ATC f8 materials FF8 AA (int)session22 j08

SESSION 22 – NON-CURRENT ASSETS OVERVIEW Objective To determine areas of risk in intangible and tangible assets and investments To obtain appropriate audit evidence TANGIBLE FIXED ASSETS Sources Fixed asset register Risks Procedures IAS 16 Sources of evidence INTANGIBLE ASSTETS INVESTMENTS Examples Risks Procedures Evidence IAS 38 Sources Risks Procedures Risks C A P IAS 16 & 38 E R Accounting treatments Disclosures A comprehensive audit program for non-current assets is set out in Appendix and must be studied 2201 SESSION 22 – NON-CURRENT ASSETS INTANGIBLE ASSETS 1.1 Examples Goodwill Development costs Patents and trademarks Brands Copyrights Know-how 1.2 Risks Completeness (e.g of capitalised development expenses) Reasonableness of useful economic life (UEL) Overvaluation (i.e in excess of expected discounted future benefits) 1.3 Procedures 1.3.1 Analytical Compare valuation with prior year Review related income (e.g for patents) 1.3.2 Other Examine documents (e.g certificate of registration of patent/trademark) Check calculation of amortisation (in accordance with stated accounting policy) Discuss with management (e.g UEL) Check calculations (i.e reperform) Vouch allocation of costs for internally-generated assets (e.g overheads to developments) Assess reasonableness of discounted future cash flows in management’s calculation of value in use (i.e impairment test) Obtain management representation (eg on expected useful life, cash flow assumptions) 1.4 Evidence Example State the criteria which must be demonstrated for expenditure on development (say in respect of a new product) to be recognised as an intangible asset (i.e “capitalised”) Suggest how would you verify them 2202 SESSION 22 – NON-CURRENT ASSETS Solution 1.4.1 Criteria 1.4.2 Evidence sought 1.5 Research and development costs [IAS 38 “Intangible Assets”] 1.5.1 Accounting treatment Research expenditure – recognise as an expense in the period in which incurred (not as an asset in a subsequent period) Development expenditure – recognise as an intangible asset if, and only if, the above criteria are met Amount recognised as an asset should not exceed the amount that is probable of being recovered from related future economic benefits, after deducting further costs Carry intangible asset at cost less accumulated amortisation (unless revalued) Amortise on a systematic basis over the best estimate of useful life (to reflect the pattern of consumption of future economic benefits) 2203 SESSION 22 – NON-CURRENT ASSETS 1.5.2 Key disclosures Useful lives or amortisation rates used Amortisation methods used Gross carrying amount and accumulated amortisation at the beginning and end of the period Line item(s) of the statement of comprehensive income in which amortisation is included Aggregate amount of research and development recognised as an expense A reconciliation of the balance of unamortised development costs at the beginning and end of the period TANGIBLE NON-CURRENT ASSETS (ALSO CALLED FIXED ASSETS) 2.1 Sources of evidence See Session 15 Example 2.2 Fixed asset register Example List the information you would expect to find in a tangible fixed asset register Solution Client should reconcile (at least annually) to cost, depreciation and accumulated depreciation figures in nominal (general) ledger or financial statements Assets should be checked: register → physical and vice versa physical → register 2204 SESSION 22 – NON-CURRENT ASSETS 2.3 Risks Recorded fixed assets may not represent capital expenditure Non-current assets (e.g property, plant and equipment) will be overstated if they not exist (e.g have been sold) or are not in good condition Fixed assets may be misappropriated, sold or scrapped without authorisation Possession does not necessarily indicate ownership (e.g rented assets) Obsolete and idle assets may not be written down to a realistic valuation Assets may not be depreciated or depreciated over unrealistic lives Encumbered assets (i.e charged as security for bank loans) require disclosure 2.4 Audit procedures An audit program is set out in Appendix and must be studied 2.5 IAS 16 “Property, plant and equipment” 2.5.1 Accounting treatment Initial measurement at cost – includes purchase price, import duties etc and directly attributable costs of bringing the asset to working condition Subsequent expenditure – add to carrying amount when it is probable that future economic benefits will exceed those originally assessed Otherwise expense in period incurred Measurement subsequent to initial recognition: Cost method – carry at cost less any accumulated depreciation and impairment losses; Revalued method – carry at a revalued amount (i.e fair value less subsequent accumulated depreciation and impairment losses) Revaluations: Land and buildings – fair value is usually market value (normally appraised by professionally qualified valuers) Plant and equipment – if no evidence of market value (e.g because of specialised nature) value at depreciated replacement cost Frequency – depends on movements in fair values Entire class to which an asset belongs should be revalued 2205 SESSION 22 – NON-CURRENT ASSETS Accumulated depreciation – at the date of the revaluation is either − − restated proportionately eliminated Increase should be credited directly to equity under heading “revaluation surplus” – may be transferred directly to retained earnings when realised Decrease should be recognised as an expense Depreciation Allocated on a systematic basis over useful life Method should reflect consumption of economic benefits Charge for each period should be expensed Retirements and disposals Statement of financial position – Eliminate on disposal or when permanently withdrawn from use and no future economic benefits are expected Statement of comprehensive income – Recognise gain or loss (difference between estimated net disposal proceeds and carrying amount) INVESTMENTS Investments may be separately classified as a non-current asset or available (held) for sale (eg under IFRS 5) Carrying value may be at cost (subject to impairment) or fair value (with changes through profit or loss) depending on how classified under IAS 39 3.1 Sources of evidence Share certificate (= document of title) shows registered holder and denomination of shares May be held by bank or solicitor Purchase contract notes and paid cheques, supported by authority for purchase Sold contract notes (to provide evidence of disposals) Income received (verified by reference to published reference guides) Published reference guide to verify that all bonus issues (also called “scrip” issues) have been accounted for and all rights issues have been taken up Latest available financial statements Management representation 2206 SESSION 22 – NON-CURRENT ASSETS 3.2 Risks Non-current asset investments may be overstated if not written down for impairment Asset investments may not be stated at cost/fair value (as appropriate) Investments sold may not be removed from accounting records Investment income due may not be received/recorded Investments may be misappropriated/sold without authority 3.3 Audit procedures 3.3.1 Listed investments Compare historic cost with market value to establish validity of depreciation write off/write back Agree market value (e.g with Stock Exchange Official List) Where there is a disclosure requirement, confirm analysis of total statement of financial position value between investments listed on “recognised” and “unrecognised” stock exchanges 3.3.2 Unlisted Confirm management’s valuation of unlisted investments (e.g to latest available financial statements) 3.3.3 All For investments classified as current, examine cash book receipt (if any) after the end of the reporting period Analytically review investment income with prior years’ income and expected yields FOCUS You should now be able to: establish critical aspects of the audit of non-current assets and investments; identify sources of evidence for intangible assets (including development costs), noncurrent assets and investments; select appropriate audit procedures for inclusion in a work program (see also Appendix 3) relating to financial statement assertions concerning tangible non-current assets 2207 SESSION 22 – NON-CURRENT ASSETS EXAMPLE SOLUTION Solution — Development expenditure Criteria to be demonstrated Evidence sought Technical feasibility (of completion) “Blueprint” Discussion with client’s technicians (e.g engineer) Working prototype Beta test feedback from users and action taken Intention to complete and use (e.g in manufacture of new products or process) or sell the intangible asset Planning permission sought for new/expanding factory Authorisation of necessary capital expenditure Action taken on testing feedback Advertisements (e.g to recruit staff, promote product) Ability to use or sell the intangible asset Applications made for copyright, trademarks, licenses etc Dedicated sales manager, establishing of sales network Advanced orders Auditor tests/uses item How probable future economic benefits are to be generated (including existence of a market or internal use) Results of market research (by client or consultant) Expected selling price per market research Selling prices of comparable products (if any) Client’s profit forecasts Analysis of potential competitor products Adequate technical, financial and other resources exist/are available to complete project and use or sell the intangible asset Business plan Attributable expenditure can be measured reliably Clearly defined product/process evidenced by documented project specification Cash flow forecasts Negotiations with bank for new/increased loan/overdraft facilities Separate ledger a/cs e.g for materials, wages and salaries, depreciation, allocated overheads Costs traced to/from materials requirements, purchase invoices, time sheets, etc 2208 SESSION 22 – NON-CURRENT ASSETS Solution — Fixed asset register Identification number (e.g registration/serial number) Description and manufacturer’s name Gross cost or valuation Estimated useful life Depreciation method/annual charge Depreciation provision Net book value Location of asset 2209 SESSION 22 – NON-CURRENT ASSETS 2210 ... loan/overdraft facilities Separate ledger a/cs e.g for materials, wages and salaries, depreciation, allocated overheads Costs traced to/from materials requirements, purchase invoices, time sheets,