Question

For each of the following Key audit matters-

1) Impairment assessment for goodwill and other intangible assets

2) Accounting for rebates

3) Adoption of australian accounting standard AASB 16 - Leases

Explain how each one is important and its impact if it is not corrected.

Answer 1

1. Goodwill and intangible assets: Impairment assessments are expected to be complex and are likely to contain certain judgments and assumptions. Examples are value in use method, preparation of discounted cash flow forecasts, forecast of long-term growth rates and discount rates.

Earlier goodwill was amortized but now Goodwill is to be impaired annually.

As per key audit matter following are the points that auditors need to check in case of impairment of Goodwill and Other Intangible Assets:-

a) Check the method adopted by the entities for reclassification of Goodwill. See whether reclassification is done accordingly.

b) Check list of intangible assets that satisfy the recognition criteria, which includes trade names, customer lists, customer contracts and related customer relationships, non-contractual customer relationships and order and production backlog

c) Identify the reporting entity.

d) Check whether reporting units are component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, for which discrete financial information is available and whose operating results are regularly reviewed by higher level management.

e) Check whether Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination that gave rise to the goodwill, using a reasonable method.

f) Check whether Goodwill is tested for impairment annually

g) Identify the events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

h) Check Annual tests are conducted at the same time every year for each reporting unit.

i) Check Impairment tests conducted between annual tests do not remove the requirement for annual tests. Impairment testing, if required on other assets (including identifiable intangibles), is conducted before testing goodwill for impairment.

j) Check how fair value of each reporting unit is determined. Fair value is basically the market value of the reporting unit, and its determination will generally require some degree of professional judgment.

k) Compare the fair value of the reporting unit against its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is assumed not to be impaired. It is only if the fair value is below the carrying amount that the extent of impairment (if any) is required to be

l) Check the determination of fair value of all assets (excluding goodwill) and liabilities of the reporting unit, including any unrecognised internally generated intangible assets that would be recognised under acquisition accounting if the reporting unit were acquired at the date of the estimation. Determining fair value may present both a costly and complicated implementation issue.

m) Derive the implied fair value of goodwill by subtracting the fair value of assets and liabilities determined under (I) from the fair value of the reporting unit determined under (j). This calculation will include the value of internally generated goodwill, which acts as a "buffer" against any impairment write-down.

n) Compare the carrying value of goodwill against its implied fair value. An impairment loss is recognised as an operating expense to the extent that the carrying amount of goodwill exceeds its implied fair value (except on initial adoption where any transitional write-down is recorded below the line as a change in accounting policy). The carrying value of goodwill is not permitted to be increased, nor can write-downs from previous periods be reversed.

2. Accounting of Rebate

The key to getting your rebate accounting right is to ensure you understand both the contractual form and commercial substance of your rebates and the appropriate accounting treatment. This will put you in the best position to respond to questions from your board, audit committee or other stakeholders about your rebate accounting. The following five steps may assist you in developing a good picture of your rebate profile and a well thought out response to any questioning:

1. Prepare an executive summary of rebates by value and type.

2. Compare rebate values and types to prior periods and expectations to enable an assessment of trends and unusual movements.

3. Summarise the accounting treatment for each rebate type and assess if it genuinely reflects the substance of the arrangement.

4. Compare the proportion of systemised rebate processing (generally lower risk) with manual paper-based processing (generally higher risk).

5. Consider obtaining third party assurance over the data that you’ve relied on in making the above assessments.

Ultimately, getting rebate accounting correct relies on a culture and leadership that encourages accounting for the commercial substance of rebate arrangements and discourages short-term profit maximization.

3.

AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments.

This Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.

The points that auditors need to see are as follows:-

a) Check whether at the commencement date, a lessee shall measure the right-of-use asset at cost( Check the PV factors used to determine the cost).

b) Check the determination of cost after the commencement date, a lessee shall measure the lease liability by:

(a) Increasing the carrying amount to reflect interest on the lease liability;

(b) Reducing the carrying amount to reflect the lease payments made; and

(c) Remeasuring the carrying amount to reflect any reassessment or lease modifications

c) Reassessment of the lease liability(A lessee shall remeasures the lease liability by discounting the revised lease payments,)

d) Check the determination of lease Finance lease or Operation lease.

Deviation from any of the above policy will require auditor to report the same in his audit and make the proper disclosures. The impact of wrong accounting policy will not allow the stakeholders of company to take correct decisions as the Financials will not give the true and fair view.