The balance of the franking account arises from:

(i) franked income received or recognised as a receivable at the reporting date;
(ii) income tax paid, after adjusting for any franking credits which will arise from the payment of income tax provided for in the financial statements; and
(iii) franking debits from the payment of dividends recognised as a liability at the reporting date.

The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of controlled entities were paid as dividends.

Impact of Tax Consolidation legislation:

IAG and its Australian resident wholly-owned entities entered a tax consolidated group effective 1 July 2002. The Tax Consolidation legislation required the tax consolidated group to keep a single franking account. Franking credits of $334 million were transferred to the parent entity from its Australian resident wholly-owned entities at the time these entities entered the tax consolidated group.

Potential ordinary shares consist of rights granted to employees under the Performance Share Rights Plan.

Events subsequent to reporting date:

On 30 July 2004, a total of 1 million ordinary shares were issued as a result of the exercise of vested Performance Share Rights. At 30 June 2004, these shares were included as potential ordinary shares used in calculation of diluted earnings per share.

Insurance contracts

The large majority, if not all, of the insurance products are expected to meet the new accounting definition of an “insurance contract”

Changes to accounting for insurance products are not expected to be significant

In respect of the IAG Group's core insurance business, the changes to financial reporting on conversion to A-IFRS are not expected to be significant.

One of the key changes is that the standard provides a definition of an “insurance contract”. General insurance products and reinsurance products that meet the definition will continue with current accounting treatments subject to a revised liability adequacy test. Those general insurance products and reinsurance products that fall outside the definition will be treated as investment contracts or service contracts and be accounted for as financial instruments or revenue contracts respectively.

An analysis of the IAG Group's general insurance products and reinsurance products on offer, or utilised, is substantially complete with the expectation that most, if not all, will meet the definition of an insurance contract.

This would mean that the IAG Group's accounting for unearned premium, deferred acquisition costs, outstanding claims, premium revenue, claims expense and reinsurance recoveries would continue without significant change, subject to a revised liability adequacy test.

Reset preference shares

Reclassified as debt

Distributions treated as interest, not dividends

The IAG Group's reset preference shares will be reclassified as debt. Australian Prudential Regulation Authority has indicated they may grandfather the current regulatory capital treatment for existing instruments that are adversely affected by the accounting standard change. Distributions on those instruments will be treated as interest rather than dividends.

Financial assets

More choices around accounting policies for investment assets

Accounting policy selection still to be made

Under current accounting standards the IAG Group is required to measure at net market value (fair value less disposal costs) all investments integral to general insurance activities with movements in the net market value recorded in the statement of financial performance. Under A-IFRS the IAG Group will be required to measure at fair value only those assets held to back insurance liabilities and only where a fair value measurement option is available under the relevant accounting standards. Those financial assets that are not held to back insurance liabilities will move to a system of purpose led accounting. The new standards require classification of the investments based on the purpose for which they are held. The different classifications have different accounting treatments, being fair value through the statement of financial performance, fair value through equity, and amortised cost. The IAG Group has not yet finalised its accounting policy in response to these changes.

All derivative contracts, regardless of the purpose for which they are used, will be measured at fair value.

Goodwill

No amortisation moving forward resulting in lower expenses, subject to impairment charges

The IAG Group will not restate the accounting for business combinations transacted prior to 1 July 2004, as permitted under first time adoption. Goodwill will not be amortised but will be tested for impairment at least annually. Using A-IFRS impairment methodology the balance of goodwill shown in this report of $1,455 million is supportable.

The IAG Group had a goodwill amortisation expense for the year to 30 June 2004 of $91 million. The elimination of the requirement to amortise goodwill under A-IFRS will increase reported profits, subject to any impairment charge that may be required.

Non-goodwill intangibles

All current non-goodwill intangible assets qualify for recognition

Existing non-goodwill intangible assets on the IAG Group's statement of financial position at 30 June 2004 meet the recognition and measurement requirements of A-IFRS and so the accounting treatment, including amortisation, will remain unchanged. They will be subject to impairment testing.

In certain circumstances under A-IFRS, development phase expenditure will be capitalised and so recognised as an internally generated intangible asset. Software development is the largest component of development expenditure for the IAG Group. The IAG Group is not currently carrying any capitalised software development costs in the statement of financial position but may have to review this position.

Superannuation surplus

Positive impact to retained earnings at 1 July 2004

New asset/liability recognised

Under A-IFRS the relevant net position of defined benefit superannuation plans will be recognised in the statement of financial position with movements recognised in the statement of financial performance. While information regarding the financial position of the IAG & NRMA Superannuation Plan (“Plan”) sponsored by the IAG Group is provided in the notes to financial statements, the net position of the Plan is not recognised in the IAG Group's results.

The relevant surplus in the Plan as at 30 June 2004 under A-IFRS will pass through retained earnings as at 1 July 2004. The surplus calculated under A-IFRS will be different to that calculated in accordance with current accounting standards because of different measurement requirements with the principal difference being the discount rate applied.

Only a small minority of employees of the IAG Group participate in the Plan on a defined benefit basis.

Share-based payments

Trust likely to be consolidated

Overall expense likely to be reduced

Under A-IFRS the fair value at grant date of share-based remuneration is required to be recognised as an expense over the period from grant date until the equity instruments vest fully to the employee.

The IAG Group has, during the last two years, simplified its approach to share-based remuneration. The cost to the IAG Group of acquiring shares to fund future obligations for share-based remuneration is expensed in full, generally over the period during which the employees provide related services.

Under A-IFRS it is likely that the equity remuneration trust used to manage the share-based arrangements will be consolidated by the IAG Group. The impact of this would be that the shares purchased by the equity remuneration trust would likely be accounted for as a reduction in equity. The requirement to determine the fair value of the share-based remuneration and recognise this expense over the period from grant date to vesting date will likely result in a reduction in the overall expense recognised for the IAG Group in relation to share-based payments.

The IAG Group will not retrospectively apply the A-IFRS expense treatment to the Performance Share Rights Plan because the rights were granted prior to 7 November 2002, as permitted with A-IFRS first time adoption.

Property

All property classified as owner-occupied

Under current accounting treatments, all property, regardless of the purpose for which it is used, must be designated as an investment integral to general insurance activities and so is measured at fair value. This designation will not continue under A-IFRS and property will be classified according to the purpose for which it is held. All of the property within the IAG Group will be classified as owner-occupied property under A-IFRS.

Under A-IFRS, the IAG Group has the option to continue to measure the property at fair value, but with movements being recorded through equity, or to apply a cost approach under which the property would be depreciated over its useful life and also be subject to impairment testing.

Taxation

More deferred tax assets and liabilities may be recognised

Income tax will be calculated based on the “balance sheet approach” replacing the “income statement approach” currently used. This method recognises deferred tax balances when there is a difference between the carrying value of an asset or liability, and its tax base (being the amount attributed to an asset or liability for tax purposes). This may result in more deferred tax assets and liabilities and, as tax effects follow the underlying transaction, some tax effects will be recognised in equity.

Retained earnings

The retained earnings balance as at 30 June 2004 will change

In transitioning to A-IFRS the basic principle (there are exceptions) is that the IAG Group must apply the new standards as if the IAG Group had always applied them. There will therefore be some retrospective adjustments that will affect the retained earnings balance as at 1 July 2004.