training material of audit
DESCRIPTION
Training Material of AuditTRANSCRIPT
AUDIT OF LISTED COMPANIES
COURSE OUTLINE
1. LISTED COMPANY - DEFINITION
2. DISCLOSURE REQUIREMENTS AS PER FOURTH SCHEDULE TO THE COMPANIES ORDINANCE, 1984.
3. CODE OF CORPORATE GOVERNANCE
4. INTERNATIONAL ACCOUNTING STANDARDS AS APPLICABLE IN PAKISTAN.
5. INTERNATIONAL STANDARDS ON AUDITING AS ADOPTED BY ICAP.
6. INTERPRETATIONS OF INTERNATIONAL ACCOUNTING STANDARDS ISSUED BY STANDING INTERPRETATIONS COMMITTEE (S.I.C.)
7. RELATED SERVICES / INTERNATIONAL AUDITING PRACTICE STATEMENTS.
8. ACCOUNTING TECHNICAL RELEASES ISSUED BY ICAP.
9. AUDITING TECHNICAL RELEASES ISSUED BY ICAP.
10. STATEMENTS OF STANDARD AUDITING PRACTICES.
11. STATEMENT OF STANDARD ACCOUNTING PRACTICES.
12. ACCOUNTS COMPLETION CHECK LIST.
13. AUDIT COMPLETION CHECKLIST.
14. SUBSEQUENT EVENTS REVIEW CHECKLIST.
15. GOING CONCERN REVIEW CHECKLIST.
Cont’d P/G 2
(-2-)
AUDIT OF LISTED COMPANIES
2. FOURTH SCHEDULE TO THE COMPANIES ORDINANCE, 1984.(Text of the fourth schedule is annexed)
- Balance SheetThe assets and liabilities shall be classified in the following order :-
i) Fixed Assets.ii) Long Term Investments.iii) Long Term Loans and Advances.iv) Long Term Deposits, Prepayments and Deferred Costs.v) Current Assets.vi) Share Capital and Reserves.vii) Surplus on Revaluation of Fixed Assets.viii) Redeemable Capital.ix) Debentures and Long Term Loans.x) Liabilities against Assets Subject to Finance Lease.xi) Deferred Liabilities.xii) Long Term Deposits.xiii) Current Liabilities.xiv) Contingencies and Commitments.
- Profit & Loss AccountThe income and expenditure shall be disclosed in the following order:
i) The gross turnover and deductions therefrom in respect of commission, brokerage, discount. income from various sources.
ii) Value of stock in trade as at the commencement and end of the financial year.
iii) Expenditure on* Stores and spares consumed.* Fuel and power.* Salaries, wages and benefits.* Rent, rates & taxes.* Insurance.* Repairs & maintenance.* Patents, copyrights, trade marks, designs, royalties and technical
assistance.iv) Auditors remuneration.v) Other expenses.vi) Amount provided for depreciation.vii) Various losses / expenditure including taxation.vii) Proposed dividend.
Cont’d P/G 3
(-3-)
3) CODE OF CORPORATE GOVERNANCE(Text of the code is annexed)
The Securities and Exchange Commission of Pakistan for the purpose of establishing a framework of good corporate governance, directed the Stock Exchanges to insert into their listing regulations the Code of Corporate Governance (The Code).
The Code deals with following issues / areas :
- Qualification and eligibility to act as a director.- Tenure of office of directors.- Responsibilities, powers and functions of Board of Directors.- Meetings of the Board of Directors.- Significant issues to be placed for decision by the Board of Directors.- Orientation Courses for Directors.- Chief Financial Officer (CFO) and Company Secretary
- Appointment and approval.- Qualification.- Requirement to attend board meetings.
- The Director's report to shareholders.- Frequency of financial reporting.- Responsibility for financial reporting and corporate compliance.- Auditors not to hold shares.- Audit Committee.
- Composition.- Frequency of meetings.- Attendance at meetings.- Terms of reference.- Reporting procedure.- Internal Audit.
Cont’d P/G 4
(-4-)
4) INTERNATIONAL ACCOUNTING STANDARDS AS APPLICABLE IN PAKISTAN
ISA-1 Presentation of Financial StatementsISA-2 InventoriesISA-7 Cash Flow StatementsISA-8 Net Profit or Loss for the Period, Fundamental Errors and
Changes in Accounting PoliciesISA-10 Events after the Balance Sheet Date.ISA-11 Construction ContractsISA-12 Income TaxesISA-14 Segment ReportingISA-15 Information Reflecting the Effects of Changing PricesISA-16 Property, Plant and Equipment.ISA-17 LeasesISA-18 RevenueISA-19 Employee Benefits.ISA-20 Accounting for Government Grants and Disclosure of
Government Assistance.ISA-21 The Effects of Changes in Foreign Exchange RatesISA-22 Business CombinationsISA-23 Borrowing CostsISA-24 Related Party DisclosuresISA-26 Accounting and Reporting by Retirement Benefit Plans.ISA-27 Consolidated Financial Statements and Accounting for
Investments in SubsidiariesISA-28 Accounting for Investments in AssociatesISA-29 Financial Reporting in Hyper inflationery EconomiesISA-30 Disclosures in the Financial Statements of Banks and
Similar Financial Institutions.ISA-31 Financial Reporting of Interests in Joint VenturesISA-32 Financial Instruments : Disclosure and Presentation.ISA-33 Earnings per shareISA-34 Interim Financial ReportingISA-35 Discontinuing OperationsISA-36 Impairment of Assets.ISA-37 Provisions, Contingent Liabilities and Contingent Assets.ISA-38 Intangible AssetsISA-39 Financial Instruments : Recognition and Measurement.ISA-40 Investment PropertyISA-41 Agriculture
Cont’d P/G 5
(-5-)
5) INTERNATIONAL STANDARDS ON AUDITING AS ADOPTED BY ICAP.
AS-1 Objectives and General Principles Governing an Audit of Financial Statement.
AS-2 Terms of Audit Engagements..AS-4 PlanningAS-5 Using the Work of Another Auditor.AS-6 Risk Assessments and Internal Control.AS-7 Quality Control for Audit Work.AS-8 Audit EvidenceAS-9 DocumentationAS-10 Considering the Work of Internal AuditingAS-11 The Auditor’s Responsibility to Consider Fraud and Error
in an Audit of Financial Statements.AS-12 Analytical ProceduresAS-13 The Auditors' Report on Financial Statements.AS-15 Auditing in a Computer Information System Environment.AS-16 Computer Assisted Audit Techniques AS-17 Related PartiesAS-18 Using the Work of an Expert.AS-19 Audit Sampling and Other Selective Testing Procedures.AS-21 Subsequent EventsAS-22 Management RepresentationsAS-23 Going ConcernAS-24 The Auditors' Report on Special Purpose Audit
Engagements.AS-25 Audit Materiality.AS-26 Audit of Accounting EstimatesAS-27 The Examination of Prospective Financial Information.AS-28 Inittial Engagements - Opening Balance.AS-30 Knowledge of the Business.AS-31 Consideration of Laws and Regulations in an Audit of
Financial Statements.AS-32 Comparatives.AS-33 Communications of Audit Matters with those charged with
governance.AS-34 External Confirmations
Cont’d P/G 6
(-6-)
6) INTERPRETATIONS OF INTERNATIONAL ACCOUNTING STANDARDS - STANDING INTERPRETATIONS COMMITTEE (S.I.C.)
SIC IAS SUBJECT MATTER1 2 Consistency2 23 Consistency3 28 Elimination of unrealised profits and losses on
transactions with associate5 32 Classification of Financial instruments.6 Cost of modifying existing software.7 21 Introduction of the Euro8 1 First Time application of IAS's9 22 Business Combination10 20 Government Assistance11 21 Capitalization of Losses resulting from severe
currency devaluation.12 27 Consolidation - Special Purpose Entities.13 31 Non Monetary contribution by venturers.14 16 Compensation for the impairment or loss of items.15 17 Operating leases - Incentives.16 32 Treasury Shares.17 32 Costs of an Equity Transaction18 1 Consistency - Alternative Methods19 21 & 29 Reporting Currency20 27 Equity accounting method21 12 Income Taxes22 22 Business Combinations23 16 Major Inspection or Overhaul costs.24 33 Financial Instruments and Other Contracts that may
be settled in shares.25 12 Changes in the tax status of an enterprise or its
shareholders.
Cont’d P/G 7
(-7-)
7) RELATED SERVICES / INTERNATIONAL AUDITING PRACTICE STATEMENTS
RS-1 & 2 Engagements to review financial statements.
RS-3 Engagements to perform agreed upon procedures regarding Financial Information.
RS-4 Engagement to Compile Financial Information
IAPC-1000 Inter-Bank Confirmation Procedure.
IAPC-1001 IT Environments - Stand Allow Personal Computer
IAPC-1002 IT Environment -On-Line Computer System
IAPC-1003 IT Environment - Data Base System
IAPC- 1004 The Relationship Between Bank Supervisors and External Auditors
IAPC-1005 The Special Consideration in the Audit of Small Entities
IAPC-1006 The Audit of International Commercial Banks.
IAPC-1010 The Consideration of Environmental Matters in the Audit of Financial Statements.
IAPC-1012 Auditing Derivative Financial Instruments.
Cont’d P/G 8
(-8-)
8) ACCOUNTING TECHNICAL RELEASES
(WD) TR-1 Capitalization of Interest on Loan(WD) TR-2 Financial Statement Presentation - Credit Card(WD) TR-3 Depreciation - Treatment in the Accounts of Companies
Enjoying Tax Holiday.(WD) TR-4 Gratuity - Provision in the Accounts of a Company.
TR-5 IASC Standards - Council's Statement on ApplicabilityTR-6 Fixed Assets Register
(WD) TR-7 Treatment of Depreciation in the event of Revaluation of Fixed Assets.
TR-8 Clarification regarding basis of calculation of Workers Profit Participation Fund.
(WD) TR-9 Treatment of Post-Dated Cheques or Promissory Notes.TR-10 Deferred TaxationTR-11 Depreciation on Idle Fixed Assets
TR-12 Debt Extinguishment(WD) TR-13 Accounting for Compensated Absences
TR-14 Revaluation of Fixed Assets - Accounting Treatment.TR-15 Bonus Shares - Accounting Treatment
(WD) TR-16 Pending Litigation settled in favour of client after the Balance Sheet Date
(WD) TR-17 Finished Pieces of Equipment hold by Manufacturer for customers.
(WD) TR-18 Good Accounting SoftwareTR-19 Excise Duty - Accounting TreatmentTR-20 Accounting for Expenditure during Construction periodTR-21 Date of Commencement of Commercial ProductionTR-22 Book Value per ShareTR-23 Accounting for InvestmentsTR-24 Exchange Risk Fee - Accounting TreatmentTR-25 Prudential Regulations for Banks
(WD) TR-26 Purchase of Export Quota - Accounting TreatmentTR-27 IAS-12 - Accounting for Taxes on Income.TR-28 Golden Handshake Accounting.
WD = Withdrawn
Cont’d P/G 9
(-9-)
9) AUDITING TECHNICAL RELEASES
ATR-1 Only Members to sign audit documents.(WD) ATR-2 Statement on the explanation of the word
communicationATR-3 Incoming Auditors to help in during professional
dues of retiring auditors.ATR-4 Audit of Government Corporations
(WD) ATR-5 Replying to enquiries for credit jobs.ATR-6 Audit by ex-employeeATR-7 Some glaring omissions by the Auditors pointed out
by CLA/SECP.ATR-8 Preparation of Accounts from incomplete records
and report thereon as auditor.ATR-9 Signing of correspondence and financial statements
by members.
ATR-10 Communication of consent by incoming auditorsATR-11 Appointment of Auditor – IATR-12 Appointment of Auditor – IIATR-13 Lien on books of accounts due to non-payment of
professional dues.ATR-14 Minimum hourly charge-out rates for audit work by
practicing members.ATR-15 Qualification in Auditors Report – Going concern
assumption for organization formed with a limited life.
WD = Withdrawn
10. STATEMENT OF STANDARD AUDITING PRACTICE
SAP-1 Bank Reports for Audit PurposesSAP-3 Verification of InventoriesSAP-5 Verification of Debtors balances confirmation by direct
communication.
