Audit of 2017/18 annual report and accounts (CG) - all modules
Technical guidance note 2018/1(CG)
9Prepared for appointed auditors in the central government sector
29 January 2018
Audit of 2017/18 annual report and accounts (CG) - all modules Page i
Introduction to technical guidance note
The purpose of technical guidance note 2018/1(CG) is to provide appointed auditors in the
central government sector with guidance on planning and performing the audit of the 2017/18
annual report and accounts. It comprises the following modules
Module Subject area
Overview Auditors' overall responsibilities for the annual report and accounts;
accounts regulations; summary of overall financial reporting requirements;
application of auditing standards; presentation of financial statements; and
accounting policies, estimates, and prior year errors
1 Property, plant and equipment
2 Provisions, creditors and accruals
3 Financial instruments
4 Group financial statements
5 Other financial statement areas (including leases, grants, and intangible
assets)
6 Regularity of expenditure and income.
7 Non-financial statements (including remuneration and staff report,
performance report and l governance statement)
8 Charitable NDPBs
The modules highlight the main risks of misstatement in each area, and set out actions for
each risk that auditors should undertake to assess whether the body has followed financial
reporting requirements. It is important that auditors follow the actions set out, subject to local
judgements on materiality, to ensure that all auditors adopt a consistent approach to common
risks.
For the convenience of auditors, all the above modules have been combined in this one
document. The individual modules are also available from the relevant subject pages on the
Technical reference library.
Paul O'Brien
Senior Manager (Professional Support)
Audit of 2017/18 annual report and accounts (CG) - overview module
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts
Commission. Together they ensure that the Scottish Government and public sector bodies in
Scotland are held to account for the proper, efficient and effective use of public funds.
Foreword
Audit of 2017/18 annual report and accounts (CG) - overview module Page 3
Contents
Foreword ....................................................................................................................................... 4
1 Introduction ..................................................................................................................... 5
Purpose of overview module ............................................................................................. 5
Contact point for this module ............................................................................................. 5
Summary of auditors' responsibilities for the annual report and accounts .......................... 5
2 Financial reporting requirements ................................................................................... 8
Purpose of section............................................................................................................. 8
Summary of financial reporting requirements .................................................................... 8
FReM overview ................................................................................................................. 8
3 Auditing standards ........................................................................................................ 12
Purpose of section........................................................................................................... 12
Changes in 2017/18 ........................................................................................................ 12
Key ISA requirements and application to this TGN .......................................................... 12
4 Presentation of financial statements ........................................................................... 15
Purpose of section........................................................................................................... 15
Summary of financial reporting requirements .................................................................. 15
Sources of guidance on financial reporting ...................................................................... 15
Risks of misstatement ..................................................................................................... 15
5 Accounting policies, estimates and prior year errors ................................................ 21
Purpose of section........................................................................................................... 21
Changes in 2017/18 ........................................................................................................ 21
Definitions ....................................................................................................................... 21
Summary of financial reporting requirements .................................................................. 21
Risks of misstatement ..................................................................................................... 21
Foreword
Page 4 Audit of 2017/18 annual report and accounts (CG) - overview module
Foreword Extract from the code of audit practice
Technical support
108. Audit Scotland provides technical support and guidance to all appointed auditors. While
appointed auditors act independently, and are responsible for their own conclusions and opinions,
Audit Scotland has a role in ensuring that those conclusions and opinions are reached on the
basis of informed judgement. Audit Scotland will consult with appointed auditors and other
interested parties on the preparation of technical guidance and appointed auditors are expected to
contribute. Consistency in similar circumstances is important and therefore appointed auditors
should consider such guidance.
A key element of the technical support and guidance to appointed auditors referred to in the
above extract from the Code of audit practice is technical guidance notes provided by Audit
Scotland's Professional Support.
The purpose of this technical guidance note is to provide appointed auditors in the central
government sector with guidance on planning and performing the audit of the 2017/18 annual
report and accounts. This technical guidance note applies to auditors of
the Scottish Government, non-ministerial government departments, and government
agencies
trading funds and executive non departmental public bodies (NDPBs), including
charitable NDPBs
public corporations, i.e. Scottish Water and Scottish Canals
other central government bodies (e.g. the Scottish Police Authority).
Technical guidance notes are available to appointed auditors from Audit Scotland's Technical
reference library, and are also published on the Audit Scotland website so that audited bodies
and other stakeholders can access them.
Audit Scotland makes no representation as to the completeness or accuracy of the contents of technical
guidance notes or that legal or technical guidance is correct. Points of law, in particular, can ultimately be
decided only by the Courts. Audit Scotland accepts no responsibility for any loss or damage caused as a
result of any person relying upon anything contained in this note.
1 Introduction
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1 Introduction Purpose of overview module
1. The purpose of this module of the technical guidance note is to provide
a summary of auditors' overall responsibilities for the annual report and accounts (section
1)
information on the financial reporting requirements that central government bodies are
required to follow (section 2)
guidance on the application of key requirements of international standards on auditing
(ISAs) that are particularly relevant to this technical guidance note (section 3)
information on, and guidance on the risks of misstatement in, the overall presentation of a
central government body's financial statements (section 4)
information on, and guidance on the risks of misstatement in, accounting policies,
estimates, and restating prior year errors (section 5).
Contact point for this module
2. The contact point in Audit Scotland's Professional Support for this module of the technical
guidance note is Neil Cameron, Manager (Professional Support) - ncameron@audit-
scotland.gov.uk.
Summary of auditors' responsibilities for the annual report and
accounts
Statutory framework
3. External auditors appointed by the Auditor General for Scotland are required under section
21(3) of the Public Finance and Accountability (Scotland) Act 2000 (the 2000 Act) to audit the
annual report and accounts prepared by central government bodies under the 2000 Act or
other specific legislation.
4. Auditors' reports are required by section 22(1) of the 2000 Act to set out the audit findings as
to whether the accounts comply with directions issued under relevant legislation by Scottish
Ministers (the accounts direction).
5. Section 22(1) of the 2000 Act also requires auditors' reports to set out their findings in respect
of the regularity of expenditure and income.
Guidance in this technical guidance note on auditors' responsibilities
6. The Code of audit practice sets out specific responsibilities for appointed auditors which are
designed to meet their statutory requirements, as well as additional requirements of the
Auditor General. Auditors' responsibilities for the 2017/18 annual report and accounts,
1 Introduction
Page 6 Audit of 2017/18 annual report and accounts (CG) - overview module
together with the module of this technical guidance note which provides guidance on each
responsibility, are summarised in the following table:
Auditors' responsibilities Guidance in this TGN
Audit the financial statements and express an opinion on whether they
give a true and fair view and are properly prepared in accordance with
the accounts direction
This overview module and
modules 1 to 5
Audit and express an opinion on the regularity of income and
expenditure
Module 6
Audit a specified part of the remuneration and staff report and express
an opinion on whether it has been prepared in accordance with the
accounts direction
Module 7 (Section 2)
Read and consider the information in the performance report, report
any material misstatements, and express opinions as to whether it is
consistent with the financial statements and prepared in accordance
with the accounts direction
Module 7 (Section 3)
Read and consider the information in the governance statement, report
any material misstatements and express opinions as to whether it is
consistent with the financial statements and prepared in accordance
with the accounts direction
Module 7 (Section 4)
Read and consider the information in the other non-financial
statements in the annual report and accounts and report any material
misstatements
Module 7 (Section 5)
7. This technical guidance note also provides specific guidance on the application of the above
responsibilities to those NDPBs which are registered charities (module 8).
8. Auditors are also required to assess and report on the adequacy of accounting records.
Guidance on this reporting responsibility will be provided in a separate technical guidance
note on independent auditor's reports.
9. The Code of audit practice requires auditors to plan and perform their audit work in
accordance with ISAs issued by the Financial Reporting Council. The ISAs that apply to
2017/18 audits are explained at section 3 of this module.
10. In addition to this technical guidance note, other support and guidance from Audit Scotland's
Professional Support in respect of 2017/18 central government audits is summarised in the
following table:
1 Introduction
Audit of 2017/18 annual report and accounts (CG) - overview module Page 7
Guidance and support Purpose
Technical guidance note on
independent auditor's reports
To provide model independent auditor's reports and guidance
on their application
Technical bulletins To provide information on relevant technical developments
each quarter and guidance on emerging risks
Technical reference library To provide access to the accounting manual, legislation and
other guidance referred to in this technical guidance note
Responses to technical enquiries To provide advice and support on specific issues
[Enquiries should be e-mailed to technicalqueries-
Training workshops To provide training to support this technical guidance note
2 Financial reporting requirements
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2 Financial reporting requirements Purpose of section
11. The purpose of this section is to provide information on the financial reporting requirements
that central government bodies are required to follow.
Summary of financial reporting requirements
12. Central government bodies are required to prepare their accounts in accordance with an
accounts direction. The accounts directions generally require compliance with the accounting
principles and disclosure requirements of the Government financial reporting manual (the
FReM).
13. Bodies are also required to meet relevant requirements in the Scottish public finance manual
(the SPFM) legislation.
14. Charitable NDPBs are subject to The Charities Accounts (Scotland) Regulations 2006 which
also require compliance with the charities SORP (explained in module 8).
FReM overview
Introduction
15. The accounting policies contained in the FReM follow generally accepted accounting practice
(GAAP) to the extent that it is meaningful and appropriate in the public sector context. For the
purposes of the FReM, GAAP is taken to be
the accounting and disclosure requirements of the Companies Act 2006
international financial reporting standards (IFRS - including international accounting
standards and International Financial Reporting Interpretations Committee and Standing
Interpretations Committee interpretations) as adopted by the European Union (EU).
