BABCOCK & BROWN

6. risk factors
6.2.19 Inflation risk
Depending on the anticipated cash flows from an investment,
investment returns can be affected by changes in the rate of
inflation in a particular jurisdiction or geographic region.
6.2.20 Foreign exchange
Over two-thirds of the Babcock & Brown Group’s earnings
are generated in currencies other than the Australian dollar,
exposing the Group to adverse foreign exchange movements.
The Group has a policy of hedging known cashflows and
investments made in non-self sustaining operations. Since the
majority of the Group’s expenses are denominated in the same
currencies as the associated revenues, only the net income after
total compensation is generally exposed to currency fluctuations.
6.2.21 Tax
Any change to the current rate of company income tax in any
of the jurisdictions where the Babcock & Brown Group operates
may impact on financial performance, cash flows and investor
returns. Any changes to the current rates of income tax applying
to individuals and trusts will similarly impact on investor returns.
6.2.22 Insurance
The Babcock & Brown Group has insurance, including Errors
and Omissions (Professional Indemnity) and Directors’ and
Officers’ insurance, which it believes to be commensurate with
industry standards, and adequate having regard to the business
activities of the Group. However, there are risks that this will be
insufficient to meet a very large claim or a number of large
claims, that either the Group or one of its investments is unable to
secure insurance to satisfactorily cover all anticipated risks or
that the cost of insurance will increase beyond anticipated levels.
6.2.23 Information technology
The Babcock & Brown Group relies on various information
systems, technology and software products to efficiently carry
out its business. While the Group has put in place procedures
and plans to ensure that data is retained and that these systems
are maintained to meet the demands of the business, widespread
system failures may negatively impact on the Group’s
performance.
6.2.24 Change in accounting, legal and tax regimes
The Babcock & Brown Group operates in and across a variety
of accounting, legal and tax regimes. Change in these regimes,
whilst providing opportunities, could also limit the functionality
of the financial structures that the Group has developed for
clients, which could impact on business performance, particularly
of the structured finance group. Further, any structured financial
products utilised when principal investing may also be adversely
impacted by changes in accounting, legal or tax regimes.
6.2.25 Accounting standards and reported income
The Group’s accounting policies and methods are fundamental
to how it records and reports its financial position and results
of operations. The Group’s management must exercise
judgement in selecting and applying many of these accounting
policies and methods so that not only do they comply with
generally accepted accounting principles but that they also
reflect the most appropriate manner in which to record and
report the Group’s financial position and results of operations.
Furthermore, management always make decisions after
considering all external advice on the relevant matter.
In some cases, management must select an accounting
policy or method from two or more alternatives, any of
which might be reasonable under the circumstances yet
might result in the Babcock & Brown Group reporting
materially different outcomes than would have been
reported under a different alternative.
With effect from 1 January 2005, Babcock & Brown has
adopted AIFRS.
6.2.26 Documentation risk
The Babcock & Brown Group enters into a number
of highly structured transactions that require detailed
documentation. As a result, the risk of dispute over
interpretation or enforceability of the documentation,
or errors in preparation of the documentation, may be
higher than for other investments.
56 BABCOCK & BROWN SUBORDINATED NOTES