11. STATEMENT OF STANDARD ACCOUNTING PRACTICE
SSAP-1 Classification of Stores & Spares
Cont’d P/G 10
(-10-)
12. ACCOUNTS COMPLETION CHECKLIST
Name of Client : Year ended :
Prepared by : Date
Reviewed by : Date
AUDITORS REPORT :
S. NO. DESCRIPTION FINAL DRAFT
1. Ensure that the entity's name is correctly spelled.
2. Ensure that accounting period covered by the accounts is correctly mentioned.
3. Para (b) (i) :If there is any change in accounting policy(ies) para should be amended by stating "except for the changes as stated in note(s) with which we concur".
4. Statement in Para (C) of the auditors' report should be drafted appropriately after confirming whether there is profit / loss for the period, from the profit and loss account (i.e. Profit/Loss after tax)
5. Ensure that para (d) of auditors' report regarding zakat is drafted after confirming whether there was any zakat deductible. If it has been deducted ensure that it has been deposited in the Central Zakat Fund.
6. If the accounts are for more or less than 12 months then ensure that the auditors' report uses the word "period" instead of "year".
7. Ensure that audit report is printed on firm letterhead.
Cont’d P/G 11
(-11-)
FINANCIAL STATEMENTS :
S. NO. DESCRIPTION FINAL DRAFT
1. Ensure that name of the company appears correctly on the balance sheet, profit and loss account, statement of changes in financial position (cash flow statement), statement of changes in equities and notes to the accounts.
2. Ensure that the correct period covered by the accounts appears on the profit and loss account, statement of changes in financial position (cash flow statement), statement of changes in equities and notes to the accounts.
3. If the figures in the accounts are rupees in thousands then ensure that this is reflected in the headings.
4. Ensure that totals of assets and liabilities in the balance sheet are in agreement.
5. Ensure that accumulated profit / loss brought forward in profit and loss account is correct.
6. Ensure that un-appropriated balance of profit / loss transferred to balance sheet is correct.
7. Ensure that the words "Contingencies and Commitments" appear on the Balance Sheet.
8. Ensure that last year's figures appearing in the accounts are traced from last years signed accounts except where they have been rearranged.
9. Ensure that all accounting policies are consistently applied, and if not, this fact is disclosed in accounting policy note.
10. Ensure that the statement i.e. "The annexed notes form an integral part of these accounts". appears in the balance sheet and profit and loss account.
11. Ensure that all the carry forwards and brought forwards are in agreement Ensure no rounding errors exist between brought forwards and carry forwards.
12. Ensure that if the company is subject to any other ordinance or regulations disclosures required by these have also been made. Examples of such disclosures are Investment Adviser's rules, 1971 or SBP's prudential regulations.
13. Ensure that balance sheet, profit and loss account, statement of changes in financial position (cash flow statement) and last page of notes to the accounts bears signatures of Chief Executive and Director (or whichever combination is approved by the Board of Directors)
14. Check casting of all the totals and sub totals. Check all spellings and grammar.
15. Ensure that depreciation charge computed under fixed assets schedule is in agreement with depreciation expense disclosed in expenses. Ensure that details of disposals agrees with fixed asset note (if applicable)
16. Ensure that the Closing Stock figures in Cost of Sales agrees with Stock on balance sheet. (Except for Items in transit).
17. Ensure that amortization of deferred cost is in agreement with amortization expense disclosed in expenses.
18. Ensure that change in provisions appearing on the Balance Sheet reconciles with the amounts reflected in the Profit and Loss Account.
19. Ensure that Profit / (loss) is stated in correct order.
20. Ensure that boxes are drawn correctly in the accounts.
Cont’d P/G 13
(-13-)
12. AUDIT COMPLETION CHECKLIST
CLIENT : YEAR ENDED
Each section of this checklist should be completed by the supervising senior / manager at the end of each phase of the audit, prior to partner's review.
YES/NO/ N.A.
INITIAL & DATE
1. Has all the work been planned before the start of detailed audit procedures and properly documented in the planning file ?
2. Has the continuing accuracy of the accounting and internal control systems been confirmed by walk-through procedures or other means ? Have the necessary observations and conclusion been documented?
3. Is all the audit work executed & documented in the Execution File, including1) Audit programs that are initialed, dated, and cross
referenced with each audit step performed during the course of the audit ?
2) Lead schedules are completed and conclusions are drawn on each financial statement component ?
3) Lead schedules are properly supported by the evidence gathered during the course of the audit? Ensure that they are properly referred and cross referenced with supporting schedules.
4. Has the work of each audit staff been reviewed in detail by the supervisory staff?
5. Have all matters raised in the last internal control memorandum management letter been resolved / followed up and the client's action recorded?
6. Has a management letter detailing weakness of accounting and internal control systems in respect of the current visit been drafted? Have client's comments been recorded ?
7. Have new client services opportunities, resulting from internal control matters, arising during the audit been identified and highlighted ?
8. Have all important matters been documented in the Audit Execution File, including identified auditing and reporting problems which may arise during final audit visit ?
10. Have confirmations relating to banks, lawyers, debtors creditors et c. been obtained? If not, is the summary of the same documented in the execution file & other alternative procedures been applied?
11. Has final draft initialed accounts been referenced to the working papers and documented in the Completion & Reporting File ?
12. Have the workings of cash flow statement been documented and properly referenced with final accounts ?
13. Has accounts completion checklist been filled out before issuing initialed accounts to the client?
14. Has partner review notes & queries been properly disposed off?
15. Have all significant matters relating to audit and other areas of assignment been documented in the summary review memorandum?
16. Have analytical review procedures were followed at overall review stage and comments on the same been documented ?
17. Has a representation letter been drafted based on the firm's latest standard letter ?
18. Has, letter to the board of directors been issued to the management including areas, which needs to be communicated to approved by the board of directors?
19. Has matters of important nature that needs to be considered in the next audit are properly documented in the points carried forward to next year?
20. Has an appropriate financial statements disclosure checklist been completed?
21. Have subsequent event review checklist been filled out covering evaluation of all possible post balance sheet event up to the date of the auditor's report ?
22. Has going concern checklist been filled out to ensure that going concern assumption is appropriate?
23. Have all adjustments been entered into the books of account to make them agree with the draft financial statements?
24. Has review by the second partner been carried out (in case of large clients or as per firm's policy) and proper evidence of the same is documented in the completion and reporting file?
25. Have all related party transactions (e.g., transactions with directors and associated undertaking been identified and effect of these transactions has considered ?
Prepared by (Supervising Senior Manager) Date
Reviewed by (Partner) Date
Cont’d P/G 15
(-15-)
CLIENT : Initial Date
YEAR END : COMPLETED BY : ______REVIEWED BY : _______
14. SUBSEQUENT EVENTS REVIEW CHECKLISTYes/No N.A. (Any note on separate sheets)
EVENTS DISCOVERED UPTO SIGNING OF AUDIT REPORT
1. Adjustable Events :
A) Have under given possible events (alongwith checking procedures) which may be adjusted been identified clearly, discussed with client's officials and adjusted in accounts?
a) Subsequent determination of price of fixed assets purchase or sale before the year end.
b) Property and investments : Evidence of permanent diminution in value.
- See valuation certificate.
c) Stock and work-in-process: Subsequent sale proceeds for evidencing of net realizable value at balance sheet date.
d) Long-term contracts : Estimated final result shows the accrued profit thereon was materially inaccurate.
e) Adequacy of provision for bad debts : Evidence as to collectability and negotiation with debtors.
f) Claims receivable : Negotiated at the balance sheet date.
g) Discovery of frauds and errors : Indicating financial statement are incorrect.
h) Dividend receivable / payable : Declared after balance sheet date.
Cont’d P/G 16
(-16-)
2. Non Adjustable Events : (Only disclose if material)
B) Have under noted possible events been discussed with client's officials and disclosed in accounts in compliance with IAS-10?
a) Mergers and acquisitions of any business.b) New issue of shares or acquisition of loan capital.c) Acquisition or disposal of material assets or investments.d) Major changes in market price of investments.e) Losses of fixed assets or stocks as a result of catastrophe such as
fire and flood.f) Opening / extending of trading activities.g) Closing of significant part of trading activities not expected to
close at year-end.h) Major exchange rate movements.i) Effects of any new legislation or government regulation.j) Strike and other labour disputes.k) Significant reversal of sales and profit trend.l) Reason of any suspension or interruption of operations.m) Loss of major customers or contractors.n) Potential losses on forward contracts.o) Imposition of exchange controls.p) Acquisition, or withdrawal, of short-term borrowings facilities.q) Financial arrangements made but disbursements where not made.
C) Have evidence of such above events been documented and enclosed ?D) Have representations been taken from management for such events ?E) Review the minutes of meetings since the year-end of directors,
shareholders and appropriate key committees.F) Obtain and read any post year-end management accounts and inquire
the significant variances, if any.G) Consider whether the going concern assumption in relation to whole
or a part of the enterprise is appropriate.Note :
Apart from above, also consider above events upto the signing of audit report but before its issuance and events discovered after financial statement are issued or when there is any change in financial statements after it is issued.
Cont’d P/G 17
(-17-)
CLIENT : Initial Date
YEAR END : COMPLETED BY : ______REVIEWED BY : _______
15. GOING CONCERN REVIEW CHECKLIST1. Have the following points been discussed with client and observed
during the course of audit ?Yes/No N.A. (Any note on separate sheets)
A) Indication for Company may not be able to pay its debts :
- Substantial operating losses in excess of owner equity.
- Heavy dependence on short-term finances for long-term needs.
- Working capital deficiency.
- Adverse key financial ratios.
- Low liquidity ratios.
- Net liability or net current liability position.
- Under capitalization.
- Arrears or discontinuance of dividends.
- Default in complying with the terms of loan agreements.
- Excessive obsolete stock.
- Inability to pay creditors on due date.
- Long overdue debtors and excessive bad debts.
- Deterioration in the relationship with bankers and inability to obtain finances or essential new product development or other essential investments.
- Continuous use of fixed assets.
B.i. Indications for company about the continuation of business & lead inability of paying debts (Internal Problems) :
- Loss of key management or staff without replacement
- Increasing stock level
Cont’d P/G 18
(-18-)
- Work stoppage and other labour difficulties.
- Shortages of important supplies.
- Substantial dependence on success of particular project.
- Excessive reliance on new products.
- Uneconomic commitments.
- In case of any legal proceeding, if decided against the Company, liability can not be met.
B.II (External Problems)
- Non compliance with capital or other statutory requirements.
- Loss of key patents.
- Loss of key or major market, franchise, license or principal supplier.
- Undue influence of market dominant competitors.
- Political risk.
- Pending legal proceedings against the entity that may, if successful result in judgments that could not be met.
- Frequent financial failure of enterprise of same industry.
- Changes in legislation or government policy.
2. Have the sufficient evidences been obtained for above said points?
(-1-)
AUDIT OF NON LISTED COMPANIES
COURSE OUTLINE
1. NON LISTED COMPANY - DEFINITION.
2. DISCLOSURE REQUIREMENTS AS PER FIFTH SCHEDULE TO THE COMPANIES ORDINANCE, 1984.
3. DIFFERENCE BETWEEN DISCLOSURE REQUIREMENTS OF FOURTH SCHEDULE AND FIFTH SCHEDULE.
4. APPLICABILITY OF INTERNATIONAL ACCOUNTING STANDARDS ON UNLISTED PUBLIC COMPANIES AND PRIVATE LIMITED COMPANIES
Cont’d P/G 2
(-2-)
2. FIFTH SCHEDULE OF THE COMPANIES ORDINANCE, 1984(Text of the fifth schedule is annexed)
- Balance SheetThe assets and liabilities shall be classified in the following order :
i) Fixed Assets.ii) Long Term Investments.iii) Long Term Loans and Advances.iv) Long Term Deposits, Prepayments and Deferred Costs.v) Current Assets.vi) Share Capital and Reserves.vii) Surplus on Revaluation of Fixed Assets.viii) Redeemable Capital.ix) Debentures and Long-Term Loans.x) Liabilities against Assets subject to Finance Lease.xi) Defend Liabilities.xii) Long Term Deposits.xiii) Current Liabilities.xiv) Contingencies and Commitments.
