ATC f8 materials FF8 AA (int)session22 j08

SESSION 22 – NON-CURRENT ASSETS

OVERVIEW
Objective
To determine areas of risk in intangible and tangible assets and investments.
To obtain appropriate audit evidence.

TANGIBLE FIXED
ASSETS

Sources
Fixed asset register
Risks
Procedures
IAS 16

Sources of
evidence

INTANGIBLE
ASSTETS

INVESTMENTS

Examples
Risks
Procedures
Evidence
IAS 38

Sources

Risks
Procedures

Risks

C

A

P

IAS 16 & 38

E

R

Accounting treatments
Disclosures

A comprehensive audit program for non-current assets is set out in Appendix 3 and must be
studied.

2201


SESSION 22 – NON-CURRENT ASSETS

1

INTANGIBLE ASSETS

1.1

Examples
Goodwill
Development costs
Patents and trademarks
Brands
Copyrights
Know-how

1.2

Risks
Completeness (e.g. of capitalised development expenses)
Reasonableness of useful economic life (UEL)
Overvaluation (i.e. in excess of expected discounted future benefits).

1.3

Procedures

1.3.1

Analytical

Compare valuation with prior year.
Review related income (e.g. for patents).

1.3.2

Other

Examine documents (e.g. certificate of registration of patent/trademark).
Check calculation of amortisation (in accordance with stated accounting policy).
Discuss with management (e.g. UEL).
Check calculations (i.e. reperform).
Vouch allocation of costs for internally-generated assets (e.g. overheads to
developments).
Assess reasonableness of discounted future cash flows in management’s calculation of
value in use (i.e. impairment test).
Obtain management representation (eg on expected useful life, cash flow assumptions).

1.4

Evidence

Example 1
State the criteria which must be demonstrated for expenditure on development
(say in respect of a new product) to be recognised as an intangible asset (i.e.
“capitalised”). Suggest how would you verify them.

2202


SESSION 22 – NON-CURRENT ASSETS

Solution
1.4.1 Criteria

1.4.2 Evidence sought

1.5

Research and development costs [IAS 38 “Intangible Assets”]

1.5.1

Accounting treatment

Research expenditure – recognise as an expense in the period in which incurred (not as
an asset in a subsequent period).
Development expenditure – recognise as an intangible asset if, and only if, the above
criteria are met.
Amount recognised as an asset should not exceed the amount that is probable of being
recovered from related future economic benefits, after deducting further costs.
Carry intangible asset at cost less accumulated amortisation (unless revalued).
Amortise on a systematic basis over the best estimate of useful life (to reflect the pattern
of consumption of future economic benefits).

2203


SESSION 22 – NON-CURRENT ASSETS

1.5.2

Key disclosures

Useful lives or amortisation rates used.
Amortisation methods used.
Gross carrying amount and accumulated amortisation at the beginning and end of the
period.
Line item(s) of the statement of comprehensive income in which amortisation is
included.
Aggregate amount of research and development recognised as an expense.
A reconciliation of the balance of unamortised development costs at the beginning and
end of the period.

2

TANGIBLE NON-CURRENT ASSETS (ALSO CALLED
FIXED ASSETS)

2.1

Sources of evidence
See Session 15 Example 1

2.2

Fixed asset register

Example 2
List the information you would expect to find in a tangible fixed asset register.

Solution

Client should reconcile (at least annually) to cost, depreciation and accumulated depreciation

figures in nominal (general) ledger or financial statements.
Assets should be checked:
register → physical and vice versa
physical → register
2204


SESSION 22 – NON-CURRENT ASSETS

2.3

Risks
Recorded fixed assets may not represent capital expenditure.
Non-current assets (e.g. property, plant and equipment) will be overstated if they do not
exist (e.g. have been sold) or are not in good condition.
Fixed assets may be misappropriated, sold or scrapped without authorisation.
Possession does not necessarily indicate ownership (e.g. rented assets).
Obsolete and idle assets may not be written down to a realistic valuation.
Assets may not be depreciated or depreciated over unrealistic lives.
Encumbered assets (i.e. charged as security for bank loans) require disclosure.

2.4

Audit procedures

An audit program is set out in Appendix 3 and must be studied .

2.5

IAS 16 “Property, plant and equipment”

2.5.1

Accounting treatment

Initial measurement at cost – includes purchase price, import duties etc and directly
attributable costs of bringing the asset to working condition.
Subsequent expenditure – add to carrying amount when it is probable that future
economic benefits will exceed those originally assessed. Otherwise expense in period
incurred.
Measurement subsequent to initial recognition:
Cost method – carry at cost less any accumulated depreciation and impairment
losses;
Revalued method – carry at a revalued amount (i.e. fair value less subsequent
accumulated depreciation and impairment losses).
Revaluations:
Land and buildings – fair value is usually market value (normally appraised by
professionally qualified valuers).
Plant and equipment – if no evidence of market value (e.g. because of specialised
nature) value at depreciated replacement cost.
Frequency – depends on movements in fair values.
Entire class to which an asset belongs should be revalued.

