Wellington, Aug 23 NZPA - Two leading professional directors say the accounting treatment of tax changes in the Government's May budget has distorted company accounts by more than $1 billion and is making them misleading.

Rob Challinor and Tony Frankham are highlighting difficulties arising from the elimination of tax deductions for depreciation on buildings with an expected life of 50 years or more and say they have the support of fellow directors.

An attempt to address the problem through changes to the international and New Zealand reporting regimes has been initiated by a group of 19 senior company directors but changes will take time.

Financial results of New Zealand corporates will be distorted by more than $1 billion through the application of international financial reporting standards (NZ-IFRS) to taxation changes in the budget, they said.

The impact on certain companies is so material that their financial statements will arguably not present a "true and fair view" as the market perceives that term.

The accounting rules are seriously distorting the earnings of many companies. Their effect is misleading.

An accounting standard requires a deferred tax liability to be set up representing the difference between the carrying values of buildings for accounting purposes and the value for tax purposes -- now being zero.

Thus an existing building in the books at $10 million will require a deferred tax charge to current profit, at the new corporate tax rate of 28 percent, of $2.8m and the setup of an equivalent liability in the balance sheet.

Many professional directors do not regard this accounting entry as a real liability in an economic sense.

Critics also note that it is illogical that buildings purchased after budget date do not require the establishment of such a deferred liability.

During the corporate reporting season companies have had to "back out" the deferred tax liability, but the media has headlined the net profit after tax number with the liability included.

"The danger is that many people will not understand that the deferred tax liabilities are merely accounting entries to comply with the rigid application of the international accounting standards that New Zealand companies are obliged to use," the directors said.

"The deferred tax liabilities required say nothing about the company that is useful to shareholders, potential investors, directors or managers. They are pointless in the sense that they are measuring something that has no practical application or purpose. They are non-cash, have no relevance to underlying or future performance and will not affect the ability to pay dividends."