P7- ADVANCED AUDIT AND

ASSURANCE
IAS 2: inventories
IAS 16: Property, plant & equipment
IFRS 3: Business Combinations
IFRS 5: non-current assets held for sale
and discontinued operations

Prepared by:

Andreas
Papaconstantino
u
Giorgos Savva

IAS 16Property, Plant and

Equipment

IAS 16Property, Plant and

Equipment
Overview
IAS 16Property, Plant and Equipmentoutlines
the accounting treatment for most types of
property, plant and equipment. Property,
plant and equipment is initially measured at
its cost, subsequently measured either using
a cost or revaluation model, and depreciated
so that its depreciable amount is allocated on
a systematic basis over its useful life.

IAS 16Property, Plant and

Equipment
Objective of IAS 16
The objective of IAS 16 is to
prescribe the accounting treatment
for property, plant, and equipment.
The principal issues are the
recognition of assets, the
determination of their carrying
amounts, and the depreciation
charges and impairment losses to be
recognised in relation to them.

IAS 16Property, Plant and

Equipment
Recognition
Items of property, plant, and equipment should be
recognised as assets when it is probable that:
it is probable that the future economic benefits
associated with the asset will flow to the entity, and
the cost of the asset can be measured reliably.
This recognition principle is applied to all property,
plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to
acquire or construct an item of property, plant and
equipment and costs incurred subsequently to add to,
replace part of, or service it.

IAS 16Property, Plant and

Equipment
Measurement subsequent to initial
recognition
IAS 16 permits two accounting models:
Cost model.The asset is carried at cost less
accumulated depreciation and impairment.
Revaluation model.The asset is carried at a
revalued amount, being its fair value at the
date of revaluation less subsequent
depreciation and impairment, provided that
fair value can be measured reliably.

IAS 16Property, Plant and

Equipment
Example of non compliance
No charge of depreciation at year
end.
Some PPE carried at cost and some
others on revaluation value.

IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations
Overview
IFRS 5Non-current Assets Held for Sale and
Discontinued Operationsoutlines how to
account for non-current assets held for sale (or for
distribution to owners). In general terms, assets (or
disposal groups) held for sale are not depreciated,
are measured at the lower of carrying amount and
fair value less costs to sell, and are presented
separately in the statement of financial position.
Specific disclosures are also required for
discontinued operations and disposals of noncurrent assets

IFRS 5 Non-current Assets Held for

Sale and Discontinued Operations
Held-for-sale classification
In general, the following conditions must be met for an asset
(or 'disposal group') to be classified as held for sale:
I. management is committed to a plan to sell
II. the asset is available for immediate sale
III. an active programme to locate a buyer is initiated
IV. the sale is highly probable, within 12 months of
classification as held for sale (subject to limited exceptions)
V. the asset is being actively marketed for sale at a sales price
reasonable in relation to its fair value
VI. actions required to complete the plan indicate that it is
unlikely that plan will be significantly changed or withdrawn

IFRS 5 Non-current Assets Held for

Sale and Discontinued Operation
Classification as discontinuing
A discontinued operation is a component of an entity that
either has been disposed of or is classified as held for sale,
and: [IFRS5.32]
represents either a separate major line of business or a
geographical area of operations
is part of a single co-ordinated plan to dispose of a separate
major line of business or geographical area of operations, or
is a subsidiary acquired exclusively with a view to resale
and the disposal involves loss of control.
IFRS5 prohibits the retroactive classification as a
discontinued operation, when the discontinued criteria are
met after the end of the reporting period.

