DFS-Practical Question(Steve please help)

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peabo
peabo Registered Posts: 10 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
I work in accounts and I have received this comment from the company's auditors:"The company did not review residual values, useful lives and the relevance of its depreciation method at the year end as required by the IAS.Consequently we were unable to satisy ourselves as to the valuation of PPE with a book value of ...in the financial statements"
What I need to know is what exactly does this mean in layman's terms as I am aware of IAS 16 but I cannot figure out exactly what is wrong with what I have done with these assets and depreciation thereof.

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  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Your auditors have qualified their audit report (or are proposing to qualify their report) because they are saying that there is no evidence to support the book values of certain (or all) of your non-current (fixed) assets.

    Under IAS 16, non current assets are recognised in the financial statements at their initial cost (cost being purchase price + all other directly attributable costs). Under IAS 16 it is mandatory to charge depreciation on such non-current assets (other than land and other assets that can be demonstrated to have an infinite life). For those with finite lives we have to depreciate - so for an asset that cost £3,000 with an expected sale price at the end of its useful life of £1,000 and we expect it to last us 3 years, the depreciation charge would be:

    (£3,000 - £1,000) / 3 = £667.

    Your auditors are saying that you have not established an expected selling price at the end of the asset(s) useful life. They are also saying that you have not established the length of the asset(s) useful life.

    They are also challenging the relevance of your depreciation method. If you haven't estbalished an expected selling price or you haven't established an estimated useful life for an asset(s) then the depreciation charges won't be in accordance with IAS 16.

    I would be quite surprised if the auditors have expressed a qualified opinion without discussing the reasons for their qualification and giving your company the opportunity to correct them. Auditors must give management the chance to resolve such issues and I would expect something as easy to resolve as this to be changed by management of your company rather than risk the audit opinion being qualified, which would have a detrimental impact on your company's credit rating and future financing (if applicable.

    Kind regards
    Steve
  • peabo
    peabo Registered Posts: 10 New contributor 🐸
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    Thanks Steve you don't dissapoint.This was just draft financial statements , they will be coming to discuss them with management.From your explanations I now know what questions to raise with them.
  • Glynis
    Glynis Registered Posts: 488 Dedicated contributor 🦉
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    You're being brave posting a question for steve. You get hung drawn and slashed on here by certain members who think they own the forums by asking steve a question!
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    I hope that in future anyone with a technical query such as the one peabo has presented, will feel that posing the question on this forum is an appropriate way of finding the answer.
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    Agreed with Sandy.
  • Glynis
    Glynis Registered Posts: 488 Dedicated contributor 🦉
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    SandyHood wrote: »
    I hope that in future anyone with a technical query such as the one peabo has presented, will feel that posing the question on this forum is an appropriate way of finding the answer.

    I agree also but there are those who slam posters for asking certain more quallified members particular questions. These people , and they know who they are , seem to think they own this site.
  • jilt
    jilt Registered Posts: 2,903 Beyond epic contributor 🧙‍♂️
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    :bored:
  • Glynis
    Glynis Registered Posts: 488 Dedicated contributor 🦉
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    ?
  • Diannew
    Diannew Registered Posts: 2,814 Beyond epic contributor 🧙‍♂️
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    jilt wrote: »
    :bored:

    I am with you Jill...

    Yawn...looks like it is a full moon again
  • Criggers
    Criggers Registered Posts: 53 Regular contributor ⭐
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    Well constructed question (hint Glynis, so please don't troll this thread anymore) and a very interesting answer.

    Would it be bad practice to give anything with a life an expected value of 0 come the end of it? I think we depreciate everything to 0 over it's life, whether that be 3, 5 or 10 years etc. But then we depreciate most things down to the office chairs which aren't going to have a value.
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    Criggers wrote: »
    Well constructed question (hint Glynis, so please don't troll this thread anymore) and a very interesting answer.

    Would it be bad practice to give anything with a life an expected value of 0 come the end of it? I think we depreciate everything to 0 over it's life, whether that be 3, 5 or 10 years etc. But then we depreciate most things down to the office chairs which aren't going to have a value.

    As long as the residual values (if any) aren't material. This practice should be acceptable.
  • Londina
    Londina Registered Posts: 814 Epic contributor 🐘
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    SandyHood wrote: »
    I hope that in future anyone with a technical query such as the one peabo has presented, will feel that posing the question on this forum is an appropriate way of finding the answer.

    Well said Sandy! and for anyone who -after all- doesn't appreciate the help received from others, don't use this forum.

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