- Profit and Loss AccountThe income and expenditure shall be disclosed in the following order:-
i) The gross turnover and deduction therefore in respect of commission, brokerage, discount, etc ;Income from various sources
ii) Value of stock in trade as at the commencement and end of the financial year.
iii) Expenditure on :* Stores and spares consumed.* Fuel and power.* Salaries, wages and benefits.* Rent, Rates & taxes.* Insurance.* Repairs & maintenance.* Patents, copyrights, trade marks, designs, royalties and technical
assistance.iv) Auditors remuneration.v) Donationvi) Amount provided for depreciation.vii) Various losses / expenditure including taxation.viii) Proposed dividend.
Cont’d P/G 3
(-3-)
3. DIFFERENCE BETWEEN DISCLOSURE REQUIREMENTS OF 4TH SCHEDULE AND 5TH SCHEDULE
Disclosures regarding following information as required under fourth schedule (listed companies) are not required under fifth schedule (non listed companies)
BALANCE SHEET :-
* Long-Term Investments
- The nature and extent of investment made.
- The name of company, modaraba, firm, Government, Municipal Committee and local authority, in which investments are made.
- In case of investment in shares, classes and paid-up values.
- In case of investment in modaraba and redeemable capital, the number and nominal values of certificates.
- In case of investment in debentures and bonds, the terms of redemption, if any, and the rate of interest.
- The name of the chief executive, managing agent or modaraba company in case of investments in unlisted companies and modarabas other than subsidiary and associated companies.
- Percentage of the equity held by the company in an investee company or modaraba or a controlled firm or other associated undertaking, where it exceeds ten percent of the investee's total equity.
- Mode of valuation of investment.
* Long Term Loans and Advances- The name of each borrower together with the amount of loans and
advances, the terms of loans and advances and the particulars of collateral security held, if any; in case of loans and advances to subsidiary and associated companies / undertakings.
- The aggregate amount of loans and advances to the directors chief executive and executives together with the purposes and general terms of repayment.
Cont’d P/G 4
(-4-)
- In respect of other loans and advances, the name of the borrower and terms of repayment together with the particulars of collateral security held, if any.
- In case of loans and advances to subsidiary and associated companies / undertakings and to directors, chief executive and executives of the company, the maximum aggregate amount of loans and advances outstanding at any time since the date of incorporation or since the date of the previous balance sheet, which ever is later.
* Long Term Deposits, Prepayments and deferred costs.
- In respect of each material item of prepayments and deferred cost, the basis on which each item is being amortized or written off and in respect of each item of deferred costs, the reasons for carrying forward of such costs.
* Current Assets.
- In respect of trade debts, loans and advances due for repayments within a period of twelve months from the date of the balance sheet and other receivables, the maximum amount of debts at any time since the date of incorporation or since the date of the previous balance sheet, whichever is the later. Such maximum amounts to be calculated by reference to month-end balance.
PROFIT & LOSS ACCOUNT :-
* Other expenses, showing separately every material item and the nature of each such item. In the case of donations, where any director or his spouse has interest in the donee, the names of such directors, their interest in the donee and the names and address of all donees.
* The aggregate amount charged in the financial statements in respect of the directors, chief executive, managing agents and executives the company as fee, remuneration, allowances, commission, perquisites or benefits or in any other form or manner and for any services rendered, separately for the directors, chief executive, managing agents and executives together with the number of such directors and executives, under appropriate heads.
Cont’d P/G 5
(-5-)
* In the case of sale of fixed assets otherwise than through a regular auction, made to chief executive or a director or managing agent or an executive or a
share-holder holding not less than ten percent of the voting shares of the company or any associated undertaking, irrespective of the value of assets, and in the case of any other person, if the book value of the asset or assets exceeds in the aggregate five thousand rupees, particulars of the assets and in aggregate (a) cost or valuation, as the case may be (b) the book value, and (c) the sale price and mode of disposal (e.g. by tender or negotiation) and the particulars of the purchaser.
* Disclosure in respect of transactions with associated undertakings.
4. APPLICABILITY OF INTERNATIONAL ACCOUNTING STANDARDS ON UNLISTED PUBLIC COMPANIES AND PRIVATE LIMITED COMPANIES
The Section 234(3) of the Companies Ordinance, 1984 requires that every listed company to comply with certain International Accounting Standards for the purpose of preparing their annual accounts. The C.O. neither requires nor forbid the unlisted public companies and private limited companies to comply with these IASs. However, the preface to statements of IASs makes it very clear that IASs apply to the published financial statements of every commercial, industrial or business enterprise irrespective of its corporate and legal status.
Moreover, ICAP and ICMAP, as members have undertaken to support the objective of IASC (to promote the acceptance and observances of IASs) by using their best endeavours.
IASC has also does not distinguish between the legal and corporate status of the companies and as such all companies have to comply with applicable IASs. However, certain IASs such as IAS-14 "Segment Reporting" and IAS-33 "Earning per Share" etc. have been specifically formulated for the enterprises whose securities are publicly traded (listed companies) and as such these IASs shall not be applicable to unlisted public companies and private limited companies.
(-1-)
AUDIT OF FUNDS
COURSE OUTLINE
1. FUND - DEFINITION
2. PROVIDENT FUND
3. GRATUITY FUND
Cont’d P/G 2
(-2-)
AUDIT OF FUNDS
1. FUND
Fund is defined under Fourth Schedule to the Companies Ordinance, 1984, as "Fund in relation to any reserve, shall be used only where such a reserve is represented by specifically earmarked investments or other assets realizable at not less than the amount of the reserve
2. PROVIDENT FUND
What is Provident Fund ?
Provident fund is a fund established for the benefit of all permanent employees of an organization. The fund is being contributed as a Trust and is being managed by the trustees, whose decision shall be final and binding upon all the members.
Trustees
These include representatives of the Employer (Organization) and Employees (member). The Trustees have entire control over the management of the Fund who shall be vested with powers, authorities and direction.
Members
All the employees of the company being permanent employees, who have opted for the membership of fund, are called members of the fund.
Concept
Every member contributes every month to the Fund an amount equal to 10% or such other percentage as may be prescribed in the Provident Fund Rules, of his fixed monthly salary. The contribution of each member is being deducted at the time of payment of such monthly salary and being paid over to the fund.
The organization at the end of each month contribute and pay to the Fund a sum equal to the aggregate contributions of all the members during the month.
Cont’d P/G 3
(-3-)
Recognized / Unrecognized
A Provident Fund Scheme which is registered under Part I of the Sixth Schedule to the Income Tax Ordinance, 2001 shall be treated as recognized Provident Fund Scheme. A Provident Fund Scheme which is not so registered, shall be treated as unrecognized Provident Fund.
Section 227 of the Companies Ordinance, 1984
When a trust has been created by a company with respect to any Provident Fund, the company shall be bound to collect the contributions of the employees concerned and pay such contributions as well as its own contributions, to the trustees within fifteen days from the date of collection, and thereupon, the obligation shall devolve on the trustees and shall be discharged by them instead of the company.
A special account shall be opened by the company in a scheduled bank or in the National Savings Schemes, in which all moneys contributed to Provident Fund, whether by the company or by employees or any interest or profit received on investments, shall be deposited and kept.
Moneys so received shall be invested in :
- Government Securities : or- In bonds, redeemable capital, debt securities or instruments issued by
Pakistan Water and Power Development Authority and in listed securities subject to the conditions as may be prescribed by SECP.
Employees' Provident Fund (Investment in listed Securities) Rules, 1996
Where it is decided to make investment, out of the provident fund constituted for the employees of a company, in securities of the companies listed on any stock exchange in Pakistan, such investment shall be subject to the following conditions, namely :-
i) Total investment in listed securities shall not exceed thirty percent of the provident fund.
ii) Investment in shares or other listed securities of a particular company shall not exceed five per cent of its paid up capital;
Cont’d P/G 4
(-4-)
iii) In the case of investment in the shares of listed companies, it shall be made only where such companies :-
a) Have a minimum operational record of five years; and
b) Have paid not less than fifteen percent dividend to their share holders during the three preceding consecutive years ;
iv) In the case of investment in securities other than shares of listed companies, it shall not be made unless such securities have been rated as an investment grade with minimum rating of "BBB" by a credit rating company registered with the Authority under the Securities and Exchange Ordinance, 1969 (XVII of 1969), and the rating is maintained as such at the time of investment ; and
v) Investment shall not be made in a security if it is publicly known that the issuer of the security has committed default while availing of any financing facility.
3. GRATUITY FUND
What is Gratuity Fund?
Gratuity fund is a fund establisted for the benefit of all employers / workers, fulfilling certain conditions of an organization. The fund is being constituted as a Trust and being managed by the trustees, whose decision shall be final
and binding upon all the members.
Trustees
These include representatives of the Employer (Organization) and Employees (member). The Trustees have entire control over the management of the Fund who shall be vested with powers, authorities and direction.
Members
All the employees of the company being eligible employees, who have opted for the membership of fund, are called members of the fund.
Who is entitled to Gratuity?A person is entitled to gratuity if all these conditions are satisfied.
Cont’d P/G 5
(-5-)
i) If the organization has twenty or more workmen employed at any day during the preceding twelve months.
ii) A person has to be a ‘workman’ as defined it section2 (i) of the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. Workmen means any person employed in any industrial or commercial establishment to do any skilled or unskilled, manual or clerical work, for hire or reward.
iii) Workmen’s length of employment or sevice should be of six months or more. For any service period of less than six months in any year , no gratuity is payable for that year.
Gratuity when payable:
i) On resignation by a workman; andii) Termination of service by the employer due to any reason other
than misconduct (whether the misconduct result in financial loss to employer or not).
Rate of GratuityThe rate of gratuity is thirty (30) days wages for every completed year of service or for any period in ecess of six months in the same establishment. Hence for a period of service which is six months or less no gratuity is payable.
“Completed year of service” means a period of twelve months service counted from the date of first appointment in the same establishment.It does not means calendar year, financial year or any other period
What are wages?Wages adminssible to a workman in the last month of service if he is a fixed rate workman or the highest pay drawn during the last twelve months in the case of peice rated workman.
Recognized / Unrecognized
A Gratutity Fund Scheme which is registered under Part III of the Sixth Schedule to the Income Tax Ordinance, 2001 shall be treated as recognized Gratuity Fund Scheme. A Gratuity Fund Scheme which is not so registered, shall be treated as unrecognized Gratutity Fund.
(-1-)
International Accounting Standards - IAS - 18 to IAS - 30
COURSE OUTLINE :
- Subject Matters of IAS 18 TO IAS 30
Cont’d P/G 2
(-2-)
International Accounting Standards - IAS - 18 to IAS 30
SUBJECT MATTER
IAS – 18 Revenue
IAS – 19 Employee Benefits
IAS – 20 Accounting for Government Grants and Disclosure of Government Assistance.
IAS – 21 The Effects of Changes in Foreign Exchange Rates.
IAS – 22 Business Combinations
IAS – 23 Borrowing Costs
IAS – 24 Related Party Disclosures
IAS – 26 Accounting and Reporting by Retirement Benefit Plans.
IAS – 27 Consolidated Financial Statements and Accounting for investments in Subsidiaries.
IAS – 28 Accounting for investments in Associates
IAS – 29 Financial Reporting in Hyperinflationery Economies.
IAS – 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions.
Cont’d P/G 3
(-3-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 18
¨ Objective :
To prescribe the accounting treatment of revenue arising from certain types of transactions and events.
¨ Scope :
This standard should be applied in accounting for revenue arising from the following transactions and events.
- the sale of goods;- the rendering of services; and- the use by others of enterprise assets yielding interest, royalties and dividends.
¨ Definition :
'Revenue' is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contribution from equity participants.
'Fair Value' is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
¨ Measurement of Revenue :
Revenue should be measured at the fair value of the consideration received or receivable.
Fair value is the market value taking into account the amount of any trade discount and relate allowed by the enterprise.
When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfill demand on a timely basis in a particular location.
When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.
Cont’d P/G 4
(-4-)
Revenue Recognition
- Sale of GoodsWhen
a) the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods.
b) the enterprises retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
c) the amount of revenue can be measured reliably;
d) It is probable that the economic benefits associated with the transaction will flow to the enterprise; and
e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
- Rendering of ServicesWhen
a) the amount of revenue can be measured reliably;
b) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
c) the stage of completion of the transaction at the balance sheet date can be measured reliably; and
d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Cont’d P/G 5
(-5-)
- Interest, Royalties and DividendsWhen
a) it is probable that the economic benefits associated with the transaction will flow to the enterprise; and
b) the amount of revenue can be measured reliably.
