Tasmanian Audit Office Client Information Session April 2009

1. 1 The economic environment facing the Globe today, including Tasmania, is a far different one to 12 months ago. Whilst the warning signs were there this time last year, plenty has crystallised since, requiring us all to consider and appropriately account for the impacts of todays economic environment. This session is designed to touch on just a few of those areas organisations should be considering, not only for the 30 June reporting season, but also beyond. The economic environment facing the Globe today, including Tasmania, is a far different one to 12 months ago. Whilst the warning signs were there this time last year, plenty has crystallised since, requiring us all to consider and appropriately account for the impacts of todays economic environment. This session is designed to touch on just a few of those areas organisations should be considering, not only for the 30 June reporting season, but also beyond.

2. 2 Agenda The world has changed � an overview The impacts on your business Financial Reporting Fraud Enterprise Risk Management Briefly outline agenda for the whole sessionBriefly outline agenda for the whole session

3. 3 The World has changed � an overview Growth rates to fall to 0.5% in 2009 Deepest recession since World War II 50 million job losses expected in 2009 Government bail-out plans and stimulus packages ASIC reports a 27% increase in companies declared insolvent (October 2008 vs. October 2007) What are the impacts of the current market conditions on the global economy? These impacts have been widely published and some of the news headlines of the past 6 � 9 months include the following: The International Monetary Fund is expecting global growth rates to fall to 0.5% in 2009 with advanced economies expected to suffer its deepest recession since World War II. The International Labour Organisation expects another 50 million job losses in 2009. The US government releases a US$700 billion bail-out package for its financial industry and a US$787 billion stimulus package. The British government announced a �500 billion bail-out plan for its financial sector in October 2008. The Australian government releases a A$4 billion bail-out into the struggling non-bank financial sector and A$42 billion stimulus package. ASIC reported a 27% increase in companies being declared insolvent when comparing October 2008 to October 2007 These are just a few examples and there are many more examples of government bail-outs in other countries, company failures (for example Lehman Brothers) and companies suffering significant losses (for example AIG Life etc). What are the impacts of the current market conditions on the global economy? These impacts have been widely published and some of the news headlines of the past 6 � 9 months include the following: The International Monetary Fund is expecting global growth rates to fall to 0.5% in 2009 with advanced economies expected to suffer its deepest recession since World War II. The International Labour Organisation expects another 50 million job losses in 2009. The US government releases a US$700 billion bail-out package for its financial industry and a US$787 billion stimulus package. The British government announced a �500 billion bail-out plan for its financial sector in October 2008. The Australian government releases a A$4 billion bail-out into the struggling non-bank financial sector and A$42 billion stimulus package. ASIC reported a 27% increase in companies being declared insolvent when comparing October 2008 to October 2007 These are just a few examples and there are many more examples of government bail-outs in other countries, company failures (for example Lehman Brothers) and companies suffering significant losses (for example AIG Life etc).

4. 4 Tasmania not immune CPI moved to 3.7% annual Dec 07 to Dec 08 (Dec 06 to Dec 07: 3.0%) AUD/USD fell to 0.6937 at 31/2/09 (31/12/07: 0.8781) All ordinaries indices fell to 3,744 points at 16/4/09 (31/12/07: 6,421) 10 Year Government Bond Rate fell to 4.58% at 15/4/09 (31/12/07: 6.33%) RBA Cash Interest Rate fell to 3.0% on 8/4/09 (5/3/08: 7.25%) Unemployment increased to 5.7% March 2009 (March 2008: 4%) King Island Beef, ACL Bearings Importantly, and unfortunately, Tasmania and Australia have not been and will continue to not be immune to the effects of the global financial crisis. These stats show the magnitude of the impacts to date. Importantly, and unfortunately, Tasmania and Australia have not been and will continue to not be immune to the effects of the global financial crisis. These stats show the magnitude of the impacts to date.

5. 5 The impacts are far reaching and this slide outlines some of the key impacts your organisation should be considering for the 30 June reporting period and beyond. The balance of this session will individually address each of these areas.The impacts are far reaching and this slide outlines some of the key impacts your organisation should be considering for the 30 June reporting period and beyond. The balance of this session will individually address each of these areas.

