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Anesu Daka CA (SA)(Z)

Judicial Management, Liquidation and Curatorship

Accounting & Audit Aspects

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1. Key Accounting Aspects:o Going concern (Conceptual Framework + IAS 1)o Provisions (IAS 37+IAS19)o Measurement of Assets (IAS36+IFRS5+IFRS13)o Financing Options (IAS 17 and IAS 32+ IAS39/IFRS9 &

7)o Other entities - dealing with troubled entity

2. Key Audit Aspects:o Complex IFRS implications- assertion levelo Going concern (Overall)o Audit Report impact


Going Concern (GC)IAS 1.25 requires management to:

o Assess GC of an entity on annual basis;

o Prepare AFS on a GC basis;

o Disclose any GC uncertainties, if any or

o Disclose the any other basis if GC basis not used together with the reason why GC is not applicable

ISA 570 – GC assessment procedures + impact on audit opinion


Questions ?


1. Provisions:

a) Future operating losses (IAS 37.63-65)

b) Onerous Contracts (IAS 37.66-69)

c) Restructuring + Termination Benefits (IAS 37.70-83 + IAS 19.165)


Future operating losses

Provisions shall NOT be recognised for future operating losses.

– Does NOT meet definition of a provision

– Rather indicate impairment of assets – test for impairment under IAS 36.


Audit Aspects

Risk indicator

• GC factor

• Impairment indicator

Response

• Assess for GC as per ISA 570

• Assess for impairment as per IAS 36


Onerous contracts

• Definition: An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

• 66 If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision.

• 68 Measurement- at the least net cost of exiting from the contract, which is the lower of:– the cost of fulfilling it and – any compensation or penalties arising from failure to fulfil

it


Audit Aspects

Risk indicator

• Liability inadequacy (C)

• Incorrect timing of recognition (cut-off)

• Incorrect measurement (M/V)

Response

• Review of contracts and status

• Cut-off test as per IAS 37

• Review management’s estimate/reperform.


Termination Benefits- IAS 19.165

For termination benefits, IAS 19 specifies that amounts payable should be recognised when, and only when, the entity is demonstrably committed to either: – terminate the employment of an employee or group of employees before the normal

retirement date; or – provide termination benefits as a result of an offer made in order to encourage voluntary

redundancy.

Recognise termination benefits when an entity can demonstrate commitment to a termination, e.g. :

entity has a detailed formal plan for the termination;– the location, function, and approximate number of employees who will be compensated for

terminating their services;– the termination benefits for each job classification or function;– when the plan will be implemented; and

• is without realistic possibility of withdrawal.• Where termination benefits fall due after more than 12 months after the balance

sheet date, they should be discounted. [IAS 19.139 & IAS 37.72- Restructuring Provision]


Termination Benefits


Restructurings

• Examples of events that may fall under the definition of restructuring:

• (a) sale or termination of a line of business;

• (b) the closure of business locations in a country or region or the relocation of business activities from one country or region to another;

• (c) changes in management structure, for example, eliminating a layer of management; and

• (d) fundamental reorganisations that have a material effect on the nature and focus of the entity’s operations.


Restructurings

Recognition Criteria for Restructuring provision

• Recognise a provision from a constructive obligation to restructure which arises only when an entity:

(a) has a detailed formal plan for the restructuring identifying at least:

(i) the business or part of a business concerned;

(ii) the principal locations affected;

(iii) the location, function, and approximate number of employees who will be compensated for terminating their services;

(iv) the expenditures that will be undertaken; and

(v) when the plan will be implemented; and

• has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.


RestructuringsMeasurement of a Restructurings Provision:

• A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both:

(a)necessarily entailed by the restructuring; and

(b)not associated with the ongoing activities of the entity.

• A restructuring provision does not include such costs as:

(a) retraining or relocating continuing staff;

(b) marketing; or

(c) investment in new systems and distribution networks.

NB: May include Onerous Contracts


Audit Aspects

Risk indicator

• Liability inadequacy (C)

• Incorrect timing of recognition (cut-off)


Response

• Review of contracts and status

• Cut-off test as per IAS 37/19

• Review management’s estimates/reperform.


Questions ?