DisclosureAn enterprise should disclose :
a) the accounting policies adopted for the recognition of revenue including the methods adopted to determine the stage of completion of transaction involving the rendering of services;
b) the amount of each significant category of revenue recognized during the period including revenue arising from :
i) the sale of goods;ii) the rendering of services;iii) interestiv) royalties;v) dividends; and
c) the amount of revenue arising from exchanges of goods or services included in each significant category of revenue.
Cont’d P/G 6
(-6-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 19
EMPLOYEE BENEFITS
¨ Objective :
To prescribe the accounting and disclosure for employee benefits.
¨ Scope :
This standard should be applied by an employer in accounting for employee benefits.
¨ Definition :
Employee benefits include :
- Short term employee benefits such as wages, salaries and social security contribution, paid annual leaves and paid sick leaves, profit sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees;
- Post employment benefits such as pension, other retirement benefits, post employment life insurance and post employment medical care;
- Other long-term employee benefits, including long - service leave or sabbatical leave, jubilee or other long service benefits, long term disability benefits and if they are not payable wholly within twelve months after the end of the period, profit sharing, bonuses and deferred compensation;
- Termination benefits; and
- Equity compensation benefits.
¨ Distinction Between Defined Contribution Plans and Defined Benefit Plans.
Under defined contribution plans, an enterprise pays fixed contribution into a separate entity (a fund) and will have no legal or constructive obligation to pay further contribution if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior period. The standard requires an enterprise to recognize contributions to a defined contribution plan when an employee has rendered service in exchange for those contributions.
Cont’d P/G 7
(-7-)
All other post employment benefit plans are defined benefit plans. Defined benefit plans may be unfunded, or they may be wholly or partly funded. Accounting by an enterprise for defined benefit plans involves the following steps.
a) using actuarial technique to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior period.
b) discounting that benefit using the projected unit credit method in order to determine the present value of the defined benefit obligation and the current service cost.
c) determining the fair value of any plan assets;
d) determining the total amount of actuarial gains and losses and the amount of those actuarial gains and losses that should be recognized;
e) where a plan has been introduced or changed, determining the resulting past service cost; and
f) where a plan has been curtailed or settled, determining the resulting gain or loss.
¨ Amount to be recognized in the balance sheet :
The amount recognized as a defined benefit liability should be the net total of the following amounts:
a) the present value of the defined benefit obligation at the balance sheet date;
b) plus any actuarial gains less any actuarial losses not recognized;
c) minus any past service cost not yet recognised;
d) minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be settled directly;
e) a reconciliation showing the movements during the period in the net liability (or asset) recognised in the balance sheet;
f) the total expense recognised in the income statement for each of the following, and the line items of the income statement in which they are included :
Cont’d P/G 8
(-8-)
i) Current service cost;ii) Interest cost;iii) the expected rates of return for the periods presented in the financial
statements on any reimbursement rights recognised as an asset;iv) the expected rates of salary increase;
v) medical cost trend rates; and vi) any other material actuarial assumption used.
An enterprise should disclose each actuarial assumption in absolute terms (for example as an absolute percentage) and not just as a margin between different percentages or other variables.
Cont’d P/G 9
(-9-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 20ACCOUNTING FOR GOVERNMENT GRANTS ANDDISCLOSURE OF GOVERNMENT ASSISTANCE
¨ Scope :
This standard should be applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance.
¨ Definition :
"Government grants" are assistance by government in the form of transfer of resources to an enterprise in return for past or future compliance with certain conditions relating to the operating activities of the enterprise. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.
"Government assistance" is action by government designed to provide an economic benefit specific to an enterprise or range of enterprises qualifying under certain criteria. Government assistance for the purpose of this standard does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.
¨ Recognition of Government Grant :
Government grants, including non-monetary grants at fair value, should not be recognized until there is reasonable assurance that :
a) the enterprise will comply with the conditions attaching to them; andb) the grants will be received
Government grants should be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. They should not be credited directly to shareholders interests.
¨ Presentation of Grants Related to Assets :
Government grants related to assets, including non-monetary grants at fair value, should be presented in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.
¨ Presentation of Grants Related to Income :
Grants related to income are sometimes presented as a credit in the income statement, either separately or under a general heading such as "Other income” Alternatively, they are deducted in reporting the related expense.
Cont’d P/G 10
(-10-)
¨ Repayment of Government Grants :
A government grant that becomes repayable should be accounted for as a revision to an accounting estimate.
Repayment of a grant related to income should be applied first against any unamortised deferred credit set up in respect of the grant. To the extent that the
repayment exceeds any such deferred credit or where no defered credit exists, the repayment should be recognised immediately as an expense.
Repayment of a grant related to an asset should be recorded by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The cumulative additional depreciation that would have been recognised to date as an expense in the absence of the grant should be recognised immediately as an expense.
¨ Disclosure :
The following matters should be disclosed :
a) the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements;
b) the nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the enterprise has directly benefitted; and
c) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.
Cont’d P/G 11
(-11-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 21THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
¨ Objective :
The principal issues in accounting for foreign currency transactions and foreign operations are to decide which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates.
¨ Scope :
This standard should be applied :
a) in accounting for transaction in foreign currencies; and
b) in translating the financial statements of foreign operation that are included in the financial statements of the enterprise by consolidation or by the equity method.
¨ Definition :
- Foreign Operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise.
- Foreign entity is a foreign operation, the activities of which are not an integral part of those of the reporting enterprise.
- Reporting currency is the currency used in presenting the financial statements.
- Foreign Currency is a currency other than the reporting currency of an enterprise.
- Exchange rate is the ratio for exchange of two currencies.
- Exchange difference' is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.
- Closing rate is the spot exchange rate at the balance sheet date.
Cont’d P/G 12
(-12-)
¨ Initial recognition of foreign currency transaction :
Should be recognised by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
¨ Reporting at subsequent balance sheet date :
At each balance sheet date :
a) foreign currency monetary items should be reported using the closing rate;
b) non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and
c) non-monetary items which are carried at fair value denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined.
¨ Recognition of Exchange Differences :
Benchmark treatment.
Exchange differences using on the settlement of monetary items or on reporting an enterprises monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements, should be recognised as income or as expenses in the period is which they arise.
Allowed alternative treatment.Exchange differences may result from a severe devaluation or depreciation of a currency against which there is no practical means of hedging and that affects liabilities which cannot be settled and which arise directly on the recent asquisition of an asset invoiced in a foreign currency. Such exchange differences should be included in the carrying amount of the related asset, provided that the adjusted carrying amount does not exceed the lower of the replacement cost and the amount recoverable from the sale or use of the asset.
¨ Disclosure :
1. An enterprise should disclose :
Cont’d P/G 13
(-13-)
a) the amount of exchange differences included in the net profit or loss for the period.
b) net exchange differences classified as equity as a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.
c) the amount of exchange differences arising during the period which is included in the carrying amount of an asset in accordance with the allowed alternative treatment.
2. When the reporting currency is different from the currency of the country in which the enterprise is domiciled the reason for using a different currency should be disclosed. The reason for any change in the reporting currency should also be disclosed.
3. When there is a change in the classification of a significant foreign operation, an enterprise should disclose : a) the nature of the change in classification;b) the reason for the change;c) the impact of the change in classification on shareholder's equity;
Cont’d P/G 14
(-14-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 22BUSINESS COMBINATIONS
¨ Objective :
To prescribe the accounting treatment for business combination. The standard covers both an acquisition of one enterprise by another and also the rare situation of a uniting of interest when an acquirer cannot be identified.
¨ Definition :
A 'business combination' is the bringing together of separate enterprises into one economic entity as a result of one enterprise merging with or obtaining control over the net assets and operations of another enterprise.
An 'acquisition' is business combination in which one of the enterprises, the acquirer, obtains control over the net assets and operations of another enterprise, the acquiree, in exchange for the transfer of asset, incurrence of a liability or issue of equity.
A 'uniting of interests' is a business combination in which the shareholders of the combining enterprises combine control over the whole or effectively the whole, of their net assets and operations to achieve a continuing mutual sharing in the risks and benefits attaching to the combined entity such that neither party can be identified as the acquirer.
'Control' is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
'Fair value' is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.
¨ Acquisition :
In virtually all business combinations, one of the combining enterprises obtains control over the other combining enterprise, thereby enabling an acquirer to be identified. Control is presumed to be obtained when one of the combining enterprises acquir morethan one half of the voting rights of the other combining enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.
Cont’d P/G 15
(-15-)
¨ Uniting of Interest :
In exceptional circumtances, it may not be possible to identify an acquirer. Instead of a dominant party emerging, the shareholders of the combining enterprises join in a substantially equal arrangement to share control over the whole, or effectively the whole, of their net assets and operations. In addition, the managements of the combining enterprises participate in the management of the combined entity. As a result, the shareholders of the combining enterprises share mutually in the risks and benefits of the combined entity. Such a business combination is accounted for as uniting of interests.
Cont’d P/G 16
(-16-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 23BORROWING COSTS
¨ Objective :
To prescribe the accounting treatment for borrowing costs. This standard generally requires the immediate expensing of borrowing costs. However, the standard permits as an allowed alternative treatment, the capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset.
¨ Definition :
"Borrowing Costs" are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
"A qualifying asset" is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
¨ Borrowing Costs May Include :
a) interest on bank overdrafts and short term and long term borrowings;
b) amortization of discounts or premium relating to borrowings;
c) amortization of ancillary costs incurred in connection with the arrangement of borrowings;
d) Finance charges in respects of finance lease recognized in accordance with IAS - 17, Lease; and
e) exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs.
¨ Examples of qualifying assets :
- Inventories that requires a substantial period of time to bring them to a saleable condition;
- Manufacturing plants;
- Power generation facilities ; and
- investment propertiesCont’d P/G 17
(-17-)
¨ Recognition of Borrowing Costs :
Benchmark Treatment.
Borrowing cost should be recognized as an expense in the period in which they are incurred.
Allowed Alternative Treatment
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this standard.
¨ Disclosure :
Benchmark Treatment
The financial statements should disclose the accounting policy adopted for borrowing costs.
Allowed Alternative Treatment
The financial statements should disclose :
a) the accounting policy adopted for borrowing costs;
b) the amount of borrowing costs capitalized during the period; and
c) the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.
Cont’d P/G 18
(-18-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 24RELATED PARTY DISCLOSURES
¨ Scope :
This standard should be applied in dealing with related parties and transactions between a reporting enterprise and its related parties. This standard deals only with those related party relationships described in.
(a) to (e) below :
a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by or are under common control with, the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries).
b) associates ;
c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that give them significant influence over the enterprise, and close members of the family of any such individual;
d) key management personnel including directors and officers of companies and close members of the families of such individuals; and
e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.
¨ Definition :
"Related Party", parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decision.
"Related party transaction", a transfer of resources or obligations between related parties, regardless of whether a price is charged.
"Control" ownership directly, or indirectly through subsidiaries, of more than one half of the voting power of an enterprise, or a substantial interest in voting power and the power to direct, by statute or agreement, the financial and operating policies of the management of the enterprise.
Cont’d P/G 19
(-19-)
"Significant influence" participation in the financial and operating policy decisions of an enterprise, but not control of those policies - significant influence may be exercised in several ways, usually by representation on the board of directors, but also by, for example, participation in the policy making process,
material inter company transactions, interchange of managerial personnel or dependence on technical information, Significant influence may be gained by share ownership, statute or agreement with share ownership. Significant influence is presumed in accordance with the definition contained in IAS - 28, Accounting for Investment in Associates.
¨ Examples of Situations where related party transactions may lead to disclosures by a reporting enterprise in the period which they affects :
- purchases or sales of goods (finished or unfinished);- purchases or sales of property and other assets;- rendering or receiving of services;- agency arrangements;- leasing arrangement;- transfer of research and development;- licence agreements;- finance (including loans and equity contribution in cash or in kind);- guarantees and collaterals; and- management contracts.
¨ Disclosure :
1. Related party relationship where control exists should be disclosed irrespective of whether there have been transactions between the related parties.
2. If there have been transactions between related parties, the reporting enterprise should disclose the nature of the related party relationships as well as the types of transactions and the elements of the transactions necessary for an understanding of the financial statements.
3. Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise.
Cont’d P/G 20
(-20-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 26ACCOUNTING AND REPORTING BY RETIREMENTBENEFIT PLANS
¨ Scope :
This standard should be applied in the reports of retirement benefits plans where such reports are prepared.