2205


SESSION 22 – NON-CURRENT ASSETS
Accumulated depreciation – at the date of the revaluation is either

−

−

restated proportionately
eliminated.

Increase should be credited directly to equity under heading “revaluation surplus” –
may be transferred directly to retained earnings when realised.
Decrease should be recognised as an expense.
Depreciation
Allocated on a systematic basis over useful life.
Method should reflect consumption of economic benefits.
Charge for each period should be expensed.
Retirements and disposals
Statement of financial position – Eliminate on disposal or when permanently
withdrawn from use and no future economic benefits are expected.
Statement of comprehensive income – Recognise gain or loss (difference between
estimated net disposal proceeds and carrying amount).

3

INVESTMENTS

Investments may be separately classified as a non-current asset or available (held) for sale
(eg under IFRS 5). Carrying value may be at cost (subject to impairment) or fair value (with
changes through profit or loss) depending on how classified under IAS 39.

3.1

Sources of evidence
Share certificate (= document of title) shows registered holder and denomination of

shares. May be held by bank or solicitor.
Purchase contract notes and paid cheques, supported by authority for purchase.
Sold contract notes (to provide evidence of disposals).
Income received (verified by reference to published reference guides).
Published reference guide to verify that all bonus issues (also called “scrip” issues) have
been accounted for and all rights issues have been taken up.
Latest available financial statements.
Management representation.

2206


SESSION 22 – NON-CURRENT ASSETS

3.2

Risks
Non-current asset investments may be overstated if not written down for impairment.
Asset investments may not be stated at cost/fair value (as appropriate).
Investments sold may not be removed from accounting records.
Investment income due may not be received/recorded.
Investments may be misappropriated/sold without authority.

3.3

Audit procedures

3.3.1

Listed investments

Compare historic cost with market value to establish validity of depreciation write
off/write back.
Agree market value (e.g. with Stock Exchange Official List).
Where there is a disclosure requirement, confirm analysis of total statement of financial
position value between investments listed on “recognised” and “unrecognised” stock
exchanges.

3.3.2

Unlisted

Confirm management’s valuation of unlisted investments (e.g. to latest available
financial statements).

3.3.3

All

For investments classified as current, examine cash book receipt (if any) after the end of
the reporting period.
Analytically review investment income with prior years’ income and expected yields.

FOCUS
You should now be able to:
establish critical aspects of the audit of non-current assets and investments;
identify sources of evidence for intangible assets (including development costs), noncurrent assets and investments;
select appropriate audit procedures for inclusion in a work program (see also Appendix
3) relating to financial statement assertions concerning tangible non-current assets.

2207


SESSION 22 – NON-CURRENT ASSETS

EXAMPLE SOLUTION
Solution 1 — Development expenditure
Criteria to be demonstrated

Evidence sought

Technical feasibility (of
completion)

“Blueprint”
Discussion with client’s technicians (e.g. engineer)
Working prototype
Beta test feedback from users and action taken

Intention to complete and
use (e.g. in manufacture of
new products or process) or
sell the intangible asset

Planning permission sought for new/expanding
factory
Authorisation of necessary capital expenditure
Action taken on testing feedback
Advertisements (e.g. to recruit staff, promote
product)

Ability to use or sell the
intangible asset

Applications made for copyright, trademarks,
licenses etc
Dedicated sales manager, establishing of sales
network
Advanced orders
Auditor tests/uses item

How probable future
economic benefits are to be
generated (including
existence of a market or
internal use)

Results of market research (by client or consultant)
Expected selling price per market research
Selling prices of comparable products (if any)
Client’s profit forecasts
Analysis of potential competitor products

Adequate technical, financial
and other resources exist/are
available to complete project
and use or sell the intangible
asset

Business plan

Attributable expenditure can
be measured reliably

Clearly defined product/process evidenced by
documented project specification

Cash flow forecasts
Negotiations with bank for new/increased
loan/overdraft facilities

Separate ledger a/cs e.g. for materials, wages and
salaries, depreciation, allocated overheads
Costs traced to/from materials requirements,
purchase invoices, time sheets, etc.

2208


SESSION 22 – NON-CURRENT ASSETS

Solution 2 — Fixed asset register
Identification number (e.g. registration/serial number)
Description and manufacturer’s name
Gross cost or valuation
Estimated useful life
Depreciation method/annual charge
Depreciation provision
Net book value
Location of asset

2209


SESSION 22 – NON-CURRENT ASSETS

2210