ACCA P7 IAS SUMMARY AND AUDIT WORK WITH EXAM TECHNIQUE Muhammad Faisal 03335340210
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Contents IAS 1 – Presentation of financial statements ................................................................................................ 6 Audit Work ............................................................................................................................................ 6 IAS 2 – Inventories ........................................................................................................................................ 6 Audit Work ............................................................................................................................................ 6 IAS 7 – Statement of cash flows.................................................................................................................... 7 IAS 8 – Accounting policies, changes in accounting estimates and errors ................................................... 7 Audit Work ............................................................................................................................................ 7 IAS 10 – Events after the reporting period ................................................................................................... 7 Audit Work ............................................................................................................................................ 7 IAS 11 - Construction contracts..................................................................................................................... 7 Audit Work ............................................................................................................................................ 8 IAS 12 – Income Taxes .................................................................................................................................. 8 Audit Work ............................................................................................................................................ 8 IAS 16 – Property, plant & equipment .......................................................................................................... 8 Audit Work ............................................................................................................................................ 9 IAS 17 - Leases............................................................................................................................................... 9 Audit Work ............................................................................................................................................ 9 IAS 18 – Revenue ........................................................................................................................................ 10 Audit Work .......................................................................................................................................... 10 IAS 19 (revised) – Employee benefits ......................................................................................................... 10 Audit Work .......................................................................................................................................... 10 IAS 20 – Accounting for government grants ............................................................................................... 11 Audit Work .......................................................................................................................................... 11 IAS 21 – The effects of changes in foreign exchange rates ......................................................................... 11 Audit Work .......................................................................................................................................... 11 IAS 23 – Borrowing costs............................................................................................................................. 12 Audit Work .......................................................................................................................................... 12 IAS 24 – Related party disclosures .............................................................................................................. 12 Audit Work .......................................................................................................................................... 12 IAS 27 (revised) – Separate financial statements ....................................................................................... 13 2 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
IAS 28 (revised) – Investment in associates and joint ventures ................................................................. 13 IAS 32 - Financial Instruments – Presentation ............................................................................................ 13 IAS 39 - Financial Instruments – Recognition and Measurement............................................................... 13 IFRS 7 – Financial Instruments – Disclosures .............................................................................................. 13 IFRS 9 - Financial Instruments ..................................................................................................................... 13 Audit Work .......................................................................................................................................... 14 IAS 33 – Earnings per share......................................................................................................................... 15 Audit Work .......................................................................................................................................... 15 IAS 34 – Interim financial reporting ............................................................................................................ 15 IAS 36 – Impairment of assets .................................................................................................................... 15 Audit Work .......................................................................................................................................... 16 IAS 37 – Provisions, contingent liabilities and contingent assets ............................................................... 16 Audit Work .......................................................................................................................................... 16 IAS 38 – Intangible assets............................................................................................................................ 17 Audit Work for Research and Development ....................................................................................... 17 Audit Work for Other Intangible assets (Brands, Licenses, rights etc..) ............................................. 17 IAS 40 – Investment property ..................................................................................................................... 18 Audit Work .......................................................................................................................................... 18 IFRS 1 – First-time adoption of International Financial Reporting Standards ............................................ 18 IFRS 2 – Share-based payment.................................................................................................................... 18 Audit Work .......................................................................................................................................... 19 IFRS 3 Revised – Business combinations..................................................................................................... 19 Audit Work .......................................................................................................................................... 19 IFRS 5 – Non-current assets held-for-sale and discontinued activities....................................................... 19 Audit Work (assets / operations that have been disposed of) ........................................................... 20 Audit Work (assets / operations held for sale) ................................................................................... 20 IFRS 8 – Operating segments ...................................................................................................................... 20 Audit Work .......................................................................................................................................... 21 IFRS 10 – Consolidated financial statements .............................................................................................. 21 IFRS 11 – Joint arrangements...................................................................................................................... 21 IFRS 12 – Disclosure of interests in other entities ...................................................................................... 22 3 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
IFRS 13 – Fair value measurement.............................................................................................................. 22 Audit Work .......................................................................................................................................... 22 Matters to be consider Question solving Technique .................................................................................. 23
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IAS 1 – Presentation of financial statements
Provides formats for classification and presentation of financial information Identifies components of financial statements Note items of OCI must now be classified as either items that may be reclassified to profit or loss in future periods, or those items which will not be reclassified in future periods If the company has going concern doubts, these should be disclosed in the Financial Statements. If the company is not considered a going concern, its Financial Statements should be presented under an alternative basis.
