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?

Wednesday, July 23, 2014

Presentation of dividend income and dividend payment in cash flow statement

We receive a question from our reader to ask us on how to present dividend income in cash flow statement. We would like to do a re-cap before we answer the questions.

In an indirect cash flow statement, there are 3 types of activities presented on the face of cash flow statement,

-          Operating activities

-          Investing activities

-          Financing activities

The titles of these activities explain how the cash flow statement should be presented.

Dividend income relates to income earned from the Company’s investment in subsidiary or other investment (e.g. investment in associate or investment in available-for-sale investment). As a result, dividend income should be deemed as investing activities.

What about dividend paid by the Company to the shareholders? It should be presented as financing activities. Why? Divided payment relates to the return generated by shareholders from the financing provided by the shareholders (i.e. equity – share capital). As a result, dividend payment should be presented as part of financing activities.

Please free to contact us at if you need any clarification.

Wednesday, July 16, 2014

Reasonableness test of licence fee

You audit client may be in regulated industries or providing services that are tightly regulated. In this intance, there are chances whereby the audit client is required to pay certain licence fee for the right to operate within that industry or the right to provide such service.

It is important for the auditor to review the agreement to review that allowable services to be provided by your audit client and whether if the licence has expired. This is to help to identify any non-compliance with the rules.

More often than not, your audit client is required to pay certain license fee - which could be based on certain % of revenue , specific rates for certain volume, etc.

Audit client must maintain a process to track the recording of these activities to ensure that the transactions recorded are complete. We, as auditor, also need to review the process in place to check that there is a robust process to ensure the completeness of these transactions. We also need to review the reasonableness of the license fee payable computed to test that the amount is not materially different for audit purpose.

A comparison of current year licence fee payable and prior year licence fee payable could help to identify fluctuation or absence of fluctuation that are expected.