6. 6 The market conditions today have resulted in a significant increase in asset impairment indicators. Many of these indicators listed here impact the underlying cashflows of the organisation or other inputs that go into recoverable amount calculations. Accordingly, many assets, including those that have not been tested for impairment before (or for a long time), will require a recoverable amount calculation. For each organisation, it is important to consider whether you have: Robust documentation around the impairment indicators and the support for impairment or no-impairment Robust recoverable amount models. We will talk later around the valuation inputs. The market conditions today have resulted in a significant increase in asset impairment indicators. Many of these indicators listed here impact the underlying cashflows of the organisation or other inputs that go into recoverable amount calculations. Accordingly, many assets, including those that have not been tested for impairment before (or for a long time), will require a recoverable amount calculation. For each organisation, it is important to consider whether you have: Robust documentation around the impairment indicators and the support for impairment or no-impairment Robust recoverable amount models. We will talk later around the valuation inputs.

7. 7 Whether valued at cost or fair value, the impacts of the current economic environment, place enormous pressure on the valuation of all assets and the public sector are not immune to these valuation issues. Often valuation of assets requires a significant level of judgement and specialist skills. Current market conditions only increases the complexity involved. Accordingly, it is recommended that specialist advice is sought where relevant. Investments in subsidiaries � Appropriateness of carrying amount is dependent on operating cash flows of underlying subsidiary. Usually valued at cost, however, if recent transaction increased risk due to decline in market and future cash flows of subsidiary. Investments in equity securities � With the market decline most equity securities, listed or unlisted, have decreased in value. Goodwill � annual impairment is required using typically a value in use, discounted cash flow model. All inputs into these models are most likely to have changed materially. Other intangibles � Even definite useful life intangibles may require impairment testing due to impacts on the current environment. Derivatives � Fair value likely to materially change given the movement in interest rates, fx rates, commodity prices etc. Naturally, those applying hedge accounting will need to continue to monitor the effectiveness of the hedge to enable the continuation of hedge accounting. Receivables � with many companies and organisations struggling to keep afloat, exposure to such customers should be assessed. Deferred tax assets � In particular assessment of probability of recouping tax losses. Inventories �consideration of current market forces that may have driven the net market value below cost. P,P&E � specific assets or cash generating units will require close consideration. Whether valued at cost or fair value, the impacts of the current economic environment, place enormous pressure on the valuation of all assets and the public sector are not immune to these valuation issues. Often valuation of assets requires a significant level of judgement and specialist skills. Current market conditions only increases the complexity involved. Accordingly, it is recommended that specialist advice is sought where relevant. Investments in subsidiaries � Appropriateness of carrying amount is dependent on operating cash flows of underlying subsidiary. Usually valued at cost, however, if recent transaction increased risk due to decline in market and future cash flows of subsidiary. Investments in equity securities � With the market decline most equity securities, listed or unlisted, have decreased in value. Goodwill � annual impairment is required using typically a value in use, discounted cash flow model. All inputs into these models are most likely to have changed materially. Other intangibles � Even definite useful life intangibles may require impairment testing due to impacts on the current environment. Derivatives � Fair value likely to materially change given the movement in interest rates, fx rates, commodity prices etc. Naturally, those applying hedge accounting will need to continue to monitor the effectiveness of the hedge to enable the continuation of hedge accounting. Receivables � with many companies and organisations struggling to keep afloat, exposure to such customers should be assessed. Deferred tax assets � In particular assessment of probability of recouping tax losses. Inventories �consideration of current market forces that may have driven the net market value below cost. P,P&E � specific assets or cash generating units will require close consideration.

8. 8 The key here is that during these economic conditions value in use calculations will become more prevalent as the most appropriate method to determine recoverable amount. In making this statement, it is acknowledged that �depreciated replacement cost�, will still be appropriate for �not-for-profit� entities. However, the requirement to use DRC is dependent on �the entity, if deprived of the asset, would replace its remaining future economic benefits�. Given the current economic environment, this assumption should be reassessed by the �not-for-profit� sector. The key here is that during these economic conditions value in use calculations will become more prevalent as the most appropriate method to determine recoverable amount. In making this statement, it is acknowledged that �depreciated replacement cost�, will still be appropriate for �not-for-profit� entities. However, the requirement to use DRC is dependent on �the entity, if deprived of the asset, would replace its remaining future economic benefits�. Given the current economic environment, this assumption should be reassessed by the �not-for-profit� sector.

9. 9 As previously mentioned, ASIC has reported a 27% increase in companies declared insolvent (October 2008 vs. October 2007). KPMG has also noted a significant increase in modified opinions being issued, including a number with �emphasis of matter� in relation to going concern. It is important that those charged with governance are satisfied that the entity is able to pay its debts as and when they fall due. The time period for consideration of going concern in financial reports is at least 12 months from balance date. Does your organisation have appropriately robust cash flow forecasts and models to provide reasonable evidence over the entity�s going concern. If reliant on debt funding, does the entity have secure arrangements with lenders for debt facilities for at least 12 months? This will be discussed more later, however, has a key impact on going concern considerations.As previously mentioned, ASIC has reported a 27% increase in companies declared insolvent (October 2008 vs. October 2007). KPMG has also noted a significant increase in modified opinions being issued, including a number with �emphasis of matter� in relation to going concern. It is important that those charged with governance are satisfied that the entity is able to pay its debts as and when they fall due. The time period for consideration of going concern in financial reports is at least 12 months from balance date. Does your organisation have appropriately robust cash flow forecasts and models to provide reasonable evidence over the entity�s going concern. If reliant on debt funding, does the entity have secure arrangements with lenders for debt facilities for at least 12 months? This will be discussed more later, however, has a key impact on going concern considerations.