IFRS 5 Non-current Assets Held for

Sale and Discontinued Operation

Non compliance
No active market
Value above the fair value
Classified as NCA held for sale and
the entity used the asset to perform
its activities

IFRS 3: Business
Combinations

Introduction
A business combination is a transaction or other
event in which a reporting entity (the acquirer)
obtains control of one or more businesses (the
acquiree).
IFRS 3 does not apply to the following:
- the formation of a joint venture
- the acquisition of an asset or group of assets that is
not a business
- a combination of entities or businesses under
common control

The acquisition method

Business combinations are accounted for using
the acquisition method, i.e.,
- identifying the acquirer
- determining the acquisition date
- recognizing and measuring the identifiable assets
acquired and the liabilities assumed and any noncontrolling interest and
- recognizing and measuring any goodwill or a
bargain purchase

KEY ISSUE
A key concept underlying IFRS 3 is that of
purchase price allocation, where the cost of
an acquired business is analyzed into the
value of all its components:
Tangible net assets, such as property, plant
and equipment
Intangible net assets, such as brands and
customers
Goodwill, being the balance

Control - DEFINITION
Ownership of more than half the voting rights
of another entity
Power over more than half of the voting rights
by agreement with investors
Power to govern the financial and operating
policies of the entity under statute/agreement
Power to remove/appoint majority of directors

Recognition and
measurement
The acquisition date is the date on which the acquirer
obtains control.
Recognition principle:
separate recognition of identifiable assets acquired,
liabilities and contingent liabilities assumed.
Measurement principle:
assets and liabilities that qualify for recognition are
measured at their acquisition-date fair values
measurement at fair value provides relevant information
that is more comparable and understandable.

Goodwill
Goodwill (an asset) is measured initially
indirectly as the difference between the
consideration transferred, excluding transaction
costs in exchange for the acquirees identifiable
assets, liabilities and contingent liabilities.

Goodwill (continued)
If the value of acquired identifiable assets and liabilities
exceeds the consideration transferred, the acquirer
immediately recognizes a gain (bargain purchase).
Goodwill is not amortized, but is subject to an impairment
test.
If less than 100% of the equity interests of another entity is
acquired in a business combination, non-controlling interest is
recognized.
Choice in each business combination to measure noncontrolling interest either at fair value or at the non-controlling
interests proportionate share of the acquirees identifiable net

MAIN ISSUES
The main issues regarding IFRS 3 include:
- the costs associated with acquisition are
included in the consideration transferred
rather than being expensed
- changes in the recognized amount of
contingent consideration affect goodwill
- goodwill is amortized over its estimated
useful.
- non-controlling interest must be measured
using the proportionate share method

EXAMPLE OF NONCOMPLIANCE
A company X acquired another company Z for just over 928
million, allocating 319 million to intangible assets, and 936
million to goodwill. The intangible asset value was allocated to a
black hole' category of other intangibles' without further
explanation. There was no allocation of value to marketing
related intangibles including brands. There is no real justification
for the allocation to goodwill of an amount approximately equal
to the acquisition cost.
The lack of information in this instance is remarkable and
makes it difficult to form any views on the transparency of the
acquisition. Even so the allocation to intangible assets again
looks to be too low and the allocation to goodwill
correspondingly too high.

IAS 2: inventories

The standard
Under the standard, inventories should be stated
at the lower between cost and net realisable
value.
Cost includes: purchase price (net of any trade
discount), conversion cost (i.e. materials, labour,
overheads) and other costs necessary to bring the
inventory to its present location and condition (i.e.
ready to sell)
Cost should not include any foreign exchange differences, no
matter how big they are.

Net realisable Value is the higher between:

value in use and
selling price less cost to sell

The standard (cont.)

When inventories are sold, the
carrying amount is recognised as an
expense in the period in which the
related revenue is recognised.
Any write-downs to NRV are
recognised as an expense in the
period of the write-down.
Reversals from an increase in NRV
are recognised in the period in which
they occur.

Inventory in the Financial

statements
The auditor should as part of they audit
perform stock-count, or have a substantial
presence during the stock down (should the
company has effective internal audit
department to which the auditor can rely).
Possible irregularities would be:
Stock-count to be overstated
Obsolete stock not adjusted for
Inventory value not stated as per the standard

Non compliance (example)

Company A has stated all inventory (total
of 8 types of inventory) at cost.
During the audit, auditors have obtained
evidence (from the selling invoices of the
period following the audited period) that
the NRV of 3 types of inventory items is
lower and in further enquiries has also
found that approximately 4% of inventory
relates to sales returns with complain from
the clients for malfunctions.