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.

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