Audit Work Auditors should assess the going concern status of clients by: Reviewing the latest trading results of the company, by inspecting management accounts after the year end. Assessing the cash the company has (e.g. by agreeing bank statements, loan agreements etc.) and the cash the company could generate: o Assets that could be sold o Assets that could be used as security for a loan o Receivables that could be collected (or sold to a factor). Assessing the state of the industry. Obtaining a written representation from the Board that the company is a going concern. Assessing company forecasts for reasonableness.
IAS 2 – Inventories Valued at lower of cost and fair value less selling costs (i.e. NRV) for each separate item or product Include all costs of getting item or product to current location and condition note – LIFO is banned Audit Work Cost should be agreed to: o Invoices (if purchased) o Materials requisitions / timesheets / personnel records if manufactured o If manufactured, overhead absorption method would need to be reassessed for reasonableness. NRV should be agreed to: o Post year-end selling prices / invoices. Stock take attendance should ensure that the quantities are correct.
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IAS 7 – Statement of cash flows Standard format – choice between direct or indirect method – indirect normally used Three standard headings = operating, investing and financing – within standard heading, items can be in any order Normally begin operating activities with profit before tax and adjust for non-cash items
IAS 8 – Accounting policies, changes in accounting estimates and errors Accounting policies should be appropriate and relevant, be consistently applied and be disclosed Changes in estimates are taken to SOCI – e.g. change in depreciation method or revised estimate of NRV Changes in accounting policy and fundamental errors should be accounted for as a Prior Period Adjustment to re-state the opening position and comparative information Audit Work Agree events to whatever documentation exists. Inspect Financial Statements to verify disclosure of Prior Period Adjustments.
IAS 10 – Events after the reporting period Definition – those events between SOFP date and date of approval of financial statements Adjusting events – those which provide additional evidence of the situation existing at the SOFP date e.g. insolvency of major debtor notified shortly after the reporting date Non-adjusting events – those which do not provide evidence of the situation at the SOFP date e.g. share issue after the reporting date. Disclose only, but may become adjusting event if going concern basis threatened. Audit Work Since such events can be audited right up to the date the audit report is signed, investigation of all post year end evidence is vital.
IAS 11 - Construction contracts Long-term defined as contract straddling two or more accounting periods Recognize foreseeable losses – prudent 7 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Recognize element of attributable profit – matching Audit Work To assess whether a contract is profitable: o Assess future contract estimates for reasonableness o Agree contract income back to the contract document itself. To assess loss-making contracts: o investigate all transfers of costs and revenues between contracts to ensure correct
IAS 12 – Income Taxes Tax on company income charge in SOCI and recognize as a liability Deferred tax based upon full provision at reporting date: o Permanent differences ignored o Temporary differences in accounting and tax treatment accounted for, e.g. Depreciation charge and tax allowances on PPE Share options annual expense and allowed for tax when exercised Defined benefit pension plans annual charge and contributions allowed for tax Need to consider recoverability of deferred tax assets – asset ceiling limit Audit Work Calculate the company’s corporation (business) tax using a tax software which will automatically calculate the deferred tax.
IAS 16 – Property, plant & equipment Initial measurement – cost directly attributable to bringing the asset into working condition; now compulsory to capitalize finance costs. Capitalize subsequent expenditure which enhances economic benefits of the asset. May be revalued – take revaluation to revaluation reserve; continue to depreciate asset over remaining expected useful life. Disclose name, date and qualifications of valuer. Commence depreciation when asset available for use and charge to reflect economic benefits consumed during the period May be possible not to charge depreciation if it is immaterial due to very long expected useful life of asset and/or high residual values. If this is the case, asset to be maintained to a high standard and is unlikely to suffer from economic or technical obsolescence. A change in the ability of a company to use an asset may suggest it has been impaired. Where this is the case, the company should perform an impairment review 8 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Audit Work Assets should be inspected to verify their existence, and that they are in use. Ownership documents (title deeds, vehicle registration documents) should be inspected. For new assets, purchase documents (e.g. Invoices) should be inspected to check price and date. Depreciation policies should be compared with prior year and those of similar companies to assess if appropriate. Depreciation policies should also be compared with any company replacement policies, and with the recent trend in gains and losses on the sale of assets. Depreciation calculations should be re-performed and compared with prior year. Revaluations should be checked to valuation reports, and the valuer assessed for independence, qualifications and experience.
