(a) Matters and evidence

Matters
– Consider treatment of sale and leaseback transaction as required by IFRS 16
– Assess whether control of asset has transferred to buyer
– Whether asset transfer is sale in line with IFRS 15
– IFRS 15 criteria based on transfer of control; ability to direct, use and obtain substantially all remaining benefits of asset
– Derecognise property and recognise right-of-use asset based on proportion of asset retained
– Recognise financial liability based on PV of lease payments
– Recognise gain/loss on transaction in P/L for year
– Reasoned conclusion that treatment appears to be correct on basis of information available

Evidence
– Copy of sale and leaseback agreement to confirm key details, e.g. rights of lessee and lessor to control asset; also: proceeds, rental amounts and timings, lease term, interest rate implicit in lease
– Discussions with management about transfer of control and correct treatment of sale and leaseback arrangement
– Board minutes for evidence of discussion of sale and leaseback transaction
– Review of local property market including trade journals, press articles, official statistics to confirm high demand for retail leases
– Review of surveyor reports on building to confirm expected life
– Agreement of carrying amount of property to non-current asset register
– Agreement of sale proceeds to cash book/bank statement
– Copy of client working papers for present value of lease payments
– Recalculation of PV of lease payments by auditor
– Review of financial statements to confirm that details of sale and leaseback transaction disclosed in line with IFRS 16 requirements

Maximum marks 8

(ii) Investment property
Matters
– Materiality
– Discussion of whether it meets classification requirements from 1 April 20X4
– Property not let by 31 March 20X5 does not impact on this classification
– End of owner-occupation is evidence of change in use
– Fair value model is acceptable provided consistent treatment
– On transfer to investment property carried at fair value
– Increase of $25,000 should be recognised in other comprehensive income
– Resulting error: overstatement of profit by $25,000

Evidence
– Notes of discussions with management to confirm intention to hold property to earn rentals and for capital appreciation
– Inspection of title deeds to confirm ownership of investment property
– A copy of any client working papers in relation to the calculation of the right-of-use asset
– Accounting policy agreed to financial statements to confirm that fair value model is to be adopted and consistent
– Board minutes for evidence of management discussion of change of use and for confirmation of date when owner-occupation ceased
– Written representations from management confirming change of use, relevant date and future intentions
– Record of physical inspection of building in order to confirm its general condition and that it is no longer occupied by Lifeson Co
– Market valuation of building by independent and external auditor’s expert at date of transfer and at reporting date to determine respective fair values and resulting gains
– Details of external expert valuer including an assessment of professional qualifications, experience, reputation, independence and objectivity
– Agreement of carrying amount on transfer to non-current asset register
– Notes of discussions with management in relation to incorrect recording of the gain and need to include error in auditor’s schedule of uncorrected misstatements
– Review disclosures made in the financial statements to ensure they comply with the requirementsof IAS 40

Maximum marks 6

(iii) Shopping mall – asset impairment

Matters
– Materiality
– Whether client’s calculation of recoverable amount based on value in use is in line with requirements of IAS 36
– Discussion of whether client has used appropriate discount factor for calculating value in use
– Whether NRV of shopping mall exceeds its value in use (at both dates)
– Reversal of impairment loss should be capped to depreciated historic cost had no impairment loss been recognised
– Resulting error: overstatement of profit and assets by $300,000

Evidence
– Agreement of opening balances for property to non-current asset register
– Physical inspection of shopping mall to confirm condition, occupancy level and reasonableness of depreciation policy and of management’s cash flow forecasts
– Copy of client working papers for impairment review giving details of NRV of mall and value in use calculations
– Copy of client cash flow forecasts and budgets supporting value in use calculations
– Notes of discussions with management and assessment of reasonableness of assumptions used in forecasts and appropriateness of discount factor used in value in use calculations
– Management representations attesting to the reasonableness of assumptions and other related management judgements
– Recalculation of value in use by auditor
– Sensitivity analyses on forecasts and value in use calculations
– External confirmation of the shopping mall’s net realisable value by an appropriately qualified, independent expert
– Notes of discussions with management in relation to incorrect recording of impairment reversal and need to include error in auditor’s schedule of uncorrected misstatements

Maximum marks 6