16. The FReM is prepared by HM Treasury in consultation with the Financial Reporting Advisory
Board (FRAB) and is issued by the relevant authorities in the UK (the Scottish Government in
respect of Scotland).
17. The 2017/18 FReM was first issued in December 2016, with issue 2 in December 2017. It
applies EU adopted IFRS and interpretations in effect for accounting periods commencing on
or before 1 January 2017. Where required, the FReM includes interpretations and adaptations
to apply the standards to the central government context.
18. In addition to GAAP, bodies are required to apply the principles of parliamentary accountability
and regularity. These principles are explained for Scottish bodies in the SPFM.
2 Financial reporting requirements
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Application to Scottish bodies
19. Paragraph 5.1.4 of the FReM explains that the format of the accounts should be based on the
principles, but not the detail, set out in the FReM. It clarifies that the FReM's disclosure
requirements apply to Scottish bodies where they originate in
accounting standards; or
Companies Act 2006 requirements as set out in the FReM.
Key accounting concepts
20. The requirements of the FReM are explained throughout this technical guidance note. In order
to understand the specific requirements, however, auditors should ensure they are familiar
with the accounting concepts set out in the International Accounting Standards Board's
Conceptual framework for financial reporting as referred to at section 2.2 of the FReM. In
particular, key accounting concepts include the following
Central government bodies should recognise assets, liabilities, income and expenses
when they satisfy the FReM's definitions and recognition criteria.
The financial statements should be prepared on a going concern basis of accounting, i.e.
on the basis that a body's functions will continue in operational existence for the
foreseeable future. Transfers of services under combinations of public sector bodies do
not negate the presumption of going concern.
Bodies are required to present the financial statements in a manner that provides
relevant, reliable, comparable, clear and concise information.
A body need not comply with the disclosure requirements of the FReM if the information
is not material to the understanding of users. However, additional disclosures may be
required to enable users to understand the impact of particular transactions, events and
conditions on the body's financial position and performance.
Some financial information is inherently complex and cannot be made easy to
understand, but excluding such information from the financial statements would make
them incomplete and potentially misleading.
Changes in 2017/18
21. Changes in the FReM for 2017/18 are incorporated in the relevant module. In summary, the
changes that are applicable to Scottish bodies are as follows
Chapter 5 has been amended to reflect the introduction of The Companies, Partnerships
and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (explained in
module 7).
Chapter 8 has been amended to include a new section on devolved tax accounts in
Scotland. Paragraph 8.2.20 requires Revenues Scotland to prepare an annual account of
the devolved taxes to be laid in the Scottish Parliament and published separately from the
annual report and accounts produced by Revenue Scotland.
2 Financial reporting requirements
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Elements of annual report and accounts
22. The elements of the annual report and accounts required by the FReM, along with where
guidance is provided in this technical guidance note, are summarised in the following table:
Element Requirements Guidance in this TGN
Financial statements FReM section 5.4 Overview module (sections 4
and 5) and modules 1 to 5
Performance report FReM section 5.2 Module 7 (section 3)
Accountability report
Corporate governance report
Directors' report
FReM paragraph 5.3.9 Module 7 (section 5)
Statement of Accountable
Officers responsibilities
FReM paragraphs 5.3.10 to
5.3.12
Module 7 (section 5)
Governance statement SPFM Module 7 (section 4)
Remuneration and staff report FReM paragraphs 5.3.15 to
5.3.27
Module 7 (section 2)
Parliamentary and
accountability report
FReM paragraph 5.3.28 to
5.3.29
Module 7 (section 5)
23. Auditors should confirm that the body's annual report and accounts for 2017/18 includes
the financial statements required by the FReM (explained at section 4 of this overview
module)
a performance report
an accountability report comprising a
corporate governance report (including a directors' report, statement of Accountable
Officer's responsibilities, and governance statement)
remuneration and staff report
parliamentary and accountability report.
24. Where a required element of the annual report and accounts is missing, auditors should
consider whether its exclusion is appropriate, e.g. a parliamentary and accountability
report is not required where a body has nothing to disclose
request that the body includes the missing element where its inclusion is required
where a body declines to include the required element, consider the impact on the
affected opinion in the independence auditor's report.
2 Financial reporting requirements
Audit of 2017/18 annual report and accounts (CG) - overview module Page 11
Non-compliance with the FReM
25. Paragraph 2.2.6 of the FReM permits a departure from its requirement in the extremely rare
circumstances in which a body concludes that compliance would be so misleading that it
would prevent the financial statements giving a true and fair view.
26. Auditors should assess whether the departure is justified and, if so, check that the body has
disclosed
that it has complied with the FReM, except that it has departed from a particular
requirement in order to give a true and fair view
the nature of the departure, including the treatment that the FReM would require, the
reason why that treatment would be misleading in the circumstances, and the treatment
adopted
the financial effect of the departure in 2016/17 and 2017/18 on each item in the financial
statements that would have been reported had the requirement been complied with.
27. However, a body cannot rectify inappropriate accounting policies either by disclosure of the
accounting policies used or by notes or explanatory material. If auditors conclude that the
departure is not justified, they should request that the body amends the financial statements to
comply with the FReM. If the body declines to do so, and this results in a material
misstatement, auditors should consider the impact on their opinion on the financial
statements.
3 Auditing standards
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3 Auditing standards Purpose of section
28. The purpose of this section is to highlight the application of key requirements of ISAs that are
particularly relevant to this technical guidance note.
Changes in 2017/18
29. For 2017/18, the revised 2016 ISAs (UK) have replaced the 2009 ISAs (UK&I).
Key ISA requirements and application to this TGN
30. Auditors are required to plan and perform the audit of the 2017/18 annual accounts in
accordance with the Financial Reporting Council's 2016 ISAs (UK). The main changes from
the 2009 ISAs (UK&I) were explained in technical bulletin 2016/2 (paragraphs 5 to 18).
31. The following table provides a summary of key ISA (UK) requirements and their application to
this technical guidance note:
ISA (UK) requirement Application to this TGN
Material misstatements
ISA (UK) 315 requires auditors to identify and
assess the risks of material misstatement in the
financial statements.
This technical guidance note highlights potential
risks of misstatement in the 2017/18 financial
statements of central government bodies.
A misstatement is defined in ISA (UK) 450 as a
difference between the amount, classification,
presentation, or disclosure of a reported financial
statement item and the amount, classification,
presentation, or disclosure required for the item
to be in accordance with the applicable financial
reporting framework.
Auditors should request management and, if
necessary those charged with governance, to
correct all misstatements identified during the
audit, other than those that are clearly trivial.
This technical guidance note describes the
applicable financial reporting framework for
central government bodies and explains the
amount, classification, presentation, and
disclosure requirements of the framework for key
financial statement areas.
A misstatement can arise from a body's failure to
properly use reliable information that could
reasonably have been taken into account. IAS 8
states that financial statements do not comply
with IFRS if they contain material errors, or
immaterial errors made intentionally to achieve a
particular presentation (i.e. fraud).
The threshold for 'clearly trivial' must not exceed
£250,000.
3 Auditing standards
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ISA (UK) requirement Application to this TGN
ISA (UK) 320 deals with the concept of
materiality and requires judgments about
materiality to be affected not only by the size of
a misstatement, but also by its nature and the
surrounding circumstances.
Auditors should consider the inherent public
interest factor and apply judgement when
determining materiality. It is for auditors to form
a judgement regarding whether misstatements
are material and nothing in this technical
guidance note is intended to overrule that
judgement.
Professional scepticism
ISA (UK) 200 requires auditor to exercise
professional scepticism. Professional scepticism
is an attitude that includes
a questioning mind
being alert to conditions which may indicate
possible misstatement
a critical assessment of audit evidence.
This technical guidance note is intended to
support the proper exercise of professional
scepticism which is fundamental to performing a
high quality public sector audit.
Professional judgement
ISA (UK) 200 also deals with professional
judgment, which is the application of relevant
training, knowledge and experience in making
informed decisions about the appropriate
courses of action.
The overriding purpose of this technical
guidance note is to ensure that auditors'
opinions and conclusions are reached on the
basis of informed judgement.
Audit evidence
ISA (UK) 500 explains what constitutes audit
evidence, and deals with the auditor’s
responsibility to design and perform audit
procedures to obtain sufficient appropriate audit
evidence.
If information to be used as audit evidence has
been prepared using the work of a
management’s expert (i.e. an individual with
expertise in a field other than accounting or
auditing, whose work is used by the body in
preparing the financial statements), auditors
should
evaluate the competence, capabilities and
objectivity of that expert
This technical guidance note sets out actions for
auditors to undertake to assess whether the
body has followed the required treatment. This
is intended to promote consistency across the
sector. However, it remains the responsibility of
auditors to design the necessary audit
procedures to satisfy themselves that they have
obtained sufficient appropriate audit evidence.
3 Auditing standards
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ISA (UK) requirement Application to this TGN
obtain an understanding of the work of that
expert
evaluate the appropriateness of that expert’s
work as audit evidence.
Other information
ISA (UK) 720 deals with the auditor’s
responsibilities relating to information other than
the financial statements that is included in the
annual report and accounts.
This includes additional responsibilities for some
of the other information (which the ISA describes
as statutory other information).
For central government bodies, all information
required by the FReM (other than the financial
statements and audited part of the remuneration
and staff report) is statutory other information.
This technical guidance note sets out auditors'
responsibilities for this information.
Independent auditor's report
ISA (UK) 700 establishes standards and
provides guidance on the form and content of
the independent auditor’s report.
A separate technical guidance note containing
model independent auditor's reports for 2017/18
will be published in due course. The models will
follow the structure and wording of ISA (UK) 700
adapted for the central government sector.