¨ Definition :
'Retirement benefit plan' are arrangements whereby an enterprise provides benefits for its employees on or after termination of service (either in the form of an annual income or as a lump sum) when such benefits, or the employer's contributions towards them, can be determined or estimated in advance of retirement from the provision of a document or from the enterprise's practices.
'Defined contribution plans' are retirement benefits plans under which amounts to be paid as retirement benefits are determined by contributions to a fund together with investment earnings thereon.
'Defined benefit plans' are retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to a formula usually based on employees' earning and / or years of service.
¨ Defined Contribution Plans :
The report of a defined contribution plan should contain a statement of net assets available for benefits and a description of the funding policy.
The objective of reporting by a defined contribution plan is periodically to provide information about the plan and the performance of its investments. That objective a usually achieved by providing a report including the following :
a) a description of significant activities for the period and the effect of any changes relating to the plan, and its membership and terms and conditions;
b) statements reporting on the transaction and investment performance for the period and the financial position of the plan at the end of the period; and
c) a description of the investment policies.
Cont’d P/G 21
(-21-)
¨ Defined Benefit Plans :
The Report of a defined benefit plan should contain either :
a) a statement that shows :
i) the net assets available for benefits;
ii) the actuarial present value of promised retirement benefits, distinguishing between vested benefits and non-vested benefits; and;
iii) the resulting excess or deficit; or
b) a statement of net assets available for benefits including either :
i) a note disclosing the actuarial present value of promised retirement benefits distinguishing between vested benefits and non-vested benefits; or
ii) a reference to this information in an accompanying actuarial report.
If an actuarial valuation has not been prepared at the date of the report, the most recent valuation should be used as a base and the date of the valuation disclosed.
The actuarial present value of promised retirement benefits should be based on the benefits promised under the terms of the plan on service rendered to date using either current salary levels or projected salary levels with disclosure of the basis used. The effect of any changes in actuarial assumption that have had a significant effect on the actuarial present value of promised retirement benefits should also be disclosed.
Cont’d P/G 22
(-22-)
¨ Disclosure :
The report of a retirement benefit plan, whether defined benefit or defined contribution, should also contain the following information.
a) a statement of changes in net assets available for benefits;
b) a summary of significant accounting policies; and
c) a description of the plan and the effect of any changes in the plan during the period.
The report of a retirement benefit plan contain a description of the plan, either as part of the financial information or in a separate report. It may contain the following :
a) the names of the employers and the employee groups covered;
b) the number of participants receiving benefits and the number of other participants, classified as appropriate.
c) the type of plans-defined contribution or defined benefit;
d) a note as to whether participants contribute to the plan;
e) a description of the retirement benefits promised to participants;
f) a description of any plan termination terms; and
g) changes in items (a) to (f) during the period covered by the report.
Cont’d P/G 23
(-23-)
INTERNATIONAL ACCOUNTING STANDARDS IAS - 27CONSOLIDATED FINANCIAL STATEMENTS
AND ACCOUNTING FORINVESTMENTS IN SUBSIDIARIES
¨ Scope :
This standard should be applied in the preparation and presentation of consolidated financial statements for a group of enterprises under the control of a parent. This standard should also be applied in accounting for investments in subsidiaries in a parent's separate financial statements.
¨ Definitions :
'Control' is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
A 'Subsidiary' is an enterprise that is controlled by another enterprise (known as the parent)
A 'Parent' is an enterprise that has one or more subsidiaries.
A 'group' is a parent and all its subsidiaries.
'Consolidated financial statements' or the financial statements of a group presented as those of a single enterprise.
'Minority interest' is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parents.
¨ Presentation of Consolidated Financial Statement :
A parent should present consolidated financial statements.
A parent that is a wholly owned subsidiary or is virtually wholly owned, need not present consolidated financial statements provided, in the case of one that is virtually wholly owned, the parent obtains the approval of the owners of the minority interest. Such a parent should disclose the reasons why consolidated financial statements have not been presented together with the basis, on which subsidiaries are accounted for in its separate financial statements. The name and registered office of its parent that publishes consolidated financial statements should also be disclosed.
Cont’d P/G 24
(-24-)
¨ When control is presumed to exist :
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control.
Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is :
a) power over more than one half of the voting rights by virtue of an agreement with other investors;
b) power to govern the financial and operating policies of the enterprise under a statute or an agreement;
c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or
d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body.
¨ Accounting for Investments in Subsidiaries in a Parent's Separate Financial Statements :
In a parent's separate financial statements, investments in subsidiaries, that are included in the consolidated financial statements should be either :
a) carried at cost ;
b) accounted for using the equity method as described in IAS-28, Accounting for investments in associates; or
c) accounted for as available for sale financial assets as described in IAS - 39, Financial Instruments; Recognition and Measurement.
Investments in subsidiaries that are excluded from consolidated financial statements should be either :
a) carried at cost;
b) accounted for using the equity method as described in IAS - 28;
c) accounted for as available for sale financial asset as described in IAS - 39.
Cont’d P/G 25
(-25-)
¨ Disclosure :
a) in consolidated financial statements, a listing of significant subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held;
b) in consolidated financial statements, where applicable ;
i) the reason for not consolidating a subsidiary;
ii) the nature of the relationship between the parent and a subsidiary of which the parent does not own, directly or conductly through subsidiaries, more than one half of the voting power;
iii) the name of an enterprise in which more than one half of the voting power is owned, directly or indirectly through subsidiaries, but which, because of the absence of control, is not a subsidiary;
iv) the effect of the acquisition or disposal of subsidiaries on the financial position at the reporting date and on the corresponding amounts for the preceeding period; and
c) in the parent's separate financial statements, a description of the method used to account for subsidiaries.
Cont’d P/G 26
(-26-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 28ACCOUNTING FOR INVESTMENTS IN ASSOCIATES
¨ Scope :
This standard should be applied in accounting by an investor for investments in association.
¨ Definition :
An 'associate' is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor.
'Significant Influence' is the power to participate in the financial and operating policy decision of the investor but is not control over these policies.
'Control' is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
'The equity method' is a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee. The income statement reflects the investor's share of the results of operations of the investee.
'The cost method' is a method of accounting whereby the investment is recorded at cost. The income statement reflects income from the investment only to the extent that the investor receives distribution from accumulated net profits of the investee arising subsequent to the date of acquisition.
¨ Significant Influence :
The existence of significant influence by an investor is usually evidenced in one or more of the following ways :
a) representation on the board of directors or equivalent governing body of the investee;
b) participation in policy making processes;c) material transaction between the investor and the investee;d) inter change of managerial personnel; ore) provision of essential technical information
Cont’d P/G 27
(-27-)
¨ Separate Financial Statements of the Investor :
An investment in an associate that is included in the separate financial statements of an investor that issues consolidated financial statements and that is not held exclusively with a view to its disposal in the near future should be either :
a) carried at cost;
b) accounted for using the equity method as described in this standard; or
c) accounted for as an available for sale financial asset as described in IAS - 39
An investment in an associate that is included in the financial statements of an investor that does not issue consolidated financial statements should be either :
a) carried at cost ;
b) accounted for using the equity method as described in this standard if the equity method would be appropriate for the associate if the investor issued consolidated financial statements; or
c) accounted for under IAS - 39, as an available for sale financial asset or financial asset held for trading, based on the definition in IAS-39.
¨ Disclosure :
The following disclosures should be made :
a) an appropriate listing and description of significant associates including the proportion of ownership interest and, if different, the proportion of voting power held; and
b) the methods used to account for such investments.
Cont’d P/G 28
(-28-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 29FINANCIAL REPORTING IN HYPER INFLATIONARY
ECONOMIES
¨ Scope :
This standard should be applied to the primary financial statements, including the consolidated financial statements, of any enterprise that reports in the currency of a hyper inflationery economy.
¨ Characteristics Indicating Hyper Inflation :
a) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
b) the general population regards monetary amounts not in terms of the local currency but in terms of a related stable foreign currency Prices may be quoted in that currency.
c) sales and purchases an credit take place at prices that compensate for the expected loss of purchasing power during the credit period even if the period is short;
d) Interest rates, wages and prices are linked to a price index; and
e) the cumulative inflation rate over three years is approaching or exceeds 100%.
¨ Disclosure :
The following disclosures should be made :
a) the fact that the financial statements and the corresponding figures for previous periods have been restated for the changes in the general purchasing power of the reporting currency and, as a result, are stated in terms of the measuring unit current at the balance sheet date;
b) whether the financial statements are based on a historical cost approach or a current cost approach; and
c) the identity and level of the price index at the balance sheet date and the movement in the index during the current and the previous reporting period.
Cont’d P/G 29
(-29-)
INTERNATIONAL ACCOUNTING STANDARD IAS - 30DISCLOSURES IN THE FINANCIAL STATEMENTS OF
BANKS AND SIMILAR FINANCIAL INSTITUTIONS
¨ Scope :
This standard should be applied in the financial statements of banks and similar financial institutions.
For the purposes of this standard, the term 'bank' includes all financial institutions, one of whose principal activities is to take deposits and to borrow with the objective of lending and investing and which are within the scope of
banking or similar legislation. The standard is relevant to such enterprises whether or not they have the word 'bank' in their name.
¨ Accounting Policies :
In order to comply with IAS - 1, Presentation of Financial Statements, and thereby enable users to understand the basis on which the financial statements of a bank are prepared, accounting policies dealing with the following items may need to be disclosed.
a) the recognition of the principal types of income;
b) the valuation of investment and dealing securities;
c) the distinction between those transactions and other events that result in the recognition of assets and liabilities on the balance sheet and those transactions and other events that only give rise to contingencies and commitments.
d) the basis for the determination of losses on loans and advances and for writing off uncollectable loans and advances; and
e) The basis for the determination of charges for general banking risks and the accounting treatment of such charges.
¨ Income Statement :
A bank should present an income statement which groups income and expenses by nature and discloses the amounts of the principal types of income and expenses.
In addition to the requirements of other International Accounting Standards, the disclosures in the income statement or the notes to the financial statements, should include, but are not limited to the following items of income and expenses.
Cont’d P/G 30
(-30-)
- Interest and similar income;
- Interest expense and similar charges;
- Dividend income;
- Fee and commission income;
- Fee and commission expenses;
- Gains less losses arising from dealing securities;
- Gains less losses arising from investment securities;
- Gains less losses arising from dealing in foreign currencies;
- Other operating income;
- Losses on loans and advances;
- General Administrative expenses; and other operating expenses.
¨ Balance Sheet :
A bank should present a balance sheet that groups assets and liabilities by nature and lists them in an order that reflects their relative liquidity.
In addition to the requirements of other International Accounting Standards, the disclosures in the balance sheet or the notes to the financial statements should include, but are not limited to, the following assets and liabilities;
¨ Assets :
Cash and balance with the central bank;Treasury bills and other bills eligible for rediscounting with the central bank;Government and other securities held for dealing purposes;Placements with, and loans and advances to, other banks;Other money market placements;Loans and advances to customers; andinvestment securities.
¨ Liabilities :
Deposits from other banks;Other money market deposits;Amount owned to other depositors;Certificates of deposits;Promissory notes and other liabilities evidenced by paper; and other borrowed funds.
(-1-)
INTERNATIONAL STANDARDS ON AUDITINGISA-22 TO ISA-32
SUBJECT MATTER
ISA-22 Management Representations
ISA-23 Going Concern
ISA-24 The Auditors Report on Special Purpose Audit Engagements
ISA-25 Audit Materiality
ISA-26 Audit of Accounting Estimates
ISA-27 The Examination of Prospective Financial Information
ISA-28 Initial Engagements - Opening Balances
ISA-30 Knowledge of the Business
ISA-31 Consideration of laws and regulations in an audit of financial statements
ISA-32 Comparatives
Cont’d P/G 2
(-2-)
ISA-22/IFAC-SM NO-580MANAGEMENT REPRESENTATIONS
PURPOSE
To establish standards and provide guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documentary management representations and the action to be taken if management refuse to provide appropriate representations.
ACKNOWLEDGMENT BY MANAGEMENT OF ITS RESPONSIBILITY FOR THE FINANCIAL STATEMENTS.
The auditor can obtain evidence of management's acknowledgment of its responsibility for the fair presentation of the financial statements and approval from:
¨ Relevant minutes of meetings of the board of directors or similar body;
¨ By obtaining a written representation from management; or
¨ A signed copy of the financial statements.
