognised.

In addition the income tax expense and deferred tax assets and liabilities may be affected by other AIFRS to the extent that they impact on the balance sheet and profit and loss.

• AASB 116: Property, Plant and Equipment requires major inspection costs to be capitalised. This will require the fair value and depreciation of the related asset to be re-allocated.

Asset revaluation increments and decrements must be accounted for on an individual asset basis, rather than on a class basis.

This may decrease accumulated funds.

• AASB 119 requires the defined benefit obligation to be discounted using the government bond rate as at each reporting date rather than the long-term expected rate of return on plan assets. This may increase the future volatility of superannuation expense.

• AASB 123: Borrowing Costs provides the option to expense or capitalise borrowing costs. NSW Treasury is likely to mandate the expensing of borrowing costs to harmonise with GFS. Previously, borrowing costs related to qualifying assets were capitalised.

• AASB 136: Impairment of Assets requires an entity to assess at each reporting date whether there is any indication that an asset (or CGU) is impaired and if such indication exists, the entity must estimate the recoverable amount. However, the effect of this Standard should be minimal because all substantive principles in AASB 136 are already incorporated in Treasury’s policy Valuation of Physical Non-Current Assets at Fair Value.

• AASB 138: Intangibles requires that all research costs must be expensed and restricts capitalisation of development costs.

Some previously recognised internally generated intangible assets may need to be derecognised.

• AASB 139 results in the recognition of financial instruments that were previously off balance sheet, including derivatives.

The standard adopts a mixed measurement model and requires financial instruments held for trading and available for sale to be measured at fair value and valuation changes to be recognised in profit or loss or equity, respectively. Previously they were recognised at cost. This may increase the volatility of the operating result and balance sheet.

The standard also includes stricter rules for the adoption of hedge accounting, and where these are not satisfied, movements in fair value will impact the income statement.

To achieve full harmonisation with GFS, all financial instruments will need to be designated at fair value through profit or loss.

However, at this stage it is unclear whether this option will be available under the standard, and if available, whether Treasury will mandate the option.

49

COUNTRY ENERGYANNUAL REPORT 2003–2004

Notes to the Financial Statements

for the year ended 30 June 2004

• AASB 140: Investment Property requires investment property to be measured at cost or fair value. NSW Treasury is likely to mandate the adoption of fair value. In contrast to the current treatment of an asset classified within property, plant and equipment, investment property recognised at fair value is not depreciated and changes in fair value are recognised in the income statement.