4 Presentation of financial statements
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4 Presentation of financial statements Purpose of section
32. This section provides information on, and guidance on the risks of misstatement in, the
presentation of a (non-charity) body's financial statements.
33. Guidance on risks in respect of the recognition and measurement of specific financial
statement areas is provided in modules 1 to 3 and 5. Guidance is provided on matters
specific to group financial statements in module 4 and on charitable NDPBs in module 8.
Summary of financial reporting requirements
34. The FReM requires bodies to prepare their financial statements in accordance with IAS 1
Presentation of financial statements and IAS 7 Statement of cash flows, as adapted and
interpreted by the FReM.
35. FReM paragraph 5.4.3 requires bodies to prepare individual or group financial statements as
appropriate using IAS 1. Where bodies prepare group financial statements, IAS 1 is
interpreted to require that the financial statements provide two columns, one showing the core
body and the other showing the group.
Sources of guidance on financial reporting
36. HM Treasury provides illustrative accounts for each type of body.
37. The National Audit Office produces a financial statement disclosure guide.
38. IPSAS 1 Presentation of financial statements provides guidance on IAS 1 for public bodies.
Risks of misstatement
39. The following paragraphs highlight potential risks of misstatement in respect of the
presentation of financial statements, and set out actions for auditors to undertake to assess
whether the body has followed the required treatment.
A complete set of financial statements is not properly presented
40. FReM section 6.2 sets out what a complete set of financial statements should comprise. This
is summarised for 2017/18 in the following table:
4 Presentation of financial statements
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Element Explanation
Statement of financial position
as at 31 March 2018
IAS 1 requires a statement of financial position as at the end of
the period. The FReM withdraws the flexibility in IAS 1 to select
the order of line items set out at paragraph 54 of IAS 1.
The statement of financial position shows the value as at 31
March 2018 of the assets and liabilities recognised by the body.
The net assets are matched by the reserves held by the body.
Statement of comprehensive
net expenditure (SoCNE)
Although IAS 1 requires a statement of comprehensive income,
the FReM adapts this at paragraph 5.4.6 by requiring
departments and agencies to prepare a SoCNE.
The SoCNE shows the components that total to net expenditure
for the year.
NDPBs should present either a SoCNE or statement of
comprehensive income as appropriate to their own
circumstances.
Statement of changes in tax-
payers' equity
IAS 1 requires bodies to prepare a statement of changes in
equity. The FReM interprets this to require a statement of
changes in taxpayer's equity following the format in IAS 1.
NDPBs are required to adapt the format to present transactions
with the general fund.
The statement of changes in tax-payers' equity statement shows
the movement from 1 April 2017 to 31 March 2018 on the
various reserves held by the body
how the movements are broken down between gains and
losses incurred.
Statement of cash flows IAS 1 sets out the requirements for the statement of cash flows.
A statement of cash flows shows the changes in cash and cash
equivalents of the body during 2017/18.
Notes to the financial
statements
IAS 1 requires notes to include
significant accounting policies
information required to be disclosed by IFRS or the FReM
other information that is relevant to users' understanding of
the financial statements.
Comparative information in
respect of 2016/17
Except when the FReM permits or requires otherwise,
comparative information for 2016/17 requires to be presented for
all amounts reported in the 2017/18 financial statements.
4 Presentation of financial statements
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Element Explanation
Statement of financial position
as at 1 April 2016
A revised opening statement of financial position is also required
when a body
applies an accounting policy retrospectively
makes a retrospective restatement of items in its financial
statements
reclassifies items in its financial statements.
41. Auditors should assess whether the body has
presented a complete set of financial statements for 2017/18
clearly identified the financial statements and distinguished them from the other
information, statements and reports in the annual report and accounts
clearly identified each financial statement and the notes
presented all of the financial statements with equal prominence in the order that best
enables users to understand them
offset assets and liabilities or income and expenses only where required or permitted by
the FReM.
42. When checking that the FReM's disclosure requirements have been met, auditors should
consider requesting that the body complete the NAO's 2017/18 disclosure guide for the
financial statements
investigate the reasons for any non-compliance that the guide highlights
assess whether the body's responses in the checklist are consistent with auditor's
knowledge.
Statement of financial position is not properly presented
43. The statement of financial position is likely to include lines for property, plant and equipment,
intangible assets, investments, provisions, etc. all of which are explained in the relevant
module of this technical guidance note.
44. Auditors should confirm that
the statement at 31 March 2018 is presented in accordance with IAS 1 as adapted by the
FReM
all the line items that are applicable to the body have been included in the statement of
financial position
items have been disaggregated where that assists in understanding the financial position
material items have not been aggregated where they have different natures
the Accountable Officer or Chief Executive has signed the statement.
4 Presentation of financial statements
Page 18 Audit of 2017/18 annual report and accounts (CG) - overview module
Statement of comprehensive net expenditure is not properly presented
45. Auditors should assess whether the 2017/18 SoCNE has been presented in accordance with
IAS 1 as adapted by the FReM. The items that should generally be presented in the SoCNE
are summarised in the following table:
Sub-total Explanation
Total operating income This will include lines for items such as income from goods and
services.
Total operating
expenditure
This will include lines for items such as staff costs, goods and services,
depreciation, and movements in provisions.
Net operating
expenditure
This should equal to total operating expenditure less total operating
income.
Net expenditure This is net operating expenditure less finance income and plus finance
expenditure.
[Note: This is the line that should be referred to in the first bullet of the
opinion on the financial statements in the independent auditor's report.]
Other comprehensive net
expenditure
This will include lines for items such as the net gain/loss on the
revaluation of property, plant and equipment.
Statement of changes in taxpayers' equity is not properly presented
46. Auditors should assess whether the 2017/18 statement of changes in taxpayers' equity has
been presented in accordance with IAS 1 as adapted by the FReM. The statement should
reconcile the balances at 1 April 2017 on the general fund and revaluation reserve to the
balances at 31 March 2018 and is likely to have items for
grant-in-aid for NDPBs
comprehensive net expenditure
revaluation gains and losses
any transfers between reserves.
Statement of cash flows is not properly presented
47. Auditors should
confirm that the 2017/18 statement of cash flows has been prepared in accordance with
IAS 7 as adapted by the FReM
assess whether the statement is complete and free from misstatement.
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Audit of 2017/18 annual report and accounts (CG) - overview module Page 19
Presentation of financial statements is not consistent with previous years
48. ISA 1 requires bodies to retain the presentation and classification of items in the financial
statements used in the previous year unless another presentation or classification is required
by the FReM or is more appropriate.
49. Auditors should
identify any cases where the body has changed the presentation or classification of items
in 2017/18
assess whether the new presentation or classification is more appropriate
assess whether the body has accurately reclassified the 2016/17 comparative amounts
for changes in the presentation, and any changes of classification, of items in 2017/18
confirm that the nature of the reclassification, and reasons for it, and the amount of each
item reclassified, has been disclosed. Auditors should assess whether the disclosures
are complete, concise, clear, relevant and free from misstatement
50. Where 2016/17 comparative amounts have not been reclassified on the grounds that it is
impracticable, auditors should assess whether the body has made every reasonable effort to
reclassify the amounts. Where auditors are satisfied that reclassification is impracticable, they
should
confirm that the body has disclosed the
reason for not reclassifying the amounts
the nature of the adjustments that would have been made if the amounts had been
reclassified.
assess whether the disclosures are complete, clear, concise and free from misstatement.
51. Where auditors do not consider it impracticable to reclassify the items, they should request the
body to do so. Where the body declines, and the misstatement is material, auditors should
consider the impact on their opinion on the financial statements.
Restated opening statement of financial position is not properly presented where applicable
52. Auditors should confirm that a restated statement of financial position as at 1 April 2016 has
been presented if the body has
changed an accounting policy and applied the change retrospectively (as explained at
section 5); or
made a retrospective restatement to correct an error in the 2016/17 financial statements
(as explained at section 6); or
reclassified items in the 2017/18 financial statements.
and the effect on the information is material.
4 Presentation of financial statements
Page 20 Audit of 2017/18 annual report and accounts (CG) - overview module
53. The body's estimates originally made at 1 April 2016 should not have been adjusted with the
benefit of hindsight simply because more up to date information has become available. New
information should have been treated in the same way as non-adjusting events after the
reporting date (explained at section 11 of module 5).
54. It is not necessary for the body to include notes to a restated opening statement of financial
position.
Information in the notes is not properly disclosed
55. Specific guidance regarding the information to be disclosed in notes to the financial
statements is provided in the relevant module of this technical guidance note. As an overall
responsibility, auditors should
assess whether the notes have been presented in a systematic manner
confirm that each item in the financial statements has been cross-referenced to any
related information in the notes.
56. IAS 1 provides examples of systematic ordering. These include
giving prominence to the areas that the body considers to be most relevant to an
understanding of its financial performance and financial position
grouping together information about items measured similarly such as assets measured
at current value
following the order of the line items in the financial statements.
5 Accounting policies, estimates and prior year errors
Audit of 2017/18 annual report and accounts (CG) - overview module Page 21
5 Accounting policies, estimates and prior year errors Purpose of section
57. This section provides information on, and guidance on the risks of misstatements in,
accounting policies, estimates and restatement of prior year errors.
Changes in 2017/18
58. There are no changes in financial reporting requirements in 2017/18.
Definitions
59. Accounting policies are the specific principles, bases, conventions, rules and practices applied
in preparing and presenting financial statements.
60. Estimation involves judgements about the measurement of items based on the latest
available, reliable information in cases where they cannot be measured with precision.
61. Errors include the effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts.
Summary of financial reporting requirements
62. The FReM requires bodies to comply with IAS 8 Accounting policies, changes in accounting
estimates and errors. The objective of IAS 8 is to prescribe the criteria for selecting and
changing accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies, changes in accounting estimates and correction of errors.