BASIC ELEMENTS OF A MANAGEMENT REPRESENTATION LETTERAddressee:
Would be the auditorDate:A management representation letter would ordinarily be dated the same date as the auditors report. However, in certain circumstances, a separate representation letter regarding specific transaction or other events may also be obtained during the course of the audit at a date after the date of the auditors report.
Signature:A management representation letter would ordinarily be signed by the members of management who have primary responsibility for the entity and its financial aspects (ordinarily the senior executive officer and the senior financial officer) based on the best of their knowledge and belief.
Cont’d P/G 3
(-3-)
ISA-23/IFAC-SM NO-570GOING CONCERN
PURPOSE
To establish standards and provide guidance on the auditors responsibility in the audit of financial statements with respect to the going concern assumption used in the preparation of the financial statements, including considering management's assessment of the entity's ability to continue on a going concern.
GOING CONCERN ASSUMPTION
Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, cease trading or seeking protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
EXAMPLES OF EVENTS OR CONDITIONS, WHICH INDIVIDUALLY OR COLLECTIVELY MAY CAST SIGNIFICANT DOUBT ABOUT THE GOING CONCERN ASSUMPTION.
Financial:¨ Net liability or net current liability position.
¨ Negative operating cash flows.
¨ Adverse key financial ratios.
¨ Arrears or discontinuance of dividend.
¨ Inability to pay creditors on due dates.
¨ Inability to comply with the terms of loan agreements.
Operating:¨ Loss of key management without replacement.
¨ Loss of a major market, franchise or principal supplier.
¨ Labour difficulties.
Cont’d P/G 4
(-4-)
Others:¨ Non compliance with capital or other statutory requirements.
¨ Changes in legislation or government policy expected to adversely affect the entity.
AUDITOR'S RESPONSIBILITY
The auditor's responsibility is to consider the appropriateness of management's use of the going concern assumption in the preparation of financial statements and consider whether there are material uncertainties about the entity's liability to continue as a going concern that need to be disclosed in the financial statements. The auditor considers the appropriateness of management's use of the going concern assumption.
ADDITIONAL AUDIT PROCEDURES WHEN EVENTS OR CONDITIONS ARE IDENTIFIED.
When events or conditions have been identified which may cast significant doubt on the entity's ability to continue as a going concern, the auditor should:
a) Review management's plans for future action based on its going concern assessment. Such plans include plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital.
b) Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors, and
c) Seek written representation from management regarding its plans for future action.
AUDIT CONCLUSION AND REPORTINGGoing Concern assumption appropriate but a material uncertainty exists.
The auditor considers whether the financial statements:a) Adequately describe the principal events or conditions that give rise to the
significant doubt on the entity's ability to continue in operation and management's plans to deal with these events or conditions.
b) State clearly that there is a material uncertainty related to events or conditions which may cast significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
Cont’d P/G 5
(-5-)
If adequate disclosure is made in the financial statements, the auditor should express an unqualified opinion but modify the auditors report by adding an emphasis of matter paragraph that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity's ability to continue as a going concern and draws attention to the note in the financial statements that discloses the matters set out in above paragraph.
In extreme cases such as situations involving multiple material uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.
If adequate disclosure is not made in the financial statements, the auditor should express a qualified or adverse opinion, as appropriate. The report should include specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entity's ability to continue as a going concern.
GOING CONCERN ASSUMPTION INAPPROPRIATE
If in the auditors judgment, the entity will not be able to continue as a going concern, the auditor should express an adverse opinion if the financial statements have been prepared on a going concern basis.
Cont’d P/G 6
(-6-)
ISA-24/IFAC-SM NO-800THE AUDITOR'S REPORT ON SPECIAL PURPOSE
AUDIT ENGAGEMENTS
PURPOSE
To establish standards and provide guidance in connection with special purpose audit engagements including:
¨ Financial statements prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards or national standards.
¨ Specified accounts, elements of accounts, or items in a financial statements (Component of financial statements).
¨ Compliance with contractual agreements; and
¨ Summarized financial statements
GENERAL CONSIDERATION
Before undertaking a special purpose audit engagement the auditor should ensure there is agreement with the client as to the exact nature of the engagement and the form and content of the report to be issued.
When requested to report in a prescribed format, the auditor should consider the substance and wording of the prescribed report and when necessary, should make appropriate changes to conform to the requirements of this ISA, either by rewording the form or by attaching a separate report.
The auditor should consider whether any significant interpretation of an agreement on which the financial information is based are clearly disclosed in the financial information.
REPORT ON FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH A COMPREHENSIVE BASIS OF ACCOUNTING OTHER THAN INTERNATIONAL ACCOUNTING STANDARDS OR NATIONAL STANDARDS.
The auditors report on financial statements prepared in accordance with another comprehensive basis of accounting used or should refer to the note to the financial statements giving that information. The opinion should state whether the financial statements are prepared, in all material respects, in accordance with the identified bases of accounting.
Cont’d P/G 7
(-7-)
If the financial statements prepared on an other comprehensive basis are not suitably titled or the basis of accounting is not adequately disclosed, the auditor should issue an appropriately modified report.
REPORTS ON A COMPONENT OF FINANCIAL STATEMENTS.
In determining the scope of the engagement, the auditor should consider those financial statement items that are interrelated and which could materially affect the information on which the audit opinion is to be expressed.
The auditors report on a component of financial statements should include a statement that indicates the basis of accounting in accordance with which the component is presented or refers to an agreement that specifies the basis. The opinion should state whether the component is prepared, in all material respects, in accordance with the identified basis of accounting.
When an adverse opinion or disclaimer of opinion on the entire financial statements has been expressed, the auditor should report on components of the financial statements only if those components are not so extensive as to constitute a major portion of the financial statements.
REPORTS ON COMPLIANCE WITH CONTRACTUAL AGREEMENTS
Engagements to express an opinion as to an entity's compliance with contractual agreements should be undertaken only when the overall aspects of compliance relate to accounting and financial matters within the scope of the auditor's professional competence. The report should state whether, in the auditors opinion, the entity has complied with the particular provisions of the agreement.
REPORTS ON SUMMARIZED FINANCIAL STATEMENTS
Unless the auditor has expressed an audit opinion on the financial statements from which the summarized financial statements were derived, the auditor should not report on summarized financial statements.
Cont’d P/G 8
(-8-)
ISA-25/IFAC-SM NO-320AUDIT MATERIALITY
PURPOSE
To establish standards and provide guidance on the concept of materiality and its relationship with audit risk.
DEFINITION
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.
CONSIDERATION OF MATERIALITY
Materiality should be considered by the auditor when:
a) Determining the nature, timing and extent of audit procedures; and
b) Evaluating the effect of misstatements.
RELATIONSHIP BETWEEN MATERIALITY AND AUDIT RISK
There is an inverse relationship between materiality and the level of audit risk, that is, the higher the materiality level, the lower the audit risk and vice versa. The auditor takes the inverse relationship between materiality and audit risk into account when determining the nature, timing and extent of audit procedures.
Cont’d P/G 9
(-9-)
ISA-26/IFAC-SM NO-540AUDIT OF ACCOUNTING ESTIMATES
PURPOSE
To establish standards and provide guidance on the audit of accounting estimates contained in financial statements.
WHAT IS ACCOUNTING ESTIMATE?
Accounting estimate means an approximation of the amount of an item in the absence of a precise means of measurement.
Examples are:¨ Allowances to reduce inventory and accounts receivable to their estimated
realizable value.
¨ Provision to allocate the cost of fixed assets over their estimated useful lives.
¨ Accrued revenue.
¨ Deferred tax.
¨ Provision for a loss from a lawsuit.
¨ Losses on construction contracts in progress.
¨ Provision to meet warranty claims.
AUDIT PROCEDURES
The auditor should obtain sufficient appropriate audit evidence as to whether an accounting estimate is reasonable in the circumstances and, when required, is appropriately disclosed.
The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate:
a) Review and test the process used by management to develop the estimate;
b) Use an independent estimate for comparision with that prepared by management; or
c) Review subsequent events which confirm the estimate made.
Cont’d P/G 10
(-10-)
ISA-27/IFAC-SM NO-810THE EXAMINATION OF PROSPECTIVE
FINANCIAL INFORMATION
PURPOSE
To establish standards and provide guidance on engagements to examine and report on prospective financial information including examination procedures for best estimate and hypothetical assumptions.
WHAT IS PROSPECTIVE FINANCIAL INFORMATION?
Financial information based on assumptions about events that may occur in the future and possible actions by an enterprise. It is highly subjective and its preparation requires the exercise of considerable judgment. Prospective financial information can be in the form of a forecast, a projection or a combination of both.
A 'forecast' means prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared (best estimate assumptions).
A 'projection' means prospective financial information prepared on the basis of:
a) Hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start-up phase or are considering a major change in the nature of operations; or
b) A mixture of best estimate and hypothetical assumption.
ACCEPTANCE OF ENGAGEMENT
Before accepting an engagement to examine prospective financial information, the auditor would consider, amongst other things:
¨ The intended use of the information
¨ Whether the information will be for general or limited distribution
¨ The nature of the assumptions, that is, whether they are best estimate or hypothetical assumptions.
¨ The elements to be included in the information
¨ The period covered by the informationCont’d P/G 11
(-11-)
PERIOD COVERED
The auditor should consider the period of time covered by the prospective financial information.
The following are some of the factors that are relevant to the auditor's consideration of the period of time covered by the prospective financial information:
¨ Operating cycle, for example, in the case of a major construction project the time required to complete the project may dictate the period covered.
¨ The degree of reliability of assumptions, for example, if the entity is introducing a new product the prospective period covered could be short and broken into small segments, such as weeks or months.
¨ The needs of users, for example, prospective financial information may be prepared in connection with an application for a loan for the period of time required to generate sufficient funds for repayment.
EXAMINATION PROCEDURES
When determining the nature, timing and extent of examination procedures, the auditor's consideration should include:
a) The likelihood of material misstatement.
b) The knowledge obtained during any previous engagements;
c) Management's competence regarding the preparation of prospective financial information;
d) The extent to which the prospective financial information is affected by the management's judgment; and
e) The adequacy and reliability of the underlying data
PRESENTATION AND DISCLOSURE
The auditor will used to consider whether:
a) The presentation of prospective financial information is informative and not misleading.
b) The accounting policies are clearly disclosed in the notes to the prospective financial information.
Cont’d P/G 12
(-12-)
c) The assumption are adequately disclosed in the notes to the prospective financial information.
d) The date as of which the prospective financial information was prepared is disclosed; and
e) Any change in accounting policy since the most recent historical financial statements is disclosed, along with the reason for the change and its effect on the prospective financial information.
REPORT ON EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION
¨ When the auditor believes that the presentation and disclosure of the prospective financial information is not adequate, the auditor should express a qualified or adverse opinion in the report on the prospective financial information, or withdraw from the engagement, as appropriate.
¨ When the auditor believes that one or more significant assumptions do not provide a reasonable basis for the prospective financial information on the basis of best-estimate assumptions or that one or more significant assumptions do not provide a reasonable basis for the prospective financial information given the hypothetical assumption, the auditor should either express an adverse opinion in the report on the prospective financial information, or withdraw from the engagement.
¨ When the examination is affected by condition that preclude application of one or more procedures considered necessary in the circumstances the auditor should either withdraw from the engagement or disclaim the opinion and describe the scope limitation in the report on the prospective financial information.
Cont’d P/G 13
(-13-)
ISA-28/IFAC-SM NO-510INITIAL ENGAGEMENT - OPENING BALANCES
PURPOSE
To establish standards and provide guidance regarding opening balances when the financial statements are audited for the first time or when the financial statements for the prior period were audited by another auditor.
For initial audit engagement, the auditor should obtain sufficient appropriate audit evidence that:
a) The opening balances do not contain misstatements that materially affect the current period's financial statements.
b) The prior period's closing balances have been currently brought forward to the current period or, when appropriate, have been restated; and
c) Appropriate accounting policies are consistently applied or changes in accounting polices have been properly accounted for and adequately disclosed.
OPENING BALANCES
Opening balances means those account balances which exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of:a) Transactions of prior periods; and
b) Accounting policies applied in the prior period
In an initial audit engagement, the auditor will not have previously obtained audit evidence supporting such opening balances.
