technical
post-balance sheet eventsrelevant to Professional Scheme Paper 3.1
Candidates attempting Paper 3.1 should CASE STUDY
following issues arising during the final audit
find Question 3 relatively straightforward, as
By way of a case study, consider Question 3 of
have been noted on a schedule of points for
its style and standard have barely changed
the June 2005 exam. The requirement is ‘to (i)
since the Pilot Paper in 2001. However, to comment on the matters … and (ii) state the
prepare for this question, candidates should audit evidence that you should expect to find,
read the article ‘Technique in auditing
in undertaking your review of audit working
in Urvina from a supermarket to a ‘City
questions’, student accountant, September
Metro’ in response to a significant decline
2001, and any relevant examiner’s feedback, such as that published in student accountant Question 3
shopping in the capital. The store will be
in October 2005. This article provides additional help, and considers post-balance
audit of Volcan, a long-established limited
sheet events.
liability company. Volcan operates a national
supermarket chain of 23 stores, five of which
this store, together with two others, was
are in the capital city, Urvina. All the stores
bought from a national competitor. It is
are managed in the same way with purchases
Volcan’s policy to write off goodwill over
being made through Volcan’s central buying
department and product pricing, marketing,
advertising and human resources policies
‘reward scheme’ for its customers. The
being decided centrally. The draft financial
include the awarding of a ‘store point’
to customers’ loyalty cards for every $1
– $282 million), profit before taxation of $9·5
spent, with extra points being given for the
million (2004 – $7·3 million) and total assets
purchase of each week’s special offers.
of $178 million (2004 – $173 million). The
52 student accountant January 2006 technical
convert their points into cash discounts
many writing, in their answer to (a), ‘It is a
PROVISION FOR SITE RESTORATION
against future purchases on the basis of
post-balance sheet event.’ But what is ‘it’?:
Now read part (c), sketch a timeline – see
Figure 2 on page 55, identify the post-balance
sheet event(s) and which, if any, are adjusting.
the development of a site in a valley of
‘outstanding natural beauty’ on which to
going on, which of the following answer points
build a retail ‘megastore’ and warehouse
Sketching a timeline as part of an answer
the provision for the relocation should not
was received in April 2005, requires that
establish a ‘picture’ of the situation. See
is a non-adjusting post-balance sheet event
three 100-year-old trees within the valley
Figure 1 on page 55.
IAS 37 (FRS 12) prohibits provisions for
relocations after the balance sheet date.
be restored in 2006. Additions to property,
include $4·4 million for the estimated cost
permission did not change the situation that
of site restoration. This estimate includes a
existed at the balance sheet date, namely that
provision of $0·4 million for the relocation
of the 100-year-old trees. In March 2005
These are all post-balance sheet events.
provision for site restoration, etc should be
Next question: are they ‘adjusting’ or
made only if a liability exists at the balance
for a car park. A fine of $20,000 per tree
‘non-adjusting’? Remember, adjusting events
sheet date. This is the main issue – whether a
provide additional evidence of condition(s)
liability (legal or constructive) exists. It is true
existing at the balance sheet date. Adjustments
that IAS 37 (FRS 12) prohibits provisions for
that affect the balance sheet can only be:
staff relocations after the balance sheet date
MATTERS TO CONSIDER
increases in liabilities (eg recognition of a
following a business restructuring, but this is
Most candidates understand that materiality
needs to be assessed, and can, as a result,
decreases in liabilities (eg derecognition
gain up to six marks for dealing with this over
of, or reduction in, a provision previously
$0.4m of the provision was not suitable
the three parts of this question. Note however,
that assessing materiality does not mean
increases in assets (eg reduction in an
(see in Figure 2) and so could not
calculating all the ‘rules of thumb’ benchmarks
(0.5% to 1% revenue, etc) nor does it require
the ‘scattergun approach’ (ie calculating every
number as a % of revenue, total assets and profit, and hoping something is correct). Marks
In this case there can be no provisions,
will be awarded to candidates who interpret
for example, for redundancy payments (or
who linked these points and stated that the
materiality appropriately (ie only in relation to
other costs) arising from the closure. There
overprovision ($0.34m) should be written
is no liability at the balance sheet date and
Now consider Question 3. Don’t calculate
a provision must meet the definition of a
materiality for each of the three matters, but
liability. Only if the announcement had been
CONCLUDING REMARKS
identify which of the measures (ie revenue,
made before the balance sheet date, so that a
Misreading the facts, misunderstanding the
profit before tax and/or total assets) is relevant
‘valid expectation’ had been created in those
situation, and lack of accounting knowledge
and indicate Y (relevant) or N (not relevant)
affected, should provision be made for the
contributed to many incorrect answer points
in Table 1 on page 55. Please note, before
for this particular question. For example:
reviewing the ‘solution’ in Table 2, that this
A credit, therefore, cannot be created as a
‘development of a site’ (as per the
exercise does not seek to assess materiality,
liability. But consider the alternative: creating
question) could not be intangible (as in
only the calculations that are relevant to
a credit that is a reduction in the value of an
asset, ie impairment. The decline in demand
is the condition existing at the balance sheet
was similarly irrelevant (Volcan was not a
POST-BALANCE SHEET EVENTS
date which ‘triggers’ a store impairment review
(including goodwill). The announcement and
there were only three 100-year old trees,
dealing with post-balance sheet event issues,
closure provide evidence of the condition. 53 student accountant January 2006 technical
capitalisation of restoration costs – on
Total assets Profit before tax
the contrary, it requires it where there is
a liability to be recognised under IAS 37 (FRS 12). SOLUTION
See Table 2 below. Notes 1 Historic cost ($5.5m) is no longer relevant.
Carrying value (ie the amount carried in the balance sheet) should most obviously be assessed in relation to total assets. In the case of assets (as here) the carrying value
that might need to be written off to profit or
non-recoverability etc) should also be assessed in relation to profit before tax.
2 Any charge to profit or loss is clearly
relevant to profit before tax. Where the
‘other side of the entry’ is a balance sheet
item (as here) it is also relevant to total assets. Note that this question was written pre-IFRS 3, Business Combinations. Now, the correct accounting treatment for goodwill is to test annually for impairment and not to amortise.
irrelevant to the exercise, but note that it is
possible to put a ‘ceiling’ on the maximum potential discount, at 1% of revenue. The discounts on future purchases by customers constitute a reduction in sales revenue that accrues when the store points are earned,
not when they are redeemed. The reduction
in revenue (or, arguably, increase in cost
of sales) clearly has a consequential effect on profit and the amount of the accrual/provision should be assessed in relation to the balance sheet (ie total assets).
not been expensed, but treated as a cost (of developing the megastore),
it is not relevant to profit before tax. Such ‘decommissioning’ expenses are
recognised in profit or loss through increased depreciation charges in future
otal asse Kim Smith is examiner for Paper 3.1 54 student accountant January 2006
I want to thank all of you for having me here today. It is a real pleasure to meet with you and get a sense of the tradition of the Law and Medicine Center here at Case Western Reserve. There have been a lot of contributions made by this program over the last fifty years, but I am here to tell you that we need innovative ideas in law and medicine, and we need them more than ever in health policy.
Dramatic prostate-specific antigen response with activatedhemicellulose compound in metastatic castration-resistantprostate cancerJeffrey Turnera and Uzair ChaudharybCastration-resistant prostate cancer (CRPC) is anincurable disease with limited treatment options. HerbalKeywords: activated hemicellulose compound, castration-resistant prostatesupplements are unconventional treatments for a vari