Risks of misstatement
63. The following paragraphs highlight potential risks of misstatement in respect of accounting
policies, estimates and restatement of prior year errors, and set out actions for auditors to
undertake to assess whether the body has followed the required treatment.
Accounting policies are not appropriate
64. Where the FReM permits a choice of accounting policy, the body should use judgement in
developing and applying an accounting policy that results in information that is relevant and
reliable. A body cannot rectify inappropriate accounting policies either by disclosure of the
accounting policies used or by explanatory material.
5 Accounting policies, estimates and prior year errors
Page 22 Audit of 2017/18 annual report and accounts (CG) - overview module
65. Auditors should assess whether the accounting policies applied by the body
are appropriate to its circumstances
have been consistently applied.
66. In accordance with ISA (UK) 240, auditors should evaluate whether the selection and
application of accounting policies by the body, particularly those related to subjective
measurements and complex transactions, is indicative of fraudulent financial reporting.
Accounting policies are not adequately disclosed
67. Auditors should check that a summary of significant accounting policies has been
adequately disclosed in the notes. FReM paragraph 5.4.21 states that the accounting policy
for a particular item may be disclosed within the note for that item.
Changes in accounting policies are not properly accounted for
68. Auditors should check that the body has changed an accounting policy only if
the change is required by the FReM; or
it results in the financial statements providing reliable and more relevant information on
an item.
69. Where a body changes an accounting policy, auditors should assess whether it has applied
the changes retrospectively. Retrospective application involves adjusting the opening balance
of each affected component of net worth (i.e. total reserves) for the earliest period presented
and the other comparative amounts disclosed as if the new accounting policy had always
been applied. Retrospective application is not required
where the FReM or underlying standard specifies transitional provisions that should be
followed
to the extent that it is impracticable. This means that the body cannot apply it
retrospectively after making every reasonable effort to do so.
70. Auditors should check that a restated statement of financial position as at 1 April 2016 has
been prepared if the restatement is material.
Accounting estimates are not reasonable
71. Many items in financial statements cannot be measured with precision but can only be
estimated. Estimation involves judgements based on the latest available, reliable information.
An estimate cannot be determined to be accurate or inaccurate, but it can be considered free
from error if
the amount is described clearly and accurately as being an estimate
the nature and limitations of the estimating process are explained
no errors have been made in selecting and applying an appropriate process for
developing the estimate.
5 Accounting policies, estimates and prior year errors
Audit of 2017/18 annual report and accounts (CG) - overview module Page 23
72. Auditors should judge whether the body's accounting estimates are reasonable and the
related disclosures in the financial statements are adequate. As part of the judgement of
reasonableness, in accordance with ISA (UK) 540, auditors should assess whether
the method used in making the accounting estimate is appropriate
the underlying assumptions are reasonable
the body has considered and addressed the effect of estimation uncertainty
the estimate is free from misstatement.
Changes in accounting estimates are not properly accounted for
73. Auditors should assess whether
accounting estimates have been revised
where there are changes in the circumstances on which the estimate was based; or
as a result of new information or experience.
the effect of a change in an accounting estimate has been recognised prospectively (i.e.
from the date of change rather than retrospectively)
a change in the measurement basis applied to an accounting estimate has been treated
as a change in an accounting policy rather than as a change in an accounting estimate.
Prior year errors are not properly corrected
74. Prior period errors are omissions from, and misstatements in, a body's financial statements for
one or more prior periods arising from a failure to use, or misuse of, reliable information that
was available when financial statements for those periods were authorised for issue; and
could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
75. Changes in accounting estimates are different from the correction of errors as the former
results from new information or new developments.
76. Material prior period errors should be corrected by retrospective restatement in the first set of
financial statements authorised for issue after their discovery. Auditors should assess
whether the body has corrected material prior period errors identified in 2017/18
retrospectively by
restating the comparative amounts for the prior periods presented in which the error
occurred; or
if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and net worth for the earliest prior period presented.
77. A retrospective restatement to correct a prior period error is not required if it is not material or
if the restatement is impracticable. This is the case where the body cannot restate after
making every reasonable effort to do so because
the effects of the retrospective restatement are not determinable
5 Accounting policies, estimates and prior year errors
Page 24 Audit of 2017/18 annual report and accounts (CG) - overview module
the retrospective restatement requires assumptions about what management’s intent
would have been in that period; or
the retrospective restatement requires significant estimates of amounts and it is
impossible to distinguish objectively information about those estimates that
provides evidence of circumstances that existed on the date(s) at which those
amounts are to be recognised, measured or disclosed; and
would have been available when the financial statements for that prior period were
authorised for issue by the Accountable Officer (explained in section 11 of module
5).
78. When it is impracticable to determine the period specific effects of an error on comparative
information, auditors should assess whether the body has restated the opening balances of
assets, liabilities and net worth for the earliest period for which retrospective restatement is
practicable (which may be the current period).
Prior period errors are not properly disclosed
79. Where a prior period error has been corrected in 2017/18, auditors should assess whether
the body has disclosed
the nature of the prior period error
for each prior period presented, to the extent practicable, the amount of the correction for
each financial statement line item affected
the amount of the correction at 1 April 2016.
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission
check that organisations spending public money use it properly, efficiently and effectively.
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
Page 3
Contents
1 Introduction ..................................................................................................................... 4
Purpose of module ............................................................................................................ 4
Contact points for this module ........................................................................................... 4
Changes in 2017/18 .......................................................................................................... 4
Definition ........................................................................................................................... 4
Summary of financial reporting requirements .................................................................... 4
Sources of guidance on financial reporting ........................................................................ 5
Risks of misstatement ....................................................................................................... 5
2 Additions ......................................................................................................................... 6
Risks of misstatement ....................................................................................................... 6
3 Revaluations .................................................................................................................... 9
Risks of misstatement ....................................................................................................... 9
4 Depreciation and impairment ....................................................................................... 15
Risks of misstatement ..................................................................................................... 15
5 Disposals ....................................................................................................................... 21
Risks of misstatement ..................................................................................................... 21
6 Disclosures .................................................................................................................... 23
Risks of misstatement ..................................................................................................... 23
1 Introduction
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
1 Introduction Purpose of module
1. This module of technical guidance note 2018/1(CG) provides information on, and guidance on
the risks of misstatements in, the following aspects of property, plant and equipment
Additions (section 2).
Revaluations (section 3).
Depreciation and impairment (section 4).
Disposals (section 5).
Disclosure (section 6).
Contact points for this module
2. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected]
Helen Cobb, Senior Adviser (Professional Support) - [email protected]
Changes in 2017/18
3. There are no changes in financial reporting requirements in 2017/18.
4. Additional guidance has been added to this module in respect of valuations being undertaken
on 1 April.
Definition
5. Property, plant and equipment are defined as tangible assets that are held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes,
and are expected to be used during more than one period.
Summary of financial reporting requirements
6. The FReM requires bodies to account for property, plant and equipment in accordance with
IAS 16 Property, plant and equipment as adapted by FReM section 6.2. The adaptations set
out the current value measurement requirements for each class of asset.
7. The FReM requires bodies to account for
impairments in accordance with IAS 36 Impairment of assets (as adapted and interpreted
by FReM section 6.2)
donated assets in accordance with IAS 20 Accounting for government grants and
disclosure of government assistance (as interpreted by FReM section 6.2).
1 Introduction
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
Page 5
Sources of guidance on financial reporting
8. FReM section 7.1 provides guidance on property, plant and equipment as does the Scottish
Government's Application note - Property.
9. IPSAS 17 provides additional guidance on IAS 16 for public sector bodies.
Risks of misstatement
10. Sections 2 to 6 of this module highlight potential risks of misstatement in respect of property,
plant and equipment, and set out actions for auditors to undertake to assess whether the body
has followed the required treatment.
2 Additions
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
2 Additions Risks of misstatement
Acquisition costs are not properly recognised
11. The acquisition cost of an item of property, plant and equipment should be recognised as an
asset in the statement of financial position (i.e. capitalised) if it is probable that the body will
obtain future
economic benefits - this is the potential for the asset to contribute to the flow of cash to
the body. In the private sector, this would be the sole determinant; or
service potential - this concept is added by the FReM to apply to assets which do not
yield cash benefits, but instead provide benefits by allowing the body to deliver services.
12. An item of property, plant and equipment that meets the above recognition criteria should be
initially measured at its cost. Auditors should assess whether cost comprises
the purchase price
any costs attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management. IAS 16 gives examples
of attributable costs that may be included in the measurement of an asset, e.g.
the costs of site preparation, initial delivery and handling costs, and installation and
assembly costs
professional fees that relate directly to the acquisition of the assets.
the initial estimate of the costs of dismantling and removing the item and restoring the site
on which it is located.
Construction costs are not properly recognised
13. The cost of a self-constructed asset is determined using the same principles as for an
acquired asset. However, some additional issues are summarised in the following table:
Issue Explanation
Employee costs Employee costs should be capitalised only where the employees' activities
have contributed directly to bringing an asset to a location and a condition so
that it is capable of operating as intended.
However, it is acceptable to capitalise the entire price of the services
rendered by the staff of external contractors, which can include items that are
not capitalised for internal staff.
2 Additions
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
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Issue Explanation
Recharges Recharges should be capitalised only if they can be traced back to activity on
the asset (and so general overhead costs should not be capitalised). As an
informal guideline, if there is not a more specific method of allocating costs
than a blanket apportionment, they are not likely to be capital.