IAS 17 - Leases Operating lease – any lease not a finance lease – hire charges to IS on straight-line basis Finance lease: o substantially all of economic useful life of asset and transfer of risks and rewards to less – capitalize asset and liability at FV o depreciation charge and finance cost charged to SOCI Sale and leaseback transactions: o Operating leaseback – derecognize asset and recognize gain or loss on disposal o Finance leaseback: defer gain or loss on disposal and amortize over lease term recognize finance lease asset and finance lease obligation account for annual depreciation charge and finance costs in IS Audit Work The main piece of audit evidence is the lease agreement, as this will allow the auditor to: o Agree the length of the lease o Agree the lease payments o Assess how much of the rights and obligations of ownership have been transferred. For operating leases, any prepayment or accrual should be recalculated. For finance leases, the present value of minimum lease payments should be recalculated and the discount rate agreed as appropriate. Disclosures of future lease payments should be verified as accurate.
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IAS 18 – Revenue Revenue should be recognized in the period to which it relates When has revenue been earned? o When risks and rewards have been transferred o When work or service has been substantially delivered or performed o Upon identification of a critical point in a commercial relationship Audit Work Auditors will need to examine the agreements involved in any transactions to assess the true substance. With consignment stock, the auditors will need to assess: o Whether the purchaser has the right to return the goods o Whether the seller can enforce return of the goods o Whether the seller has full control of the goods (e.g. Setting the selling price).
IAS 19 (revised) – Employee benefits Defined contribution scheme recognizes annual cost of pension contribution Defined benefit scheme: o Net interest component charged to profit or loss in the year apply discount rate to net obligation at start of year includes increase in plan assets due to passage of time o service cost component charged to profit or loss in the year current year service cost past service costs recognized in full when announced gains and losses on curtailments and settlements part of service cost o Re-measurement component taken to other comprehensive income in the year actuarial gains and losses on plan assets and plan obligation income and gains/losses on plan assets, other than included as part of net interest component Short-term employee benefits – wages and salaries, benefits-in-kind etc on accruals basis Termination benefits – recognize when there is a commitment to make such payments Other long-term employee benefits – account for in similar way to defined benefit plans Audit Work If the Scheme valuation was not at the date of the accounting year end, reconcile the value between the two dates. Use analytical procedures on Scheme costs Review the audit report on the Pension Scheme itself 10 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Recalculate the pension expense recorded in the Income Statement.
IAS 20 – Accounting for government grants Match revenue grants against expense to which they relate Match capital grants with assets to which they relate – two possibilities o account for gross cost of asset and deferred income on SOFP preferred treatment as it provides more information o account only for net cost of asset on SOFP Audit Work Inspect the grant agreement, in order to check: o What the grant is helping to pay for o The total amount of the grant (may be future amounts receivable) o The conditions under which it would have to be repaid. Inspect cashbook and bank statements to verify receipt of the grant. Inspect Board Minutes to assess whether company has done anything (or is about to do anything) that might make the grant repayable. Recalculate any release of deferred grant income to ensure it matches with the related expenditure.
IAS 21 – The effects of changes in foreign exchange rates
Use exchange rate ruling at date of transaction to record in FS Non-monetary items (e.g. NCA, inventory) are not restated Monetary items are re-translated at SOFP rate with gain or loss to PorL Group FS: o Calculate goodwill in functional currency with annual retranslation at closing rate o Translate SOFP at closing rate o Translate SOCI at average rate o Exchange gains and losses on retranslation of a foreign operation: Net assets (opening net assets plus profit for year) Goodwill o Total exchange gain/loss on retranslation taken to OCI for the year o Group share of exchange gain/loss on retranslation included in equity on SOFP
Audit Work Check the exchange rates used for all retranslation against published rates.
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Ensure exchange differences have been recognized in the correct place (Income Statement or Equity as appropriate).