AUDIT PROCEDURES
The sufficiency and appropriateness of the audit evidence the auditor will need to obtain regarding opening balances depends on such matters as:
¨ The accounting policies followed by the entity.
¨ Whether the prior period's financial statements were audited, and if so whether the auditor's report was modified.
¨ The nature of the accounts and the risk of misstatement in the current period's financial statements.
Cont’d P/G 14
(-14-)
¨ The materiality of the opening balances relative to the current period's financial statements.
AUDIT CONCLUSION AND REPORTING
¨ If auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances, the auditor's report should include a qualified opinion, a
disclaimer of opinion or in those jurisdiction where it is permitted, an opinion which is qualified or disclaimed regarding the results of operations and unqualified regarding financial position.
¨ If the current period's accounting policies have not been consistently applied in relation to opening balances and if the change has not been properly accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion, as appropriate.
Cont’d P/G 15
(-15-)
ISA-30/IFAC-SM NO-310KNOWLEDGE OF THE BUSINESS
PURPOSE
To establish standards and provide guidance on what is meant by a knowledge of the business, why it is important to the auditor and to members of the audit staff working on an engagement, why it is relevant to all phases of an audit, and how the auditor obtains and uses that knowledge.
OBTAINING THE KNOWLEDGE
The auditor can obtain a knowledge of the industry and the entity from a number of sources. For example:
¨ Previous experience with the entity and its industry.
¨ Discussion with people with the entity (for example directors and senior operating personnel)
¨ Discussion with internal audit personnel and review of internal audit reports.
¨ Discussion with other auditors and with legal and other advisors who have provided services to the entity or within the industry.
¨ Discussion with knowledgeable people outside the entity (for example, industry economists, industry regulators, customers, suppliers, competitors).
¨ Publications related to the industry (for example, government statistics, surveys, taxes, trade journals, reports prepared by banks and securities dealers, financial newspaper).
¨ Legislation and regulation that significantly affect the entity.
¨ Visits to the entity's premises and plant facilities.
USING THE KNOWLEDGE
The auditor makes judgment about many matters throughout course of the audit where knowledge of the business is important. For example:
¨ Assessing inherent risk and control risk.
¨ Considering business risks and management's response thereto.
¨ Developing the overall audit plan and the audit program.
Cont’d P/G 16
(-16-)
¨ Determining a materiality level and assessing whether the materiality level chosen remain appropriate.
¨ Assessing audit evidence to establish its appropriateness and the validity of the related financial statement assertions.
¨ Evaluating accounting estimates and management representation.
¨ Identifying areas where special audit consideration and skills may be necessary.
¨ Identifying related parties and related party transaction.¨ Recognizing conflicting information (for example, contradictory representations).
¨ Recognizing unusual circumstances (for example, fraud and non compliance with laws and regulations)
¨ Making informed inquiries and assessing the reasonableness of answers.
¨ Considering the appropriateness of accounting policies and financial statement disclosures.
Cont’d P/G 17
(-17-)
ISA-31/IFAC-SM NO-250CONSIDERATION OF LAWS AND REGULATIONS IN AN
AUDIT OF FINANCIAL STATEMENTS PURPOSE
To establish standards and provide guidance on the auditor's responsibility to consider laws and regulation in an audit of financial statements.
When planning and performing audit procedures and in evaluating and reporting the results thereof, the auditor should recognize that non compliance by the entity with laws and regulation may materially affect the financial statements.
WHAT IS NON COMPLIANCE?
The term 'non compliance' as used in this ISA refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity or on its behalf by its management or employees. For the purpose of this ISA, non compliance does not include personal misconduct (unrelated to the business activities of the entity) by the entity's management or employees.
RESPONSIBILITY OF MANAGEMENT FOR THE COMPLIANCE WITH LAWS AND REGULATIONS.
It is management's responsibility to ensure that the entity's operations are conducted in accordance with laws and regulations. The responsibility for the prevention and detection of non compliance rests with management.
THE AUDITOR'S CONSIDERATION OF COMPLIANCE WITH LAWS AND REGULATIONS.
The auditor is not, and cannot be held responsible for preventing noncompliance. The fact that an annual audit is carried out may, however, act as a deterrant.
An audit is subject to the unavoidable risk that some material misstatements of the financial statements will not be detected even though the audit is properly planned and performed in accordance with ISA. This risk is higher with regard to material misstatements resulting from noncompliance with laws and regulations due to factors such as.
¨ The effectiveness of audit procedures is affected by the inherent limitations of the accounting and internal control systems and by the use of testing.
Cont’d P/G 18
(-18-)
¨ Much of the evidence obtained by the auditor is persuasive rather than conclusive in nature.
The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that the audit may reveal conditions or events that would lead to questioning whether an entity is complying with laws or regulations.
In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework. To obtain the general understanding of laws and regulations, the auditor would ordinarily.
¨ Use the existing knowledge of the entity's industry and business.
¨ Inquire of management concerning the entity's policies and procedures regarding compliance with laws and regulations.
¨ Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entity.
¨ Discuss with management the policies or procedures adopted for identifying evaluating and accounting for litigation claims and assessments.
After obtaining the general understanding, the auditor should perform procedures to help identify instances of non compliance with those laws and regulations where non compliance should be considered when preparing financial statements, specifically:
¨ Inquiring of management as to whether the entity is in compliance with such laws and regulations.
¨ Inspecting correspondence with the relevant licensing or regulatory authorities.
Further, the auditor should obtain sufficient appropriate audit evidence about compliance with those laws and regulations generally recognized by the auditor to have an effect on the determinations of material amounts and disclosures in financial statements. The auditor should have a sufficient understanding of these laws and regulations in order to consider them when auditing the assertions related to the determination of the amounts to be recorded and the disclosures to be made.
The auditor should be alert to the fact that procedures applied for the purpose of forming an opinion on the financial statements may bring instances of possible noncompliance with laws and regulations to the auditors attention.
The auditor should obtain written representations that management has disclosed to the auditor all known actual or possible noncompliance with laws and regulations whose effects should be considered when preparing financial statements.
Cont’d P/G 19
(-19-)
PROCEDURES WHEN NONCOMPLIANCE IS DISCOVERED
When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should obtain an understanding of the nature of the act and the circumstances in which it has occurred, and sufficient other information to evaluate the possible effect on the financial statements.
When the auditor believes there may be noncompliance, the auditor should document the finding and discuss them with management.
When adequate information about the suspected noncompliance cannot be obtained, the auditor should consider the effect of the lack of audit evidence on the auditors report.
The auditor should consider the implications of noncompliance in relation to other aspects of the audit, particularly the reliability of management representations.
Cont’d P/G 20
(-20-)
ISA-32/IFAC-SM NO-710COMPARATIVES
PURPOSE
To establish standards and provide guidance on the auditor's responsibility to regarding comparatives.
WHAT ARE COMPARATIVES
The frameworks and methods of presentation are refered to in this standard as follows:
a) Corresponding Figures where amounts and other disclosures for the preceding period are included as part of the current period financial statements, and are intended to be read in relation to the amounts and other disclosures relating to the current period (refered to as “current period figures” for the purpose of this ISA). These corresponding figures are not presented as complete financial statements capable of standing alone, but are an integral part of the current period financial statements intended to be read only in relationship to the current period figures; and
b) Comparative Financial Statements where amounts and other disclosures for the preceding period are included for comparison with the financial statements of the current period, but do not form part of the current period financial statements.
ESSENTIAL AUDIT REPORTING DIFFERENCES
a) For corresponding figures the auditor’s report only refers to the financial statements for the current period; whereas
b) For comparative financial statements, the auditor’s report refers to each period that financial statements are presented.
(-1-)
ACCOUNTING TECHNICAL RELEASES
SUBJECT MATTER
TR-5 IASC Standards, Council's Statement on applicability
TR-6 Fixed Assets Register
TR-8 Clarification regarding basis of calculation of Worker Profit Participation Fund.
TR-10 Deferred Taxation
TR-11 Depreciation on Idle Fixed Assets
TR-12 Debt Extinguishment
TR-14 Revaluation of fixed assets
TR-15 Accounting treatment - Bonus shares
TR-19 Accounting treatment - Excise duty
TR-20 Accounting for expenditure during construction period
TR-21 Date of commencement of commercial production.
TR-22 Book value per share
TR-23 Accounting for Investments
TR-24 Accounting treatment - Exchange risk fee
TR-25 Prudential Regulations for Banks
TR-27 IAS-12, Accounting for taxes on income
TR-28 Accounting for Golden Handshake
Cont’d P/G 2
(-2-)
TR-5 - IASC STANDARDS - COUNCIL'S STATEMENT ON APPLICABILITY
ISSUE
Misunderstanding about the applicability of International Accounting Standards (IASs) and the obligation with regard to the compliance with such Standard the auditors carry while expressing on opinion on published financial statements which have been fully defined in para 5 of the preface to statement of IASs and para 7 and 9 of the Framework for the Preparation and Presentation of Financial Statement issued by International Accounting Standards Committee (IASC).
RECOMMENDATION
The auditor, while expressing an opinion on published financial statements, should satisfy himself that they do comply with IASs in all material respects and that in the event of any departure from or inconsistancy with such standards, the auditors report should contain suitable qualification. It should however be emphasized that IASs do not over ride the local statutory provisions under Companies Ordinance, 1984 and the disclosure requirements under the Fourth and Fifth Schedules. Compliance with IASs shall be mandatory in so far as such standards are not inconsistent with local regulations or standards, directives or pronouncements issued by ICAP.
The terms financial statements covers balance sheets, income statements or profit and loss accounts, cash flow statements or statements of fund flows, notes and other statement and explanatory material which are identified as being part of the financial statements. Financial Statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report.
The users of financial statements are:
¨ Investors
¨ Employees
¨ Lenders
¨ Suppliers and other trade creditors
¨ Customers
¨ Government and their agencies
¨ PublicCont’d P/G 3
(-3-)
TR-6 - FIXED ASSETS INVENTORY AND RECORDS
ISSUE
Section 230 of the Companies Ordinance, 1984 requires every company to keep proper books of accounts with respect to a number of items which includes all assets of the company. Fixed assets comprise a significant portion of a company's assets. Except for the companies engaged in production, processing, manufacturing or mining activities to which section 230(1) (2) applies and which under separate costing rules are required to maintain separate fixed assets records, no guidance is available for other companies.
RECOMMENDATION
Adequate itemized records of fixed assets should be maintained which at minimum must indicate following particulars:
a) Description of each item.
b) Cost of the item.
c) The date of its acquisition.
d) Classification of the item.
e) The location and / or custodian of the item.
f) The rate of depreciation.
g) Accumulated depreciation.
h) Depreciation charge for the period.
i) The department / cost centre / product to which the depreciation in charged.
j) Date of revaluation (if any).
k) Revalued amount (if any) of the items.
l) Depreciation on revalued amount.
m) Accumulated depreciation on the revalued amount.
Moreover, physical verification of fixed assets should be carried out on a cyclical basis according to a formal plan once in five years. The physical inventory should be reconciled with the fixed assets records and adjusted accordingly.
Cont’d P/G 4
(-4-)
TR-8 - CLARIFICATION REGARDING BASIS OF CALCULATION OF WORKERS PROFITS PARTICIPATION FUND (WPPF)
ISSUE
Whether WPPF is to be calculated after or before charging it against the profits of the year ?For illustration purpose an example is given here under:
a) Profit of the CompanyWPPF @ 5% of Rs. 250,000
Rs. 250,000Rs. 12,500
b) Profit of the CompanyWPPF @ 5/105
Rs. 250,000Rs. 11,905
RECOMMENDATION
Contribution to WPPF is to be made on the basis of provision contained in clause (b) of sub-section (1) of section 3 of Companies Profits (Workers' Participation) Act, 1968. This provides that the amount should be 5% of its profits as per audited accounts. If there are no profits, no contribution is payable. Hence, this is in the nature of an appropriation of profits.
Accordingly, method indicated in example (a) is correct and should be followed.
TR-10 – DEFERRED TAXATION
ISSUE
Whether or not any credit on account of depreciation charged in accounts on revised value of revalued assets should be given for computing provision of deferred taxation?
RECOMMENDATION
a) An enterprise which carries out a revaluation of its fixed assets in excess of cost is not required or permitted to setup corresponding deferred taxation account unless it is probable that potential tax liability will crystallise. Such a probability can be foreseen only when the enterprise decides to sell the assets and not before.