Cut-off The recognition of costs in the carrying amount of an asset under
construction should cease when the item is in the location and condition
necessary for it to be capable of operating in the manner intended by
management. This may be before it has actually been brought into use.
Transfer to
operational
classification
The cumulative balance of costs for assets under construction should have
been transferred to the appropriate class of operational property, plant and
equipment at the point when the asset began operating in the manner
intended by management. Assets under construction in the statement of
financial position at 31 March 2018 should represent projects not operating in
the manner intended by management by that date.
Abortive costs
and abnormal
costs
Any abortive costs relating to projects that are discontinued or abnormal
costs that arise from inefficiencies (e.g. design faults, theft of materials)
should not have not been capitalised.
14. Auditors should assess whether
employee costs, recharges and other costs have been capitalised where their activities
have contributed directly to bringing an asset to a location and a condition so that it is
capable of operating as intended
no further costs have been included in assets under construction after the asset was in
the location and condition necessary for it to be capable of operating in the manner
intended by management
the cumulative balance for assets under construction was transferred to the appropriate
class of operational property, plant and equipment when the asset began operating in the
manner intended by management
abortive costs relating to projects that are discontinued and abnormal costs that arise
from inefficiencies (e.g. design faults, theft of materials) have not been capitalised.
Donated assets are not properly accounted for
15. Central government bodies may also acquire assets through donation. They may either be
donated by third parties or funds provided to acquire assets for which no consideration is
given (excluding developer's contributions). Assets transferred from one public sector body to
another for no consideration should also be treated as donated assets. The FReM requires
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
bodies to account for donated assets in accordance with IAS 20 Accounting for government
grants and disclosure of government assistance (as adapted by section 6.2).
16. Auditors should assess whether
donated assets have been measured at current value in existing use (or fair value for
relevant surplus assets) as at the date of acquisition
the funding element has been recognised as income
details of any restrictions or conditions imposed by the donor on the use of the asset has
been disclosed in a note.
Subsequent expenditure is not properly recognised
17. Expenditure can be included in the carrying amount of an existing asset (i.e. capitalised) if the
expenditure has added to the future economic benefits or service potential of the asset.
Auditors should assess whether
any expenditure incurred on an asset during 2017/18 after it has been recognised has
been included in its carrying amount at 31 March 2018 where the expenditure adds to its
future economic benefits or service potential
all other expenditure during 2017/18 that maintains (rather than adds to) the future
economic benefits or service potential of the asset (that it was expected to provide when
it was originally acquired) have been recognised as an expense in the SOCNE. This
includes, for example, the costs of repairs and maintenance.
18. Capitalisation thresholds are not mentioned in either IAS 36 or the FReM, and auditors should
assess whether the body has used appropriate thresholds. For example, the Application note
– Property states that, for the Scottish Government, thresholds for subsequent expenditure
which meet the recognition criteria are £10,000 for land, building structures and car parks, and
£5,000 for plant and machinery.
3 Revaluations
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
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3 Revaluations Risks of misstatement
The correct measurement basis for each asset is not used
19. IAS 16 allows the option of measuring property, plant and equipment at cost or revalued
amount, but the FReM interprets this by requiring them to be measured at either current value
in existing use or (for some surplus assets) fair value.
20. are summarised in the following table:
Classes of asset Measurement bases
Operational, non-
specialised land and
buildings
Existing use value defined in accordance with UKVS 1.3 RICS
Valuation professional standards UK (the red book)
Operational, specialised
assets (where no market
exists)
Depreciated replacement cost (DRC)
Vehicles, plant, furniture
and equipment
Existing use value but the FReM permits bodies to adopt a
historical cost basis as a proxy for current value for assets that
have short useful lives or low values
Surplus assets Surplus assets should be valued at current value in existing use if
there are restrictions which would prevent access to the market at
the reporting date. If the body could access the market, the surplus
asset should be valued at fair value using in accordance with IFRS
13 Fair value measurement
21. Page 40 of the 2017/18 FReM provides a useful flowchart to assist bodies select the
appropriate accounting treatment.
22. Auditors should confirm that the body has used the correct measurement basis for each
class of property, plant and equipment
Operational, non-specialised land and buildings are not properly valued
23. The current value measurement basis for operational land and buildings (i.e. those that are
used to provide services) where an active market exists is an existing use value. Existing use
value is the amount that would be exchanged for the asset in its existing use. This
3 Revaluations
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
requirement is normally met by the body engaging a qualified valuer to undertake a valuation
in accordance with the red book.
24. It is important that the body's asset register is a complete and accurate record of the land and
buildings it holds, and auditors should assess whether this is the case.
25. Under ISA (UK) 500, auditors should
evaluate the competence, capabilities and objectivity of the valuer. A qualified valuer is a
person who holds a recognised and relevant professional qualification and has sufficient
current local and national knowledge of the particular market, and the skills and
understanding to undertake the valuation competently
obtain an understanding of the valuer's work
evaluate the appropriateness of the valuer's work as audit evidence. This may include
considering the relevance and reasonableness of significant assumptions and
methodologies, as well as the relevance, completeness and accuracy of the source data.
26. There is no restriction on whether the valuer should be internal or external to the body.
However, auditors should check that, in accordance with the red book, a valuation
undertaken by an internal valuer has been subject to review by an external valuer using a
representative sample sufficient to enable the external valuer to express an opinion on the
overall accuracy of the valuation.
27. FReM paragraph 7.1.2 requires central government bodies to value their property using the
most appropriate valuation process, e.g. a quinquennial valuation supplemented by annual
indexation; annual valuations; or a rolling programme. It is for valuers to determine the most
appropriate methodology. Where an approach other than annual valuations is adopted,
auditors should assess whether the body has satisfied itself that the carrying amount of
assets at 31 March 2018 does not differ materially from that which would be determined if a
revaluation had been carried out at that date.
28. Valuations are usually carried out as at 31 March, and auditors should encourage bodies to
ensure their valuations are carried out at that date. However, there is no requirement for this,
and bodies may use 1 April (or other date) subject to the standard condition that the carrying
amount at the end of the year does not differ materially from the current value at that date.
29. Where a valuation has been carried out at 1 April 2017, auditors should assess whether
the body has considered whether there have been any movements in value during
2017/18 that should be reflected in the 31 March 2018 carrying value
the evidence that supports the body's consideration is adequate
the body has made necessary adjustments to the 31 March 2018 carrying value to reflect
any movements that require to be reflected.
30. Where a valuation has been carried out at 1 April 2018 (or subsequent date), auditors should
ensure they obtain the results and consider whether this should be treated as an adjusting
event in 2017/18 (as explained at section 11 of module 5) on the basis that it provides
3 Revaluations
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
Page 11
evidence of conditions that existed at 31 March 2018. There have been examples in the past
of material movements in value not being reflected in the relevant year resulting in a prior year
error having to be corrected by a retrospective restatement in the following year.
Plant and equipment are not properly valued
31. Where the body has used an historical cost basis as a proxy for current value, auditors
should
confirm that this has only been used for plant and equipment that have short useful
economic lives and/or low values, e.g. ICT, furniture and fittings, motor vehicles and
equipment
assess whether the carrying amount is free from misstatement.
Specialised assets are not properly identified
32. Auditors should assess whether the body has identified its properties that are considered
specialised. These are properties which
have a specialised nature arising from
the construction, arrangement, size or location of the property
the nature of the plant and machinery and items of equipment which the buildings
are designed to house
the function or the purpose for which the buildings are provided.
are rarely sold on the open market for single occupation for a continuation of their existing
use.
33. Examples of specialised properties that a body may hold include
properties of such construction, arrangement, size or specification that there would be no
market for a sale to a single owner occupier for the continuation of existing use
standard properties that are located in particular geographical areas (remote from main
business centres) for operational or business reasons, which are of an abnormal size for
that area
properties where there is no competing market demand from other organisations using
these types of property in the area
museums, libraries, and other similar premises.
Specialised assets are not properly valued
34. In some cases, a DRC basis may be used for estimating the current value of specialised
assets. This is a method of valuation which provides the current cost of replacing an asset
with its modern equivalent asset. It is the aggregate amount of the
value of the land for the existing use or a notional replacement site in the same locality
3 Revaluations
Page 12 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
the gross replacement cost of the buildings and other site works, from which appropriate
deductions may then be made to allow for age, condition, economic or functional
obsolescence, and environmental and other relevant factors.
35. Where a valuer determines that DRC is the most appropriate methodology, they should have
regard to guidance in the red book. Where DRC is used, FReM paragraph 7.1.10 states that
bodies should normally value a modern equivalent asset in line with the red book. Any
plans to value a reproduction of the existing asset instead should be discussed with the
Scottish Government to determine whether that is appropriate
bodies should use the ‘instant build’ approach
the choice of an alternative site will normally hinge on the policy in respect of the
locational requirements of the service that is being provided.
36. Where a DRC basis has been used, auditors should
check that there is no market-based evidence that could have been used
assess whether the valuations are free from misstatement.
Surplus assets are not properly identified
37. An asset should be classified as surplus where
it is not used in the delivery of services
there is no clear plan to bring it back into future operational use
it does not meet the criteria to be classified as either held for sale or as investment
properties (explained in module 5).
38. Auditors should assess whether the body has identified all its surplus assets.
Surplus assets are not properly valued
39. The measurement basis for surplus assets depends on whether there are restrictions which
prevent the body from accessing the market. Where there are no restrictions, surplus assets
should be measured at fair value in accordance with the IFRS 13. This is explained at section
5 of module 5 but in summary fair value is the price that would be received to sell the asset in
an orderly transaction between market participants at the measurement date.
40. Auditors should
confirm that surplus assets held at 31 March 2018, including any transfers during the
year, have been measured at fair value
assess whether the valuations are free from misstatement.
