Friday, January 23, 2015

Audit- offsetting receivale and payable balance

In some situation, your audit client may have receivable balance and payable balance with a same party, either external or internal party. For instance, your audit client may purchase raw materials part from Company A. Upon completion of manufacturing the goods, audit client sold certain finished goods to Company A. Consequent to these transactions, audit client has a receivale from Company A and a payable to Company A.

How should this amount been presented on the financial statement?

According to IFRS, the amount should be offset each other (i.e. presented as net) when:
- there is intention to offset (i.e. both parties intend to offset the amount) and settle net balance; and
- it's legally enforcable that the amount can be offset in all circumstances (including: in the event of liquidation/ bankrupt of either party)

To elaborate further, in order to present the amount as net, the law jurisdictions of audit client and Company A, must allow the amount to be offset in all circumstances, even when either party goes bankrupty. Logically, why is that so?

The accounting standard is worded such that- in the event of receivership, the receiver, who acts on behalf of the financial distressed company, would try to recover as much asset as possile, including financial receivable. Final Payment of liabilities usually only represent a fraction of the original amount.

As a result, iy may not be in receiver's best interest to allow offsetting. Accounting standard has considered this and hence emphasized that to present the balance as net when it is legally enforcable for balance to be offset in all situation.

Assessment get more complicated when the contractual parties are located at different countries.

Hence, a careful evaluation is warranted from management.

Wednesday, January 7, 2015

Implementation of Value-Added Tax (i.e. Goods and Service Tax) in Malaysia

Malaysia is going to roll out GST with effect from 1 April 2015 onwards. The entire business scene are likely to be affected directly or indirectly. If the Group company owns any branch or subsidiary in Malaysia, it is important to ensure that the management is already looking at managing this smooth roll out.

Generally, we expect the compliance costs to increase and there could be costs incurred /to be incurred with regard to the roll out of GST.

Based on our understanding, there have been a lot of discussion on the GST - which is not surprised. However, there are also expression of confusion by business in general on certain items - for instance, rental income earned on investment property.

From our point of view, whenever there is a change, the change need to be managed - hence, the company's process in place to manage the change is important - not only on GST but on all other matters as well.

Friday, November 21, 2014

Metal recycling business - valuation of metal scrap

We came accross an instance where we met up with business personnel, who are in metal recycling business. This business collect metal scrap from all other businesses - metal scrap collector collect, segregate and sort the metal scrap into different grade and dislose them to steel mill.

The collector usually has piles of metal scrap in the collection centre. It is almost impossible to weight the piles of metal scrap efficiently.

Based on our research, we understand that there are professional valuers who will measure the weight of the piles of metal scrap scientifically. It is understppd that the professional valuer measure the weight based on the principle of computing a cone- i.e. width x height x density.

We believe that management need to engage professional valuer to estinate the tonnage of the metal scrap. As auditor, we should carry out the work on test of management expert and observe the stock take.

Sunday, November 9, 2014

Revenue recognition - is IAS 18 comprehensive enough for all industries?

As we gained different exposure to different industries - your client portfolio starts to move away from trading / manufacturing into construction, utilities, or other unique industry. The financial reporting standards states the principle. Dealing with more complicated accounting issues, FRS might not have comprehensive guidance in-place to prescribe the accounting treatment.

This is especially so for revenue recognition - IAS 18 - it is almost impossible for this legendary accounting standard to deal with the revenue recognition of almost all industries - corporate world is diversified and the world is changing rapidly - new type of service might be invented by creative entrepreneur - how does accountant account for it and how does auditor audit the accounting treatment proposed by client?

There is an increasing volume from our clientele to call in to seek for auditor's advise on the appropriateness of revenue recognition policy on new revenue stream. Are the accounting standard moves fast enough to cope with the business development or economy development?

Apart from the new business / service developed, certain financial statement users have sought for changes to existing revenue recognition accounting standard -e.g. accounting for bundle contract, which has been in the pipeline for a number of years.

End result - accounting standard getting more and more comprehensive and complicated and prescriptive - are non-accountant financial statement user able to analyze or understand the future financial statement easily ? Fundamental of relevance?