Cont’d P/G 5
(-5-)
b) When the potential tax liability is foreseen deferred tax on such sale could be appropriated from surplus on revaluation.
c) No credit could be taken against the current tax charge from deferred tax account by way of a claw back because provision for deferred tax for potential tax liability is intended to meet such liability in case of sale only.
TR-11 - DEPRECIATION ON IDLE FIXED ASSETS
ISSUE
a) Whether depreciation should be charged on fixed assets which are idle?
RECOMMENDATION
Fixed assets in a business include assets in use and held with reasonable expectation of these being used. Depreciation should, therefore, normally be charged on all fixed assets. Temporarily idle, reserve or stand-by assets should also continue to be depreciated.
If the assets are persistently idle, there is a need to review the remaining useful lives of such assets in accordance with IAS 16 Property Plant and Equipment. IAS 16 provides that the useful lives of major depreciable assets or classes of depreciable assets should be reviewed periodically and depreciation rates adjusted for the current and future periods if expectations are significantly different from the previous estimates.
ISSUE
b) Whether on assets used by a company in business or operation of seasonal nature, depreciation be charged commensurate with the extent of their use in a season?
RECOMMENDATION
With regard to assets used in the operation of seasonal nature, the rates of depreciation determined initially, impliedly take into account, the useful lives based on such seasonal operation. The rate and consequently the amount of annual depreciation so determined should thus not be adjusted further to commensurate with the length of seasonal operation in an accounting period.
Cont’d P/G 6
(-6-)
TR-12 - DEBT EXTINGUISHMENT
ISSUE
This technical release explains circumstances for an extinguishment of debt, and the reporting of gains and losses on extinguishment.
WHEN A DEBT IS CONSIDERED TO BE EXTINGUISHED
A debtor shall consider debt to be extinguished for financial reporting purpose in the following circumstances:
a) The debtor pays the creditor and is relieved of all its obligations with respect to the debt.
b) The debtor is legally released from being the primary obligor under the debt either judicially or by the creditor and that the debtor will not be required to make future payments with respect to the debt under any guarantees.
ACCOUNTING TREATMENT
Gains and losses from extinguishment of debt should be included in the determination of net income and, if material, classified as an extraordinary or unusual item. This shall apply whether an extinguishment is early or at scheduled maturity date or late.
Gains or losses from extinguishment of debt, if material, should be described sufficiently to enable users of financial statements to evaluate their significance. Accordingly, a description of the extinguishment transaction, including the sources of any funds used to extinguish debt, if it is practicable to identify the sources, shall be disclosed in a single note to the financial statements or adequately cross-referenced if in more than one note.
Cont’d P/G 7
(-7-)
TR-14 - ACCOUNTING FOR REVALUATION OF FIXED ASSETS
ISSUE
The International Accounting Standard 16, Property, Plant and Equipment (PPE) under the benchmark and allowed alternative treatments has given option to either carry an item of PPE at its cost less any accumulated depreciation or at revalued amount.
There is a conflict between IAS 16 and Companies Ordinance, 1984 regarding the treatment of recognizing increase in carrying amount of assets. The Companies Ordinance, 1984 in sub-section (2) of section 235 requires that except and to the extent actually realized on disposal of the assets which are revalued, the surplus on revaluation of fixed assets shall not be applied to set off or reduce any deficit or loss whether past, current or future, or in any manner applies, adjusted or treated so as to add to the income, profit or surplus of the company, or utilized directly or indirectly by way of dividend or bonus. IAS – 16 in paragraph 37 however provides when an assets carrying amount is increased as a result of a revaluation the increase should be credited directly to equity under the heading of Revaluation Surplus. However a revaluation increase should be recognized as income to the extent that it reverses a revaluation decrease of the same asset previously recognized as an expense.
IAS – 16 in paragraph 33 provides two ways for adjusting accumulated depreciation at the date of revaluation, either to (a) restate proportionately with the change in the gross carrying amount of the assets of the revaluation equals its re-valued amount or (b) eleminate against the gross carrying amount of the assets and the net amount restated to the re-valued amount of the asset.
RECOMMENDATION
To recognize increase in assets’ carrying amount, the requirement of Companies Ordinance, 1984 should be followed.
It is recommended that when an item of PPE is re-valued, any accumulated depreciation at the date of revaluation should be credited to the asset amount.
In the first instance, generally the profits are appropriated and transferred to reserve for issue of bonus share. The reserve is then utilized for issue of capital on completion of necessary formalities.
Cont’d P/G 8
(-8-)
TR-15 - ACCOUNTING TREATMENT - BONUS SHARES
WHAT ARE BONUS SHARES?
Bonus shares are the shares issued by a company from distributable reserves to its ordinary shareholders, without consideration, by way of either capitalization of its profits or utilization of share premium account.
Issue of bonus shares is prompted mainly by desire to give the recipient shareholders some separate evidence of part of their respective interests in undistributed profits without distribution of cash which the board of directors deem necessary to retain in the business.
ISSUE
How the issue of bonus shares should be accounted for by the Issuer and the Recipient.
RECOMMENDATION
Issuer:A bonus issue does not give rise to any change in either the Company's assets or its respective shareholder’s proportionate interest therein. The Company issuing bonus shares shall account for such shares by transferring from Reserves to Issued Share Capital an amount equal to the par value of additional shares issued.
In the first instance, generally the profits are appropriated and transferred to Reserve for issue of Bonus share. The Reserve is then utilized for issue of capital on completion of necessary formalities.
Recipient:Capitalization of accumulated profits by the issue of fully paid bonus shares by a company does not infact change the net worth of that company and by the same token does not add anything to the assets or income of the recipient shareholder. The correct treatment of bonus shares, therefore, in the hands of the recipient would be merely to add to the number of shares it owns without giving any monetary effect in the accounts either in terms of cost or value thereof as no accretion in fact is taking place in the hands of the recipient.
TR-19 - ACCOUNTING TREATMENT - EXCISE DUTY
ISSUE
Some of the industries follow the practice of charging excise duty to profit and loss account treating the duty as period cost while a majority of companies recognize such duty as element of manufacturing cost and allocate a portion of such costs to inventory valuation:
Cont’d P/G 9
(-9-)
RECOMMENDATION
Paragraph 7 of IAS-2 'Inventories states:" The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition".
Paragraph 8 of above IAS describes cost of purchase as:" The costs of purchase of inventories comprise the purchase price, import duties and other duties (other than those subsequently recoverable by the enterprise from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
Excise duty is generally levied at rate fixed per unit, a percentage of value, or on capacity basis. Irrespective of the basis of computation or time at which the duty is collected, such duty is in the nature of a tax on production and manufacture of excisable goods.
EXCISE DUTY ON PURCHASE:
Excise duty should be reported as an element of cost of sales or a part of the related expenditure, as appropriate.
EXCISE DUTY ON PRODUCTION CAPACITY OR AS A FIXED AMOUNT:
The amount of excise duty levied on the basis of production capacity or as a fixed amount should be recognized as an element of cost of sales for the period to which such levy relates to, thus treating it as a period cost.
TR-20 - ACCOUNTING FOR EXPENDITURE DURING CONSTRUCTION PERIODISSUE
How to treat expenditure incurred during construction period up to the date of commencement of commercial production, if an enterprise is devoting substantially all of its efforts in establishing a new project.
RECOMMENDATION¨ Formation expenses such as preliminary expenses shall be written off during a
period not exceeding five years commencing from the financial year in which the costs are incurred as provided in paragraph 5(c) of Part II of the Fourth Schedule to the Companies Ordinance, 1984.
Cont’d P/G 10
(-10-)
¨ Direct project costs such as, invoice costs, import duties etc. should be capitalized.
¨ Indirect costs such as general and administrative expenses, depreciation etc, which are not attributable to a specific asset, shall be allocated to buildings and plant and machinery in proportion to their respective costs.
¨ Borrowing costs such as financial charges shall be dealt with in accordance with IAS 23 and provisions of the Companies Ordinance, 1984.
¨ Any revenues including profit on trial run earned during construction period shall be set off against expenditure incurred during construction period.
TR-21 - DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION
ISSUE
How to treat expenditure incurred during construction period up to the date of commencement of commercial production, if an enterprise is devoting substantially all of its efforts in establishing a new project.
RECOMMENDATION
Date of commencement of commercial production is the date when the plant is ready for the production of intended products in commercially feasible quantities. The cut off date so established is without regard when the plant actually commences commercial production. Where the construction of an asset is completed in parts and each part is capable of being used while construction continues on the other parts, capitalization of costs for each part should cease as it is completed.
TR-22 - BOOK VALUE PER SHARE
ISSUE
Different practices and polices are being used for computing book value (break-up value) of shares. For instance, in some cases all the assets including intangibles, defered costs and fictitious assets are included in considering the book value without regard to their recoverability. In some other cases, intangibles are excluded from the shareholders equity. Practices also vary regarding adjustment of contingent and other losses.
RECOMMENDATION
Book value per share in the equity capital of the company is the amount each share is worth on the basis of carrying value per balance sheet, prepared in accordance with a framework of recognized accounting standards.Book value per share is computed by dividing shareholders equity with the number of shares issued. Shareholders equity includes:
Cont’d P/G 11
(-11-)
¨ Paid-up capital
¨ Revenue reserves and retained earning, (less accumulated losses, if any) after deducting contingent losses in accordance with IAS 37. "Provisions, Contingent Liabilities and Contingent Assets”.
¨ Capital reserves
TR-24 - ACCOUNTING TREATMENT - EXCHANGE RISK FEE
ISSUE
Whether the exchange risk fee paid on foreign currency loans acquired for capital requirements be capitalized after commencement of commercial production or not.
RECOMMENDATION
Exchange risk fee is incurred in order to eliminate, or reduce substantially, the risk of loss from changes in exchanges rates. This involves use of forward exchange contract to establish the amount required at settlement date of transaction.
IAS 23', Borrowing Costs', provides that borrowing costs include exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest costs. The exchange risk fee is therefore in the nature of borrowing costs and its accounting treatment should be in accordance with IAS 23. 'Borrowing Costs', Accordingly, exchange risk fee incurred by an entity after commencement of commercial production should be recognized as an expense and not be capitalized.
TR-25 – PRUDENTIAL REGULATIONS FOR BANKS
It deals with full scope audit, acceptance of assignment and applicability of TR to prudential regulations for Non Banking Financial Institutions (NBFIS).
TR-27 – IAS – 12, ACCOUNTING FOR TAXES ON INCOME
It deals with applicability of section 80C, 80CC and 80D of the Income Tax Oridinance, 1979 (now, Income Tax Ordinance, 2001), accounting for tax losses.
Cont’d P/G 12
(-12-)
TR-28 - ACCOUNTING FOR GOLDEN HANDSHAKE
To restructure the organization, a number of banks, financial institutions and public and private sector corporations and companies are offering golden handshake to their employees. Large amounts are involved in the golden handshake incentives. A question has arisen whether the entire amount of golden handshake be accounted for as a period cost or be treated as a deferred cost.
The matter has been examined by council of the institute and it has been decided to issue following guidance in this respect:
a) In case the organization is being closed down, all such expenses will have to be treated as period cost.
b) In case the purpose of golden handshake is downsizing / rightsizing, the management of the organization concerned may treat such expenses as period cost or deferred cost in the manner provided below.
c) In case such expenses are treated as period cost then those should be shown separately as a line item in the profit and loss account with appropriate disclosure in the notes to the accounts.
d) Such expenses may be treated as deferred cost only when it is probable that future economic benefits associated with the scheme will flow to the enterprise and:-
I. those benefits can be quantified as far as possible;II. the period in which those benefits will flow can also be determined
reasonably, and III. the Golden Handshake scheme showing the above elements has been
approved by the board of directors.
e) These deferred expenses should be amortized over the period the benefits are expected to accrue restricted to a maximum period of five years including, the year in which these are incurred and complete disclosure about such treatment should be made in the notes to the financial statements, until such time the deferred cost is fully amortized.
f) Subject to the limit of 5 year amortization as stated in the preceeding paragraph, the carrying amount of deferred cost should be reviewed at every balance sheet date and approved by the board of directors in order to assess whether the future economic benefits as envisaged in the original scheme, approved by the board of directors, are still available to the enterprise. When a decline has occurred, the carrying amount should be reduced to the recoverable amount, which should be amortised over the balance period. Hence, the amount of reduction should be recognized as an expense immediately.