Revaluation movements during the year are not properly accounted for
41. The entries required where the carrying amount of property, plant and equipment has
increased or decreased as a result of a revaluation are summarised in the following table:
3 Revaluations
Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
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Movement Statement of financial
position
SOCNE Comment
Increase DR Property, plant and
equipment
CR Revaluation reserve
Other
comprehensive
income and
expenditure
This is the most likely position.
Increase
(reversing
previous
decrease
charged to
SOCNE)
DR Property, plant and
equipment
CR General fund
Net operating
expenditure
This is rare but may arise where
the increase is reversing a
previous decrease on the same
asset charged to net operating
expenditure. The amount
recognised should be less any
depreciation that would have
been charged had the decrease
not been recognised.
Decrease (up
to asset's
credit
balance on
revaluation
reserve)
DR Revaluation reserve
CR Property, plant and
equipment
Other
comprehensive
income and
expenditure
If the asset had previously been
revalued upwards, it will have a
credit balance on the revaluation
reserve. Any decrease is first
charged against that balance.
Decrease (in
excess of
asset's credit
balance on
revaluation
reserve)
DR General fund
CR Property, plant and
equipment
Operating
expenditure
Any decrease in excess of the
credit balance is charged to other
comprehensive income and
expenditure.
42. Auditors should assess whether an increase in value at 31 March 2018 has been recognised
in
the revaluation reserve; or
net operating expenditure if reversing a previous decrease on the same asset that was
originally charged there.
43. Auditors should assess whether a decrease in value at 31 March has been recognised in
the revaluation reserve up to the credit balance in respect of the asset
net operating expenditure to the extent it exceeds the credit balance on the revaluation
reserve.
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Page 14 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
44. Auditors should assess whether revaluation decreases (and their reversal) recognised in
other comprehensive income and expenditure have been included in the adjustments reported
in the statement of changes in taxpayers equity.
4 Depreciation and impairment
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4 Depreciation and impairment Risks of misstatement
Depreciation is not charged where required
45. Depreciation applies to all property, plant and equipment regardless of measurement basis.
Auditors should assess whether depreciation has begun to be charged at the point the asset
is available for use (i.e. when it is in a location and condition for it to be capable of operating in
the manner intended by management).
46. If the body has failed to charge depreciation on any item of property, plant and equipment,
auditors should establish the reason and assess whether it is valid. Reasons often given for
not charging depreciation, and their validity, are summarised in the following table.
Valid Invalid (i.e. depreciation still required)
Land which has an unlimited useful life
(excluding land subject to depletion)
The asset's current value has increased over
the year
The residual value of an asset is equal to (or
greater than) its carrying value
Annual revaluations are undertaken
Assets in the course of construction Regular repairs and maintenance are carried
out on the asset
The asset has been reclassified as being held
for sale
The asset has been disposed of (depending
on policy)
Depreciation is not properly calculated
47. The body should have calculated depreciation by
allocating the depreciable amount (i.e. the carrying value of the asset less any residual
value)
over the useful life of the asset
using an appropriate depreciation method.
48. Auditors should assess whether
the body has reviewed the useful lives and residual values at 31 March 2018
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Page 16 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
the useful lives reasonably reflect the period which the assets are expected to be
available for use by the body (and therefore may be shorter than the economic life)
the residual values are the estimated amounts that the body would currently obtain from
disposal of each asset, after deducting the estimated costs of disposal, if the asset was
already of the age and in the condition expected at the end of its useful life
the depreciation methods are appropriate and reflect the pattern in which the asset's
future economic benefits or service potential are expected to be consumed
any change in useful lives, residual values or depreciation method has been accounted
for prospectively as a change in accounting estimate
land and buildings have been accounted for separately, even when acquired together.
An increase in the value of land (which is not depreciated) on which a building stands
should not therefore affect the depreciable amount of the building.
Significant components are not identified
49. Depreciation should be provided for separately on each part (i.e. component) of an item of
property, plant and equipment
with a cost that is significant in relation to the total cost of the item and
has a different useful life or depreciation method.
50. Auditors should assess whether the body has
established a policy which specifies the basis for determining whether the cost of a
component is significant. It is expected that the policy will refer to cost as a proportion of
the overall cost of the asset (including the cost of the new component) rather than an
absolute amount
determined significance by comparing a component’s cost against the overall asset cost
and considering the result against the criteria in the policy
compared the cost of the new component against the overall cost of the asset as at the
same date. This means the body should have either
estimated the current build cost of the asset and compared it with the cost of the new
component; or
discounted the cost of the new component back to the date when the asset was
initially recognised and compared it with the original cost of the asset.
51. Bodies may choose to depreciate components separately even where the cost is not
significant.
Depreciation is not properly accounted for
52. When considering whether depreciation on assets or asset components has been properly
accounted for in 2017/18, auditors should confirm that
depreciation has been charged to net operating expenditure in the SOCNE
4 Depreciation and impairment
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a transfer has been made from the revaluation reserve to the general fund for assets
measured at current value for the difference between the depreciation charge and the
depreciation that would have been charged if the asset was carried at historical cost
any accumulated depreciation at the date of valuation has been eliminated against the
gross carrying amount of the asset with the net amount restated to the revalued amount
of the asset.
Impairment assessment is not carried out
53. IAS 36 requires bodies to assess at the end of each reporting period whether there is any
indication that an asset may be impaired. Examples of indications that an impairment may
have occurred are.
an unexpectedly significant decline in an asset’s carrying amount that is specific to the
asset
evidence of obsolescence
physical damage to an asset.
54. Auditors should assess whether the body has considered at 31 March 2018 whether there
are any indications that assets are impaired.
Impairment losses are not properly calculated
55. An asset is described as impaired if its carrying amount is greater than its recoverable amount
(i.e. the amount to be recovered through use or sale of the asset). If the body has identified
indications that an asset is impaired, the body is required to make a formal estimate of the
recoverable amount of the asset. This should be the higher of its net selling price and its
value in use (i.e. the present value of the asset’s remaining service potential).
56. IAS 36 confirms that revaluation principles take precedence over those for impairment. Before
an impairment loss is calculated on an asset measured at current value, the asset should be
revalued so the carrying amount is up to date (and any revaluation decrease accounted for).
57. If there are any indications that an asset is impaired, auditors should
confirm that the body has made a formal estimate of the recoverable amount of the asset
assess whether the estimate is reasonable
confirm that the carrying amount of the asset has been brought up to date before the
impairment loss is calculated
assess whether the impairment loss is the difference between the estimated recoverable
amount and the updated carrying amount.
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Page 18 Audit of 2017/18 annual report and accounts (CG) - module 1 property, plant and equipment
Impairment losses are not properly accounted for
58. If an asset's carrying amount is greater than its recoverable amount, IAS 36 requires the
recognition of an impairment loss. Impairment losses should be accounted for in the same
way as a revaluation decrease.
59. IAS 36 requires all impairment losses to be recognised in the revaluation reserve to the extent
that there is a credit balance relating to the impaired asset with the excess recognised as an
expense. However, the FReM adapts IAS 36 as summarised in the following table:
Arising from consumption
of economic benefits /
reduction in service
potential?
Treatment of impairment loss
No Recognise in revaluation reserve
Yes Recognise in SOCNE
Transfer any balance on the revaluation reserve to which the
impairment would have been charged under IAS 36 to general fund
60. Auditors should assess whether
impairment losses that do not result from a clear consumption of economic benefit or
reduction in service potential have been accounted for in the same way as revaluation
decrease, i.e. recognised in the revaluation reserve (and included in other comprehensive
income and expenditure) to the extent that there is a credit balance relating to the
impaired asset, i.e. until the asset carrying value becomes equal to the depreciated
historical cost
impairment losses in excess of the credit in the revaluation reserve and those that arise
from a clear consumption of economic value or reduction in service potential have been
recognised in net operating expenditure in the SOCNE.
61. FReM paragraph 7.3.4 highlights that, in budgetary terms, certain impairments should be
scored against departmental expenditure limits (DEL) and others against annually managed
expenditure (AME). This is summarised in the following table:
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DEL impairment AME impairment
Losses of, and damage to, assets resulting from
normal business operations
A management decision that it no longer
requires a facility in the course of construction
and the construction costs to date are
completely written off
Unnecessary over-specification of assets
Loss as the result of a catastrophe, unforeseen
obsolescence, and impairments that cannot be
scored to another impairment category such as
when
specialised buildings are written down to
DRC
land is purchased for social development
and the cost is greater than the disposal
value
specialised assets are put to non-
specialised use
assets are moved from being in use to held
for sale.
62. Although the budgeting treatment does not influence the accounting treatment, FReM
paragraph 7.3.4 suggests that bodies consider whether information about the type and cause
of impairment could usefully be disclosed in the relevant notes to the accounts.
Subsequent expenditure is capitalised but written off
63. When subsequent expenditure on an asset has been capitalised (because it adds to the
economic benefits or service potential), there is no requirement for a body to revalue the asset
unless there are indications that it might be impaired. However, auditors should encourage
the body to undertake a valuation if the amount of expenditure capitalised is significant.
64. Bodies sometimes treat the subsequent expenditure as capital expenditure but instead of
adding it to the carrying value of the asset, they write it off and describe it as 'expenditure that
does not add to the value of the asset'. This is unlikely to be the appropriate treatment.
Where a body treats the subsequent expenditure in this way, auditors should establish the
reason underlying why the expenditure was incurred as this determines the appropriate
treatment. This is explained in the following table:
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Reason for expenditure Appropriate treatment
Repairs and maintenance If this merely maintains, rather than adds to the economic benefits
or service potential, it should be treated as revenue expenditure.