10. 10 The Australian Financial Review recently published an article in January 2009 �Bank talks to head off liquidity crunch�, which suggested that some $70bn of corporate loans are to be refinanced in the next two years, with capacity in the current market unlikely to be able to absorb such a quantum. As noted on the previous slide, entities reliant on debt funding, need to make sure that its facilities are in place for at least 12 months. This not only impacts the going concern considerations but also the presentation of the debt in the financial statements. Under AASB 101, borrowings will be current (among other things) if: it is due to be settled within 12 months of reporting date The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after reporting date. Entities without an agreement to refinance at reporting date for a period of at least 12 months will need to carefully consider the current / non-current presentation of the debt. Entities with breaches in their debt covenants, and without a waiver of this breach from the bank at balance date will need to carefully consider the current / non-current presentation of the debt. The Australian Financial Review recently published an article in January 2009 �Bank talks to head off liquidity crunch�, which suggested that some $70bn of corporate loans are to be refinanced in the next two years, with capacity in the current market unlikely to be able to absorb such a quantum. As noted on the previous slide, entities reliant on debt funding, need to make sure that its facilities are in place for at least 12 months. This not only impacts the going concern considerations but also the presentation of the debt in the financial statements. Under AASB 101, borrowings will be current (among other things) if: it is due to be settled within 12 months of reporting date The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after reporting date. Entities without an agreement to refinance at reporting date for a period of at least 12 months will need to carefully consider the current / non-current presentation of the debt. Entities with breaches in their debt covenants, and without a waiver of this breach from the bank at balance date will need to carefully consider the current / non-current presentation of the debt.

11. 11 With potentially large movements in key inputs that have impacted the measurement of assets and liabilities and key business decisions in response to the current markets, organisations should be more vigilant on monitoring and considering these for post balance sheet events. It is critical to have good internal systems in place for monitoring and considering these changes post balance date. Adjusting events are those that provide evidence of conditions that existed at reporting date. Subject to materiality, these are reflected in the financial statement balances at reporting date. Non-adjusting events are those that are indicative of conditions that arose after the reporting date. Subject to materiality, these are reflected in the disclosures of the financial statements only. With potentially large movements in key inputs that have impacted the measurement of assets and liabilities and key business decisions in response to the current markets, organisations should be more vigilant on monitoring and considering these for post balance sheet events. It is critical to have good internal systems in place for monitoring and considering these changes post balance date. Adjusting events are those that provide evidence of conditions that existed at reporting date. Subject to materiality, these are reflected in the financial statement balances at reporting date. Non-adjusting events are those that are indicative of conditions that arose after the reporting date. Subject to materiality, these are reflected in the disclosures of the financial statements only.

12. 12 We have previously highlighted that the markets have impacted significantly the key inputs that are traditionally used in valuation models. For example net cash flows, discount rates, growth rates applied to cash flows etc. Historical assumptions used are no longer likely to be appropriate so organisations need to critically reassess these and provide strong external evidence to support the inputs used. Naturally, arriving at appropriate inputs does involve judgements which may be complex and accordingly each organisation should consider seeking specialist advice in this regard. The impacts are far reaching and organisations should consider impact on asset impairment models, leave calculations, defined benefit calculations, fair value calculations, provision discounting, receivables discounting. We have previously highlighted that the markets have impacted significantly the key inputs that are traditionally used in valuation models. For example net cash flows, discount rates, growth rates applied to cash flows etc. Historical assumptions used are no longer likely to be appropriate so organisations need to critically reassess these and provide strong external evidence to support the inputs used. Naturally, arriving at appropriate inputs does involve judgements which may be complex and accordingly each organisation should consider seeking specialist advice in this regard. The impacts are far reaching and organisations should consider impact on asset impairment models, leave calculations, defined benefit calculations, fair value calculations, provision discounting, receivables discounting.