IAS 23 – Borrowing costs Compulsory to capitalize borrowing cost during construction of a non-current asset The amount of capitalized interest must be disclosed in the Notes to the Financial Statements. Audit Work Use analytical review on borrowing costs (as the interest should be a predictable percentage of borrowings). Agree interest payments to bank statements and cashbook. Agree interest payments to loan documentation. Assess whether loan is directly attributable to the asset concerned
IAS 24 – Related party disclosures Definition of a related party o Entities under common control or influence o directors o key staff able to control or influence transactions and/or their terms o employee defined benefits scheme o persons connected with any of the above Must disclose existence of related parties, plus transactions and terms Audit Work The auditor has two main problems: o Knowing who are related parties of the client o Being able to spot transactions that have the appearance that suggests they might be with related parties. To try to identify who the related parties are: o Inspect shareholder register o Inspect Board Minutes for evidence of directors raising related party issues o Inspect prior year related party disclosures To identify potential related party transactions, bear in mind that if two parties in a transaction are connected, this may result in the transaction not being on commercial terms, so look out for transactions that are: o At a price other than market price 12 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
o At an odd time o Between 2 companies who have no obvious reason to do business o Lacking in overall business logic! It is difficult to ensure that all RPTs have been disclosed, as the auditors rely heavily on the Board to tell them about related party relationships, so in addition to the above audit work, auditors will typically obtain a management representation to confirm that the Board believe that all RPTs have been disclosed.
IAS 27 (revised) – Separate financial statements Applies if consolidated financial statement not prepared – disclose why Disclose basis upon which subsidiaries, associates and joint arrangements have been accounted for in these financial statements
IAS 28 (revised) – Investment in associates and joint ventures
Associate - able to exert significant influence, but not control, another entity Joint venture – unanimous decision-making and entitled to share of net assets from JV entity Indicated by 20%-50% of equity shares in another entity Consider if another entity owned (say) 70% - they would have outright control o IFRS 10 recognizes that may still have influence, even if another has control Equity accounting in group FS: o share of profit after tax for the year in SOCI o cost plus share of profits/losses since gaining influence
IAS 32 - Financial Instruments – Presentation IAS 39 - Financial Instruments – Recognition and Measurement IFRS 7 – Financial Instruments – Disclosures IFRS 9 - Financial Instruments Use definitions of asset and liability per Framework to classify financial instruments according to commercial substance 13 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Returns on financial instruments in SOCI to be classified on consistent basis as financial instrument on SOFP Split compound or hybrid instruments into liability and equity elements at inception. Classification of financial assets per IFRS 9: o Fair value through PorL (FVTPorL) is normal default classification for all financial assets Includes derivatives for speculation and financial assets held for trading o Fair value through other comprehensive income (FVTOCI) can only apply to equity instruments only upon initial recognition any impairment losses part of OCI movement in year no recycling of impairment losses or of gains/loss on subsequent disposal o Financial assets measured at amortized cost – must pass two tests: business model test – asset held to collect contractual cash flows Contractual cash flows characteristics test – cash flows consist solely of payment of interest and capital. if either test failed, must be measured as FVTPorL if at amortized cost, subject to annual impairment review Financial liabilities classification of financial liabilities per IFRS 9 as either: o FVTPorL (like financial assets), includes derivatives for speculation and financial liabilities held for trading o Other financial liabilities at amortized cost (if not at FVTPorL) o Note – can still opt to measure liabilities at FVTPorL to eliminate or reduce financial mismatch Hedging – currently still dealt with by IAS 39: o Must be formally documented at inception o Must be regularly reviewed to ensure still effective o FV hedge – take changes in FV of hedged item and hedge instrument (i.e. derivative) to PorL o Cash flow hedge – take changes in FV of hedge instrument (i.e. derivative) to OCI. Audit Work For Instruments held at fair value: o Assess valuation model used for consistency and reasonableness. o Ensure disclosures are accurate in terms of sensitivity of valuation to prove volatility, assumptions used etc. o Where fair value based on external valuation (e.g. Stock Market, expert), confirm year end value. o Consider use of suitable experts where necessary, especially with complex financial instruments. o Obtain contracts to ensure terms of all financial instruments are fully understood, properly accounted for, and transparently disclosed. o Where investments are managed by a 3rd party, obtain direct confirmation of holdings and reconcile to client’s own records. 14 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
IAS 33 – Earnings per share
Consider: o Market issue at full price – calculate weighted average no of equity shares in issue o Bonus issue – free shares – treat as if had always been in issue and restate comparative o Rights issue – treat partly as bonus issue and partly as issue at full market price o Diluted EPS – convertible debt and share option schemes Listed companies must, on the face of the Income Statement present: o Basic EPS o Diluted EPS Audit Work Recalculate basic EPS and diluted EPS. Ensure any necessary restatements of prior year EPS have been done, and suitably disclosed.