Replace a component The replaced component should first be derecognised (regardless
of whether it had been depreciated separately) to reduce the
asset's carrying amount. The cost of the new component can then
be capitalised and added in full to the asset's carrying amount.
[Note: If it is not practicable to determine the carrying amount of the
replaced component, bodies may use the cost of the new
component as an indication of the cost of the replaced part at the
time it was acquired or constructed, which should be adjusted for
depreciation and impairment, if required.]
Remedial work to correct
an impairment (e.g. repair
physical damage)
An impairment loss should be recognised before the remedial work
was carried out to reduce the asset's carrying amount. The cost of
the remedial work can then be capitalised and added in full to the
asset's carrying amount.
65. Auditors should assess whether
repairs and maintenance on an asset is treated as revenue expenditure
the carrying amount of a replaced component is derecognised and the cost of the new
component added to the asset's carrying amount
remedial work to correct an impairment is added to the asset's carrying amount after the
impairment loss has been recognised.
5 Disposals
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5 Disposals Risks of misstatement
Disposals are not identified
66. Auditors should assess whether the body has identified all disposals of property, plant and
equipment during 2017/18. Assets can be disposed of by a body through
sale
entering into a finance lease as lessor
demolition.
67. A disposal should be recognised on the date when the risks and rewards of ownership are
transferred, rather than the point when a body becomes committed to the disposal. For a
property transfer, this is likely to be the completion date rather than when contracts are
exchanged.
Disposals are not properly derecognised
68. Auditors should assess whether the carrying amount of an item of property, plant and
equipment has been derecognised (i.e. removed from the statement of financial position) on
disposal (or when no future economic benefits or service potential are expected from its use or
disposal).
69. If the asset derecognised was carried at a revalued amount, auditors should also confirm
that the credit balance on the revaluation reserve in respect of that asset has been transferred
to the general fund.
Gain or loss on disposal is not properly accounted for
70. Bodies are required to calculate the gain or loss arising from the disposal of an asset. The
gain or loss is the difference between
the disposal proceeds (i.e. capital receipt); and
the carrying amount of the asset at the date of disposal (i.e. the amount at which the
asset is recognised after deducting any accumulated depreciation and impairment
losses).
71. Auditors should
confirm that the gain or loss has been recognised in net operating expenditure (unless
the asset is leased back which is covered at section 2 of module 5)
assess whether the gain or loss has been properly calculated.
72. If payment is deferred beyond normal credit terms, the disposal proceeds should be
discounted using a reasonable discount rate. The discounting should be unwound over the
5 Disposals
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credit period by recognising the difference between the discounted amount and the total
payments received as interest income in operating expenditure.
73. Auditors should assess whether
deferred disposal proceeds have been discounted
the discount rate is reasonable
the difference between the discounted amount and the total payments received has been
recognised as interest income in operating expenditure.
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6 Disclosures Risks of misstatement
Information on property, plant and equipment is not properly disclosed
74. Auditors should
confirm that the body has complied with the disclosure requirements of IAS 16 and those
for property, plant and equipment set out at FReM paragraphs 7.1.12 to 7.1.14
assess whether the disclosures are complete, clear, concise, relevant, and free from
misstatement.
75. Paragraph 7.1.14 requires disclosures if depreciated historical cost is used as a proxy for
current value in existing use or fair value. The disclosures should include
the classes of assets where it has been used
the reasons why
information about any significant estimation techniques.
Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission
check that organisations spending public money use it properly, efficiently and effectively.
Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
Page 3
Contents
1 Introduction ..................................................................................................................... 4
Purpose of module ............................................................................................................ 4
Contact point for this module ............................................................................................. 4
2 Provisions and contingencies ........................................................................................ 5
Changes in 2017/18 .......................................................................................................... 5
Definition ........................................................................................................................... 5
Summary of financial reporting requirements .................................................................... 5
Sources of guidance on financial reporting ........................................................................ 5
Risks of misstatement ....................................................................................................... 5
3 Creditors ........................................................................................................................ 13
Changes in 2017/18 ........................................................................................................ 13
Definition ......................................................................................................................... 13
Summary of financial reporting requirements .................................................................. 13
Risks of misstatement ..................................................................................................... 13
4 Accruals ......................................................................................................................... 15
Changes in 2017/18 ........................................................................................................ 15
Definition ......................................................................................................................... 15
Summary of financial reporting requirements .................................................................. 15
Source of guidance on financial reporting ........................................................................ 15
Risks of misstatement ..................................................................................................... 15
1 Introduction
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
1 Introduction Purpose of module
1. This module of technical guidance note 2018/1(CG) provides information on, and guidance on
the risks of misstatements in, the following financial statement areas
Provisions and contingencies (section 2).
Creditors (section 3).
Accruals (section 4).
Contact point for this module
2. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected]
Helen Cobb, Senior Adviser (Professional Support) - [email protected]
2 Provisions and contingencies
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2 Provisions and contingencies Changes in 2017/18
3. There are no changes in financial reporting requirements in 2017/18.
Definition
4. Provisions are liabilities incurred of uncertain timing or amount.
Summary of financial reporting requirements
5. The FReM requires bodies to account for general provisions in accordance with IAS 37
Provisions, contingent liabilities and contingent assets as interpreted by FReM section 6.2.
6. Specific types of provisions are covered by other accounting standards such as IAS 19
Employee benefits in respect of termination benefits.
7. The SPFM section on contingent liabilities specifically addresses particular contingent
liabilities (i.e. those that are legally enforceable undertakings in the form of a guarantee or
indemnity, or even a letter of comfort that would impose a moral obligation).
Sources of guidance on financial reporting
8. IPSAS 19 provides guidance on IAS 37 for public sector bodies.
Risks of misstatement
9. The following paragraphs highlight potential risks of misstatement in respect of provisions and
contingencies, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Provisions are not recognised when the conditions are met
10. IAS 37 requires a provision to be recognised when, and only when, three specified conditions
are met. They are summarised in the following table:
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Condition Explanation
The body has a present
obligation as a result of a
past event
A past event leads to a present obligation where the settlement of
the obligation
can be enforced by law; or
where there is a constructive obligation, i.e. a body has
indicated to other parties that it will accept certain
responsibilities and has created valid expectations on the part of
those other parties that it will discharge those responsibilities.
It is probable that an
outflow of resources
embodying economic
benefits or service
potential will be required
to settle the obligation
An outflow of resources or other event is regarded as probable if
the event is more likely than not to occur.
A reliable estimate can be
made of the amount of the
obligation
Except in extremely rare cases, a body should be able to determine
a range of possible outcomes and can therefore make a 'best
estimate' of the obligation that is sufficiently reliable to use in
recognising a provision.
11. Auditors should assess whether the body has identified all of its obligations at 31 March
2018 that can either be enforced by law or represent constructive obligations.
12. Where a body has identified a present obligation, but has not recognised a provision because
it believes a reliable estimate cannot be made, auditors should assess whether a reasonable
estimate is possible. In making this assessment, auditors should
consider the reliability of the latest available information
assess whether there is an appropriate method that can be used in making the estimate
consider the underlying assumptions.
13. If a reasonable estimate is possible, auditors should confirm that the nature and limitations of
the estimating process have been disclosed.
14. Internal arrangements may involve the body setting aside resources in its budgets to fund
uncertain future expenditure or earmarking part of the general fund. For financial reporting
purposes, this is not a substitute for recognising a provision when the recognition conditions
are met.
Provisions are recognised when the conditions are not met
15. Auditors should consider the provisions recognised by the body at 31 March 2018 and
confirm that all three of the recognition conditions have been met.
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16. Where there is a present obligation but one or both of the other conditions are not met, a
provision should not be recognised, but a contingent liability should instead be disclosed.
Provisions are not properly measured
17. When assessing the amount recognised for a provision, auditors should assess whether
the amount is the body's best estimate of the expenditure required to settle the obligation
at 31 March 2018. This should be the case even where it is prohibitively expensive to
settle obligation at that date, and therefore auditors should particularly confirm that the
amount recognised has not been restricted on the grounds of affordability
the estimates of outcome and financial effect are reasonable, have been determined by
the judgement of the body's management, supplemented by experience of similar
transactions and, where appropriate, reports from independent experts
the estimate reflects additional evidence provided by any events after 31 March 2018
provisions recognised in previous years have been reviewed and adjusted, where
appropriate, to reflect the best estimate at 31 March 2018 or to reflect material changes in
the assumptions underlying the calculations of the cash flows
where the effect of the time value of money is material, the amount of the provision has
been discounted to the present value of the expected payments.
18. The FReM interprets IAS 37 by requiring bodies to use the real discount rates set by Treasury
in public expenditure system (PES) papers. PES (2017)10 sets out the real discount rates to
be applied to provisions recognised in accordance with IAS 37 as at 31 March 2018. The
rates vary depending on the number of years the expected cash flows are from that date, and
are summarised in the following table:
Category Period Percentage
Short term Within 5 years Minus 2.42%
Medium term Between 5 and 10 years Minus 1.85%
Long term More than 10 years Minus 1.56%
Provisions are not properly accounted for
19. Auditors should assess whether
new or increased provisions at 31 March 2018 have been recognised by a charge to
operating expenditure (or in limited cases as capital expenditure)
the unwinding of any discounting due to the passage of time has been recognised as an
interest charge
decreased provisions at 31 March 2018 have been recognised by a credit to operating
expenditure
2 Provisions and contingencies
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the provision balance has been debited for any liabilities settled during 2017/18.
Provision is not recognised for restructuring costs
20. Auditors should assess whether the body has recognised a provision for the expected costs
of restructuring its operations when the recognition conditions are met. In this context, a
constructive obligation to restructure arises when a body has by 31 March 2018
a detailed formal plan for the restructuring identifying
the activities concerned
the principal locations
the number of employees who will be compensated for terminating their services
the cost
date; and
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.