13. 13 Current markets are forcing organisations to reconsider their structures and service delivery models. The rise of unemployment in Australia and Tasmania is direct evidence that organisational restructuring or entities entering receivership is resulting in the loss of jobs. AASB 119 stipulates that for a provision to be recognised, the organisation needs to be �demonstrably committed� to the termination of employees through a detailed plan that is without realistic possibility of withdrawal. Organisations contemplating such restructuring that will result in the loss of employees should carefully consider their arrangements in regards to the employee benefits standard. Current markets are forcing organisations to reconsider their structures and service delivery models. The rise of unemployment in Australia and Tasmania is direct evidence that organisational restructuring or entities entering receivership is resulting in the loss of jobs. AASB 119 stipulates that for a provision to be recognised, the organisation needs to be �demonstrably committed� to the termination of employees through a detailed plan that is without realistic possibility of withdrawal. Organisations contemplating such restructuring that will result in the loss of employees should carefully consider their arrangements in regards to the employee benefits standard.

14. 14 Recent reports on fraud cases are alarming. In today�s economic environment, the inherent risk of fraud is increased.Recent reports on fraud cases are alarming. In today�s economic environment, the inherent risk of fraud is increased.

15. 15 Recent reports on fraud cases are alarming. In today�s economic environment, the inherent risk of fraud is increased.Recent reports on fraud cases are alarming. In today�s economic environment, the inherent risk of fraud is increased.

16. 16 Whilst not wanting to go through this in detail, this diagram outlines the better practice elements of a fraud and corruption framework as recommended in the Australian Standard on Fraud. During the current economic climate, and the increased risk of fraud, it is a good time to review your organisations frameworks to manage fraud and corruption to ensure they are appropriate to mitigate. Whilst not wanting to go through this in detail, this diagram outlines the better practice elements of a fraud and corruption framework as recommended in the Australian Standard on Fraud. During the current economic climate, and the increased risk of fraud, it is a good time to review your organisations frameworks to manage fraud and corruption to ensure they are appropriate to mitigate.

17. 17 Unfortunately, many fraud investigations find these warning signs exist but are ignored by staff. It is important that staff are aware of these warning signs and have confidential avenues on which to report unusual behaviour.Unfortunately, many fraud investigations find these warning signs exist but are ignored by staff. It is important that staff are aware of these warning signs and have confidential avenues on which to report unusual behaviour.

18. 18 Most organisations will have a formal framework in place to manage its strategic and operational business risks. Better practice organisations would regularly reassess these risks on a regular basis to identify new risks, delete obsolete risks and re-rate the risks at a gross (untreated) and net (treated) levels. The current market conditions have no doubt changed most organisations risk profile in some way and accordingly it is critical that businesses formally reassess the risk profile if it hasn�t already done so. For example has the risk of fraud increased, the exposure to fx or interest rates increased, risk of maintaining debt facilities to fund working capital requirements increased and so on?Most organisations will have a formal framework in place to manage its strategic and operational business risks. Better practice organisations would regularly reassess these risks on a regular basis to identify new risks, delete obsolete risks and re-rate the risks at a gross (untreated) and net (treated) levels. The current market conditions have no doubt changed most organisations risk profile in some way and accordingly it is critical that businesses formally reassess the risk profile if it hasn�t already done so. For example has the risk of fraud increased, the exposure to fx or interest rates increased, risk of maintaining debt facilities to fund working capital requirements increased and so on?

19. 19 Carbon Pollution Reduction Scheme (CPRS) � financial reporting implications for 30 June 2009 CPRS - an emissions trading scheme under which entities covered by the scheme (approx 1,000 entities) are required to purchase permits to cover their carbon emissions. Consider disclosures of uncertainty around the impacts of CPRS in the notes to the accounts Consider whether CPRS is an indicator of impairment Consider impact on budgets going forward Given uncertainty in legislation, disclosure around this uncertainty and its impact on the organisation may be appropriate. The possible introduction of the CPRS may be material enough for some entities to be an indicator of impairment, the impacts of which may require consideration in value in use models. At 30 June 2009 the CPRS legislation is expected to be in place and therefore and we would expect entities to be in a position to factor the effect of the CPRS into their impairment models. Given uncertainty in legislation, disclosure around this uncertainty and its impact on the organisation may be appropriate. The possible introduction of the CPRS may be material enough for some entities to be an indicator of impairment, the impacts of which may require consideration in value in use models. At 30 June 2009 the CPRS legislation is expected to be in place and therefore and we would expect entities to be in a position to factor the effect of the CPRS into their impairment models.

20. 20 Presenter Details Hobart: David HowieKPMG Partner62304000dhowie@kpmg.com.au Launceston: Andy GrayKPMG Partner62373737andrewgray@kpmg.com.au Ask participants if they have any questions.Ask participants if they have any questions.