IAS 34 – Interim financial reporting
May be required by local law or listing regulations Include condensed SOFP with comparative dated at end of previous financial year-end. Include condensed SOCI, plus cumulative for year to date, plus comparatives Include condensed SOCIE plus statement of cash flows, plus comparatives for each statement Include selected explanatory notes – including any change in accounting policy or significant adjustments from interim to annual financial statements
IAS 36 – Impairment of assets Definition – reduction in recoverable amount below carrying value in the FS Normally charge to PorL. If asset previously revalued, first set impairment against revaluation reserve for that asset, with any residual amount taken to PorL. May apply to individual asset, collection of assets or income(cash) generating unit If IGU includes goodwill, then gross up net or proportionate goodwill to get total CV of IGU, then apply impairment test – any impairment is then first allocated against goodwill.
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If there are several IGUs within a business (e.g. subsidiary), then two -stage impairment test required: o First on each individual IGU o Then on business as a whole Cannot write down an individual asset to an amount lower than its recoverable amount. Normally only expected to perform impairment review if there is indication that asset(s) may be impaired Compulsory impairment review required annually: o IFRS 3 – goodwill on acquisition o Financial assets Audit Work Compare the results of each part of a business with budgets/forecasts, to establish if the segment is under-performing. Assess the present value of future cash flows associated with the asset that might be impaired (e.g. Projected sales revenue for a brand) and compare with carrying value. Monitor events after the year-end (e.g. sale of an asset below carrying value) for evidence of overvalued year-end assets. Inspect Board Minutes for evidence of discussions of known problems with individual assets or parts of the business.
IAS 37 – Provisions, contingent liabilities and contingent assets Provision is a liability which has uncertainty regarding the exact amount to be paid and/or the timing of such payments It is the minimum unavoidable obligation and may be discounted to PV for long-term provisions May be the result of a legal or constructive obligation It will exclude: o Future operating losses o Relocation and retraining of existing employees o Periodic repairs Statements of future intention Contingent liability – a possible obligation arising from a past event which will only be confirmed by the outcome of one or more future uncertain events Audit Work Audit work will depend on the situation, but there are some procedures that will be useful in many of the above situations: o Where the provision is likely to have also been made in prior years, compare prior year provision to actual events to see how accurate last year’s estimate was. If last year was 16 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
o o o o
accurate and the same method of estimation is used this year, some assurance is gained that this year’s figure is reasonable. For anything legal, obtain written confirmation of the situation from the company’s lawyers. For anything contractual, inspect a copy of the contract / agreement. Correspondence with the other parties involved should be inspected. If the provision involves a calculation, it should be re-performed (with any assumptions assessed for reasonableness).
IAS 38 – Intangible assets Assets without physical substance which entity has the right to control and from which it derives economic benefits Apply either cost model or valuation model o Valuation model: Any increase in valuation taken to OCI and equity on SOFP requires that there is an active market for that asset – rarely the case o Cost model normally adopted If finite useful life, then amortize – commence when asset is available for use. If infinite life, or cannot reliably estimate finite life, then recognize at cost or valuation with annual impairment review. Research and development costs dealt with by IAS 38 o Compulsory capitalization if definition of development costs met o Otherwise immediate write-off to PorL Audit Work for Research and Development Inspect project budgets to assess the finance needed to finish the development. Inspect bank letter, loan facilities etc. to assess company’s available finance. Inspect Board Minutes to assess company’s intention to complete the project. Observe testing of prototype to help assess technical feasibility of the new product (may need a technical expert to assist). Obtain written confirmation from company’s lawyers that there are no known legal issues in completing the development. Obtain written management representation to confirm management intentions to complete the development. Inspect results of company’s market research to assess future sales of the product. If any orders / deposits already received, inspect order forms to confirm. Analyze the costs which have been capitalized to confirm they belong to this project. Audit Work for Other Intangible assets (Brands, Licenses, rights etc..) Agree cost of intangible to purchase documentation 17 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Analyze trend of income generated by the intangible(both in the past, and future forecasts) to assess impairment Compare accounting treatment with previous examples in this company, and with similar examples in the industry.