2. Measurement of Assets

• IAS 36- Impairment of Non-Current Assets

• IFRS 5- Assets Held For Sale and Discontinued Operations


Indicators of Impairment [IAS 36.12]

• External indicators: negative changes in

technology, markets, economy, or laws

• Internal indicators: asset is part of a restructuring

or held for disposal (lesser of CA vs FVLCS per IFRS)

worse economic performance than expected

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted resulting in increased depr. [IAS 36.17]


Relationship between IAS 36 and IFRS 5

IAS 36- Impairment

Measure Asset at lower of:

Carrying Amount (CA)

Recoverable Amount(RA), where RA is the greater of: Value-in Use

Fair Value Less Cost to Sale

Asset held for use

IFRS 5- Impairment

Measure Asset at lower of:

Carrying Amount (CA)

Fair Value Less Cost to Sale

Asset Held for sale


Held-for-sale classification criteria

Held-for-sale or for distribution classification.In general, ALL the following conditions must be met for an asset (or 'disposal group')

to be classified as held for sale: [IFRS 5.6-11] Para 6: CA amt is expected to be recovered principally through sale and not

continued use if: the asset is available for immediate sale (para 7) Para 8: the sale is highly probable, within 12 months of classification as held for

sale (subject to limited exceptions as per Appendix B), probability of sale is indicated by the following factors: management is committed to a plan to sell (approval received from BOD or Shareholders ) an active programme to locate a buyer is initiated the asset is being actively marketed for sale at a sales price reasonable in relation to its fair

value actions required to complete the plan indicate that it is unlikely that plan will be significantly

changed or withdrawn

• NB: An asset (or disposal group) can be classified as held for sale if the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset (or disposal group)- Appendix B


MeasurementImpairment.Impairment must be considered both at the time of classification as held for sale and subsequently:

– At the time of classification as held for sale.• measure and recognise impairment in accordance with the applicable IFRSs (generally

IAS 16, IAS 36, IAS 38, and IFRS 9). • Any impairment loss is:– recognised in profit or loss unless the:– asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is

treated as a revaluation decrease.

– After classification as held for sale.• Impairment loss = to the difference between the adjusted CA of the asset/disposal

group and fair value less costs to sell, where CA is greater than FVLCS• This impairment loss must be recognised in profit or loss (IFRS 5.20), even for assets

previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.

• NB- consider impact on income taxes-deferred tax


Measurement

Impairment Reversal

Subsequent increases in fair value.

• Can be recognised in the profit or loss;

• Limited to the cumulative impairment loss that has been recognised in accordance with:

– IFRS 5 or

– previously in accordance with IAS 36. [IFRS 5.21-22]


SFP Presentation


Presenting non-current assets or disposal groups classified as

held for sale


Discontinued Operations

Classification as discontinuing.• A discontinued operation is a component of an

entity that either has been disposed of or is classified as held for sale, and: [IFRS 5.32] – represents either a separate major line of business or a

geographical area of operations, and – is part of a single co-ordinated plan to dispose of a

separate major line of business or geographical area of operations, or

– is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.


Other classification Issues

Wound-down or abandoned operations

• The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned). [IFRS 5.13]

Non-current asset (or disposal group) that are classified as held for distribution to owners

• These should be classified, presented and measured as per requirements of IFRS 5 [IFRS 5.5A and IFRIC 17]


Disposal group

• A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction.

• The measurement basis required for non-current assets classified as held for sale is applied to the group as a whole, and

• any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36.105 [IFRS 5.4]


IFRS 5 and the disposal of interests

• If an investment to be disposed of does meet the criteria of IFRS 5:

– the accounting treatment will depend on the type of investment (subsidiary or associate),

– as well as the stage when the criteria are met:

• at acquisition date (acquired exclusively with a view to resale) or

• only subsequently (after acquisition date) classified as held for sale


Audit Aspects

Risk indicator

• Incorrect timing of classification (classification)


• Asset may no-longer exist (E + R&O)

• Inadequate P&D

Response

• Reperform classification as per IFRS 5

• Review management’s estimates/reperform.

• Use an auditor ‘s valuation expert

• Physical verification or confirmations with custodians


Questions ?


Financing Options

• Loan re-financing- IAS 1 (Current vs Non-Current)

• Restructuring:

– Debtors factoring (de-recognition- IAS 39/IFRS9)

– Sale and Lease-backs (IAS 17) Is it a loan?, A true Sale). Should the asset be derecognised?

– Conversion of Debt to Equity (IFRIC 19)- when applicable, measurement of Equity, accounting for the difference


Audit Aspects

Risk indicator

• Incorrect classification of transactions (classification)

• Incorrect measurement –Fair value (M/V)

• Asset may no-longer exist (E + R&O)

• Inadequate P&D

• Invalid/void transactions (Companies Act)

Response

• Reperform classification as per IAS 32 or IAS 17

• Review management’s measurements.

• Review contracts and apply substance over-form

• Physical verification or confirmations with custodians

• Assess for compliance


Questions ?


Other Entities

Accounting:

• Impairment of assets-receivables (IAS 39/IFRS9 and IFRS7)

Audit

• Use Judicial Manager/Liquidator confirmation


Questions ?


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