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Costello fails to justify Telstra valuation.



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Media Release

BOB McMULLAN MP SENATOR STEPHEN CONROY SHADOW TREASURER SHADOW MINISTER FOR FINANCE, SMALL BUSINESS FEDERAL MEMBER FOR FRASER AND FINANCIAL SERVICES

29 May 2003

COSTELLO FAILS TO JUSTIFY TELSTRA VALUATION

Treasurer Peter Costello has been caught out. The explanation he offered today for his predicament provides no justification for inflating Telstra’s value in the Budget.

In Question Time today he avoided the crucial questions and tried to change the subject. Mr Costello effectively argued the error did not matter, because there are two accounting standards for valuing assets.

This completely ignores the crucial issue that the Budget papers misrepresent the true value of Telstra and the Finance Department has admitted it. Everybody but Mr Costello knows that the Budget valuation of Telstra is not credible.

Mr Costello tried to justify the $3 billion overvaluation of Telstra in the Budget by claiming there is a variety of accounting standards for valuing assets like Telstra.

But there is no accounting standard that would credibly justify increasing the valuation of Telstra over the past year.1 How could Telstra’s value in the Budget have increased by $3 billion when its share price has fallen? There is no justification for valuing Telstra at $5.25. Telstra has not traded at that price since May 2002.

The government’s own Budget statements make clear that the Budget is prepared on a GFS accounting standard. The GFS accounting standard explicitly requires that ‘all assets and liabilities should be valued at their current market value’.

Finance Department secretary Dr Ian Watt said in a Senate Estimates committee hearing last night the government was wrong to value Telstra at this inflated price: I accept your proposition, the estimate is not one we should have applied.

When Dr Watt was asked by Senator Conroy: The Commonwealth general government sector balance sheet is overstated by $5 billion?

he replied: It is of that order of magnitude, Senator.

Dr Watt later amended his estimate of the overvaluation to $3 billion.

The government is not only in breach of its own accounting standards, it is also in breach of the Charter of Budget Honesty. No wonder the government refuses to have the Budget audited.

Further information: Robert Garran, Mr McMullan’s office, (02) 6277 4803, 0419 692 504 JaneMcGill, Senator Conroy’s office, (02) 6277 3295, 0402 112 255

1 See attached extract from Budget Paper 1, 2002-03, p 10-13.

Budget Paper 1, 2002-03, p. 10-13

Extract from:

Table 1: Selected differences between AAS31 and GFS reporting standards

Issue AAS31 Treatment GFS Treatment

Commonwealth general government sector investments in public corporations

Investments in public corporations are valued at historic cost in the balance sheet.

Investments in public corporations are valued at current market value. For publicly listed corporations, the share price is used to calculate market value. For non-listed corporations, the current value of net assets is used.