IAS 40 – Investment property Definition – development completed, held for investment potential and may be rented on arm’s length basis to non-group member. Use cost model – if so account for as IAS 16 and depreciate over expected useful life Use valuation model: o no depreciation charged and keep valuation up to date o increase or decrease in valuation taken to PorL Audit Work Remember that investment properties are properties. As such, normal audit work for properties applies: o Inspect property to confirm existence (and that company is not owner occupying) o Inspect title deeds and land registry records to confirm ownership o Inspect copy of latest valuation document o Assess independence, qualifications, experience of the valuer o Inspect FS to ensure all necessary disclosures are included. Ensure gains and losses on revaluation have gone to the Income Statement.
IFRS 1 – First-time adoption of International Financial Reporting Standards
Recognise assets and liabilities per Framework document and applicable IAS/IFRS Measure assets and liabilities per applicable IAS/IFRS Derecognise assets and liabilities that do not comply with IAS/IFRS Re-state comparative year(s) Provide reconciliation between old SOFP and opening IAS/IFRS SOFP
IFRS 2 – Share-based payment Equity settled – recognize equity reserve and PorL charge each year, pro-rated over vesting period. Use FV of option at grant date and estimate at each reporting date the expected number of options likely to vest. 18 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Cash settled – recognize liability and PorL charge each year, pro-rated over the vesting period. Use FV of SAR at each reporting date and estimate at each reporting date the number of SARs likely to vest. Audit Work For share options, review management assumptions over likelihood of vesting. Ensure fair value model used complies with IFRS 2. Where shares issued to pay for other things, ensure value of shares links to fair value of what they paid for.
IFRS 3 Revised – Business combinations Costs incurred as part of acquisition are now charged to PorL. Need to estimate FV of any contingent and deferred consideration at acquisition date Choice of goodwill accounting: o Proportionate or net basis – group share of goodwill only o Gross or full goodwill method – goodwill for business as a whole o Choice made an acquisition–by-acquisition basis Goodwill is a permanent intangible non-current asset subject to annual impairment review Account for subsidiary recognition and derecognition only when control is acquired or lost Account for any residual holdings at FV at date of transaction Any disposal where control retained is a transaction between equity holders Audit Work Since goodwill is the fair value of consideration less the fair value of net assets purchased, audit work should include: o At the date of purchase, agreeing consideration to purchase contract o Where any consideration is deferred, assessing any discount rate used for reasonableness o Where there is contingent consideration, assessing the likelihood that such consideration will be paid o Verifying any valuation works done on the net assets acquired.
IFRS 5 – Non-current assets held-for-sale and discontinued activities Comply with all following conditions to be classified as held for sale: o Must be a commitment to sell o Must be immediately available o Must be in current condition 19 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
o Must be at realistic price o Must be actively marketed o Thus – expect to be disposed of within 12 months Perform impairment review and reclassify out of non-current assets Cannot be held for sale in group FS if sale is to another group member Separate disclosure of discontinued operation in SOCI – defined as a component of a business which has either been disposed of or is classified as held for sale and: o represents a separate major line of business or geographical area of business o is part of a single co-ordinated plan to dispose, or o is a subsidiary acquired exclusively with a view to sale. Audit Work (assets / operations that have been disposed of) Agree proceeds to sales documentation and bank statements Recalculate any gain or loss on disposal and ensure separately disclosed in Income Statement If asset had previously been revalued, ensure any balance on revaluation reserve has been transferred to income reserves (Equity), not included in the year’s profit Verify date on sales documentation to prove asset was sold before year end. Audit Work (assets / operations held for sale) Inspect Board Minutes to confirm intention to sell Inspect correspondence with agent to confirm company is actively trying to sell the asset If company has advertised the asset for sale, inspect advertising documentation Obtain management representation to confirm Board’s intention to sell Inspect correspondence between company and any interested parties regarding the sale If company has made any announcements regarding the plan to sell, inspect copies and agree date before year end Assess asset / operation for impairment, as a plan to sell often indicates asset / operation is not performing as well as company would like.
