AAA – Audit of Historical Financial

Information
Accounting Standards – Part 2

Although this is an auditing paper, we saw in the last few sessions the importance of accounting standards
knowledge. The summary that follows should remind students of the key accounting issues that individuals may
need to explore in more detail if it is felt that there is a significant gap in their accounting knowledge.

IAS 16 – PROPERTY, PLANT AND EQUIPMENT:

 Learn the initial measurement rules, only incremental costs can be included in the initial value of a tangible.
 Make sure you know that a change in useful economic life, residual value or depreciation method are changes
in estimates and NOT changes in accounting policy.
 Revaluations up are dealt with as other comprehensive income whilst revaluations down (impairments) have
a direct impact on profit. Reversals go to the same place as the initial movement.

The main audit risks are misclassification between capital and revenue expenses, and mis-presentation of
gains/losses on revaluation. Depreciation and fair value involve considerable judgement so are open to
manipulation.

IAS 23 – BORROWING COSTS:

This is a little add-on to the initial measurement rules in IAS 16. Borrowing costs (interest) on loans needed to help
construct a non-current asset should be capitalised as they are incremental expenses.

IAS 12 – DEFERRED TAX:

Temporary differences between accounting bases and tax bases can create either deferred tax assets or liabilities.

The main audit risk is that these items have either been miscalculated or omitted entirely from the financial
statements.

IFRS 5 – ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS:

The definitions of both need to be learned.

 Assets held for sale must be reclassified and remeasured at the year-end. There is an audit risk that this has
not been done.
 A discontinued operation needs to be disclosed separately in the financial statements. There is a risk that this
has either not been done at all or that it has been done but insufficient detail has been disclosed.

IFRS 8 – SEGMENTAL REPORTING:

Separate business segments - including any discontinued operations, must be disclosed separately either on the
face of the financial statements or in supporting note.

Once again there is a non-disclosure risk, something very likely to be included in a question because it is a current
issue. This was referred to in the planning sessions and is an important audit risk.

IAS 41 – AGRICULTURE:

Biological assets (livestock) should be initially measured at cost and then remeasured at each year-end at fair
value.

IFRS 3 – GOODWILL:

 Goodwill needs to be calculated correctly upon acquisition of a subsidiary.

 It is then subjected to an annual impairment review and NOT amortised over its useful economic life.

The audit evidence here will centre around the company acquisition documents and any fair value information
relating to the net assets acquired.

IFRS 2 – SHARES BASED PAYMENTS:

Students need to identify the two different types of scheme:

 Equity-settled schemes involve the granting of share options

 Cash-settled schemes involve the granting of share appreciation rights.

There are two variables in the calculation of a cash-settled scheme expense but only one for an equity-settled
scheme, remember cash-settled schemes get remeasured at the year-end fair value which will change each year.
Equity-settled schemes are measured using the grant date value every year.
The entries for each scheme go to different places on the statement of financial position. Cash-settled schemes
create liabilities whilst equity s-ttled schemes create an equity adjustment. So lots of risk of misstatement here!

IAS 19 – RETIREMENT BENEFITS:

We must be able to tell the difference between the two types of pension scheme and the different ways in which
they are recognised in the financial statements.

 A defined contribution scheme is when contributions are fixed and the benefits paid out are variable. The only
accounting entry is an operating expense that is charged against profit.
 A defined benefit scheme is where contributions vary but the benefit paid out is fixed so the pension fund
needs annual valuation by an actuary. There will be an asset or liability each year in the statement of financial
position. There will be an expense comprising service cost, interest cost and expected return. Actuarial gains
and losses arise each year and get recognised as other comprehensive income.

The main audit risks are scheme misclassification and the recognition of items in the wrong place in the financial
statements.

IFRS 9 – FINANCIAL INSTRUMENTS:

Students must learn the two categories of financial asset/liability and how they are both initially and subsequently
measured. It is also worth knowing how to deal with the initial and subsequent remeasurement of an issued
convertible instrument.

IFRS 13 – FAIR VALUE MEASUREMENTS:

The level 1, 2 and 3 input hierarchy needs to be learned here:

 Use level 1 - actual market value if available.

 If not, use level 2 - market value of a similar item.
 If not, use level 3 - an alternative method that allows you to estimate market value, such as discounted cash
flows.

There is an audit risk of incorrect measurement because the wrong input level has been used.

IFRS 15 – REVENUE RECOGNITION:

Students should make sure they are familiar with the new 5 step approach to identifying, recognising and
apportioning revenue. The steps are:

 Identify the contract;

 Identify any separate performance obligations;
 Determine the transaction price;
 Allocate the transaction price to the performance obligations;
 Determine the period in which the revenue will be recognized.

NOTE: If any of this summary knowledge is unfamiliar it is essential that the detail in the standards is revisited in
order to maximise marks in any audit question.