Accounting for sign-on bonus paid to customers

In service industry, it is common for your audit client to give out sign-on bonus to particular customer to entice the customer to stay with the audit client for a certain period. Sign-on bonus could be upfront payment or payments could be straggerred throught the contractual period.

How should the sign-on bonus be accounted.

We are of the view that the sign-on bonus should be capitalised in full and amortized over the contractual peiod.

For instance, Audit Client A may pay offer customer XY for security guard services a sign-on bonus of US$2million for customer XY to stay with the Audit Client A for a period of 3 years. During this period, customer XY is not allowed to engage other security guad services provider. We are of the opinion that the US$2million should be capitalised and amortized over a period of 3 years.

This is to match the expenses and economic benefit over the contractual period.

Please let me know if you have different views on this :)

Myauditor - myauditing@gmail.com

Data Analytics - impact to financial audit

Recently, data analytics is a very common topic. We were looking at Deloitte website and it appears to us that data analytics provide an insightful analysis of the business which assist the auditor (or even management) to look at the business from a different ankle and assist to identify potential weakness within the business (including: weakness in business process).

We are lucky enough to work on a number of data analytics project. How we felt? It is not easy to apply data analytics to all the audit client, as your audit client's IT system or data may not capture the information we need or the client's IT system might not be commonly use and may not allow us to conduct further analysis.

Having said that, data analytic is useful if the data is available. For instance, it may share with you a list of transactions with unusual preparer ID (e.g. CEO post entries into revenue account) - this may assist the auditor or audit commitee to identify red flags.

Data analytic is portraited as the future of audit tool and we believe that greater emphasis would be placed on data analytic going forward. It is time for auditor to educate the audit client to capture more information / data into the system for more in-depth analysis.

Please feel free to contact us if you need assistance on data analytics.

Payroll Audit: Over/ underpayment to staffs

In payroll audit - auditor need to be cautious and maintain high level of professional skepticism - as payroll is a sensitive area. Payroll has implication on the Company's cost, as well as individual's payment. In certain circumstances, employee union or industry union is also stakeholder.

There could be instances where by there would be over payment or under payment to employee - and this may not be identified by the reviewer of the monthly payroll costs nor the employee. Hence, it is important not only ensure that the payroll costs stated in the payroll summary is correct. Auditor should also test the details within the payroll summary. This is especially true for individual not withdrawing full monthy salary for various reasons, for instance:

- new joiner who joins during the month;
- resignee who leave during the month;
- employee took unpaid leave during the month
- part time employee who were paid based on the number of days work

The computation of the payroll costs for different scenario should be cross-checked against the employment contract to test that correct details have been captured. There could be huge consequences for over payment and/or under payment for payroll costs.

Accounting for derivatives - things to take note

Derivatives are financial instruments recognised as fair value through profit or loss. The contractual term for some derivatives is more than one year.

For instance, interest rate swaps for a non-current loan is typically more than one year - hence, the fair value includes current and non-current portion. Management should assess and determine the current and non-current portion of these derivatives on balance sheet appropriately. This is one of the items to take note.

Also, we also have to disclose the notional amount of the derivative contracts in the financial statement. For instance, the interest rate swap is entered into to hedge a loan amonut of S$10million. This would be the notional amount to be disclosed. This would assist the financial statement user to understand how many % of the loan has been hedged with the derivatives

Besides the points above, the fair value of the derivatives should not be offset against each other. For instance, one derivative contract is in asset position, while the other derivative contract is in liability position as at year-end. These contracts should not be offset against each other on the balance sheet.

Please feel free to contact us if you need clarification on the accounting for derivatives at myauditing@gmail.com