IFRS 8 – Operating segments Identify segment if it accounts for 10% or more of any one of: o Total profits earned by segments o Total losses incurred by segments o Assets o Gross (Internal plus external) revenues generated Minimum disclosure to account for 75% of external revenues, or need to disclose additional segments Segments based upon internal reporting and decision-making lines within the entity 20 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Audit Work Ensure segmental analysis adds up and agrees to the totals reported in the Financial Statements. Compare figures with prior year to ensure consistency of presentation. Where a change in segments this year, ensure prior year figures altered and agree “new” figures back to prior year accounting records. Agree this year’s analysis back to internal management accounts.
IFRS 10 – Consolidated financial statements Elements of control: o Power over the investee o Exposure, or rights to, variable returns o Ability to use that power Subject to periodic review to determine whether control acquired/lost or continues Definition recognizes that it may be possible for one entity to have control, whilst another has significant influence, in a third entity. Potential voting rights (e.g. share options and convertible loans) must be capable of being exercised. Protective rights (e.g. able to approve issue of new debt or equity capital) normally only apply in specified circumstances and are limited in application – not usually indicative of control. Silos – able to exercise control over a defined and ring-fenced portion of another entity’s assets and liabilities.
IFRS 11 – Joint arrangements Definition – two or more parties having joint control which requires unanimous consent Joint venture – where parties have joint control and have rights to net assets of a separate entity formed for the joint venture – use equity accounting per IAS 28. Joint operation – parties have joint control and have rights to the assets and obligations for the liabilities of the joint operation – normally will not be a separate entity and parties agree rights and responsibilities or particular activities within the joint operation. Each joint operation party accounts for their own transactions and has amounts due to and from other joint operation partners.
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IFRS 12 – Disclosure of interests in other entities Single source of disclosure requirements in FS applicable to interests in subsidiaries, associates and joint arrangements Disclose assumptions and judgments made in determining status of investment(s) Disclose restrictions on ability to exercise control or influence
IFRS 13 – Fair value measurement Does not apply to transactions covered by IAS 17 and IFRS 2 Provides single and standardised definition and source of guidance for fair value measurements. Definition – the amount received to sell an asset or transfer a liability in an orderly (i.e. not distress) transaction between willing parties in an arm’s length transaction at the measurement date. Presumed to take place in an active market – principal or most advantageous market Excludes transactions costs – they are not a feature of the asset or liability to be valued Introduces 3-tier hierarchy of inputs used for valuation: o Level 1 – identical assets or liabilities traded in an active market “observable” o Level 2 – similar assets or liabilities traded in an active market “observable” o Level 3 – other data used to determine fair value “unobservable” Audit Work Understand how management has made their estimates and the models used. Assess the amount of uncertainty inherent in the estimate and use this to assess the risk of misstatement. Monitor events after the year-end, as these often give further evidence of the accuracy of a year-end estimate. Assess company controls over the estimation process, especially where it is complex. Compare methods used for estimates with prior years to ensure consistency (assuming consistency is justified). Compare prior year estimates with actual results, to assess management’s record on accurate estimating (and to test the validity of the models they use). Consider the use of an outside auditor’s expert to assess the estimate and the assumptions on which it is based. 22 ACCA P7 – facebook.com/accap7 Muhammad Faisal – 03335340210
Obtain written representations from management that they believe the assumptions behind their estimates to be reasonable. Where valuations are contingent on a business plan being followed, monitor the progress of the plan and ensure it is on track and finance is available to complete it.
Note: In this document; audit work is not included for some IAS and IFRS. If they come in exam then you can always use AEIOU mnemonic (Analytical procedures, Enquiry and confirmation, Inspection, Observation and RecalcUlation) to get the audit work done.
Matters to be consider Question solving Technique If a question asks for Matters, the main issues are: What is the correct accounting treatment in this situation? Is the company’s accounting treatment correct or not? How material are the mistakes they are making? In matter to consider exam question usually examiner ask for evidence or audit procedures so when a question asks for audit procedures, remember that there are some useful checklists:
What documents would be available. Any 3rd Parties who can provide written confirmations. Would a written management representation help. What post year-end events may have occurred, that would help assess the year-end accounting treatment. Could this have happened in previous years – if so compare. Another way to think of the above issues is by using the AEIOU mnemonic (Analytical procedures, Enquiry and confirmation, Inspection, Observation and RecalcUlation)
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