21. Auditors should assess whether the provision includes only the direct expenditure arising
from the restructuring, which are those that are
necessarily entailed by the restructuring; and
not associated with the ongoing activities of the body.
Provision is not recognised for equal pay claims
22. Some bodies may have outstanding equal pay claims under the Equal Pay Act 1970 and
Equalities Act 2010 which make it unlawful for employers to discriminate between men and
women in terms of pay and conditions.
23. Auditors should
confirm that the body has recognised a provision for outstanding claims at 31 March 2018
where the recognition conditions are met
assess whether the provision is complete and free from misstatement.
Provision is not recognised for termination benefits
24. The FReM requires bodies to account for termination benefits (also referred to as early
departure costs) in accordance with IAS 19 Employee benefits. Termination benefits may be
lump-sum payments
enhancement of retirement benefits
salary until the end of a specified notice period if the employee renders no further service
to the body.
25. They are payable as a result of either
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Page 9
a body's decision to terminate an employee’s employment before the normal retirement
date; or
an employee’s decision to accept an offer of voluntary redundancy in exchange for those
benefits.
26. A body is required to recognise the liability for termination benefits if events occur that means
it can no longer withdraw the offer of those benefits. This is summarised in the following table:
Reason for termination Point where offer cannot be withdrawn
Body's decision to
terminate an employee’s
employment
When the body has communicated to the affected employees a plan
of termination meeting all of the following criteria
Actions required to complete the plan indicate that it is unlikely
that significant changes to the plan will be made.
The plan identifies the number of employees whose employment
is to be terminated, their job classifications or functions and their
locations, and the expected completion date.
The plan establishes the termination benefits that employees will
receive in sufficient detail that employees can determine the type
and amount of benefits they will receive.
Employee’s decision to
accept an offer of
voluntary redundancy
The earlier of when
the employee accepts the offer; and
a legal, regulatory or contractual restriction on the body’s ability to
withdraw the offer takes effect. This would be when the offer is
made, if the restriction existed at the time of the offer.
27. In the absence of the above events, a body is required to recognise a liability for the
termination benefits no later than when it recognises a provision for the costs of a related
restructuring.
28. Auditors should assess whether
termination benefits have been recognised at 31 March 2018 if the body can no longer
withdraw the offer (and no later than when it recognises a provision for the costs of a
related restructuring)
termination benefits have been recognised in operating expenditure when the liability is
recognised. Termination benefits are not provided in exchange for service, and do not
provide a body with future economic benefits or service potential
where termination benefits fall due more than twelve months after 31 March 2018, they
have been discounted using the discount rate set by Treasury in PES(2017)10 which is
2.55% nominal/0.10% real.
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Provision is not recognised for outstanding legal claims
29. Auditors should assess whether the body has
identified any legal claims in progress that have not been settled by 31 March 2018
considered whether they represent a present obligation.
30. In some cases, it may not be clear whether a body has a present obligation for a legal claim. A
past event is deemed to give rise to a present obligation if, taking account of all available
evidence including the opinion of experts, it is more likely than not that a present obligation
exists at the end of the reporting period. The evidence considered should include any
additional information provided by events after the reporting period.
31. Auditors should assess whether a provision has been recognised for outstanding legal
claims if it is more likely than not that a present obligation exists at 31 March 2018 (and the
other recognition criteria are also met).
Provision is not recognised for overtime holiday pay
32. A ruling from the Employment Appeal Tribunal states that holiday pay should include non-
guaranteed overtime (i.e. overtime which is not guaranteed by the employer, but which the
worker is obliged to work if it is offered).
33. The ruling may have implications for bodies where their employees are required to work
overtime as a regular part of their job. The backdated claims have, however, been limited, with
the tribunal ruling that workers can only make claims if it is less than three months since their
last incorrect payment, although the claim can be backdated until such time as there is a three
month break between underpayments.
34. Auditors should assess whether the body has considered the need to recognise a provision
at 31 March 2018 for any claims received, including obtaining legal advice, where the
recognition conditions are met.
Provision not recognised for financial guarantees
35. The FReM requires bodies to comply with IAS 39 Financial instruments: recognition and
measurement in respect of financial guarantees. Financial guarantee contracts require bodies
to make specified payments to reimburse the holder of a debt if the debtor fails to make a
payment under a contract. Auditors should confirm that
financial guarantee contracts entered into since 1 April 2006 have been recognised as a
liability on the statement of financial position
the provision was initially recognised at fair value in accordance with IFRS 13 (as
explained at section 5 of module 5), estimated by considering the probability of the
guarantee being called and the likely amount payable
the provisions have been amortised over their useful lives to match any reductions in the
underlying risk exposure, e.g. a repayment of some of the principal by the debtor
2 Provisions and contingencies
Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
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the carrying amount of the financial guarantee has remained at the initially recognised
amount (less cumulative amortisation) unless payment under the guarantee has become
probable in which case the amount of the provision should have been determined in
accordance with IAS 37
any movements in the carrying amount have been debited or credited to operating
expenditure.
Expected reimbursements are not recognised
36. Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, auditors should assess whether the reimbursement
is a reasonable estimate (where there is uncertainty over the amount)
has been recognised at 31 March 2018 only when it is virtually certain that it will be
received
has been treated as a separate asset (and not netted off the provision)
does not exceed the amount of the provision.
Information on provisions is not properly disclosed
37. Auditors should
confirm that the body has complied with the disclosure requirements of IAS 37
assess whether the disclosures are complete, clear, concise, and free from misstatement.
38. In extremely rare cases, where disclosure of some or all of the required information can be
expected to prejudice seriously the position of the body in a dispute with other parties on the
subject matter of a provision, the body need not disclose the information. Where the body
believes this to be the case, auditors should
assess whether the disclosure is likely to seriously prejudice the body
if that is the case, confirm that the body has instead disclosed
the general nature of the dispute
the fact that the information has not been disclosed
the reason for non-disclosure.
assess whether the disclosures and complete, clear, concise, and free from
misstatement.
Contingent liabilities are not disclosed
39. A contingent liability requires to be disclosed where
there is a present obligation but it is not probable that an outflow of resources will be
required or the amount cannot be reliably measured (and therefore a provision cannot be
recognised)
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there is a possible obligation arising from past events whose existence will be confirmed
by uncertain future events not wholly within the body’s control.
40. Auditors should
assess whether the body has identified all its contingent liabilities
confirm that the body has disclosed for each contingent liability
a brief description of its nature
an estimate of its financial effect
an indication of the uncertainties
the possibility of any reimbursement.
assess whether the disclosures are complete, clear, concise, and free from misstatement.
41. The disclosure of a contingent liability is not required where
the possibility of any outflow in settlement is remote
it is not practicable to do so. Auditors should assess whether it is not practicable and, if
so, confirm that the fact it is not practicable has been disclosed
disclosure of some or all of the required information can be expected to prejudice
seriously the position of the body in a dispute with other parties on the subject matter of
the contingent liability. Auditors should
confirm that the body has instead disclosed the general nature of the dispute,
together with the fact that, and reason why, the information has not been disclosed
assess whether the disclosure is clear, concise, and free from misstatement.
3 Creditors
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3 Creditors Changes in 2017/18
42. There are no changes in financial reporting requirements in 2017/18.
Definition
43. Creditors are financial liabilities arising from the contractual obligation to pay cash in the future
for goods or services or other benefits that have been received or supplied and have been
invoiced or formally agreed with the supplier.
Summary of financial reporting requirements
44. The FReM requires bodies to account for creditors in accordance with IAS 18 Revenue,
IPSAS 23 Revenue from non-exchange transactions and IAS 39 Financial instruments:
recognition and measurement.
Risks of misstatement
45. The following paragraphs highlight potential risks of misstatement in respect of creditors, and
set out actions for auditors to undertake to assess whether the body has followed the required
treatment.
Creditors are not recognised at the required point
46. Auditors should assess whether the body has identified all cases where
it has been invoiced for ordered goods that have been delivered or services rendered
during 2017/18; and
payment has not been made by 31 March 2018.
Creditors are not recognised at the required amount
47. Auditors should assess whether creditors have been measured at the fair value of the
consideration payable in accordance with IFRS 13. Fair value is defined as the price that
would be paid to transfer a liability in an orderly transaction between market participants at the
measurement date (explained further at section 5of module 5).
48. In most cases, the consideration payable is the amount of cash and cash equivalents payable.
If payment is on deferred terms, the consideration payable should be recognised at the
discounted amount in accordance with IAS 39, with the difference recognised as interest
expense in operating expenditure. Short duration payables with no stated interest rate may
be measured at original invoice amount if the effect of discounting is immaterial.
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Revenue received in advance is not recognised as a creditor
49. Auditors should
assess whether the body has identified all cases where it has received revenue from
service recipients during 2017/18 but the goods have not been delivered or services
rendered by 31 March 2018
confirm that the body has recognised a creditor at 31 March 2018 (i.e. receipt in advance)
in the balance sheet for any such case.
4 Accruals
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4 Accruals Changes in 2017/18
50. There are no changes in financial reporting requirements in 2017/18.
Definition
51. Accruals are liabilities to pay for goods and services that have been received or supplied,
including amounts due to employees. They technically differ from creditors in that they have
not been invoiced or formally agreed with the supplier. Although it is usually necessary to
estimate the amount of accruals, the uncertainty is generally much less than for provisions.
Summary of financial reporting requirements
52. The FReM requires bodies to prepare their financial statements using the accrual basis of
accounting.
53. The FReM requires bodies to recognise an accrual for the untaken element at the year end of
short-term accumulating paid absences, in accordance with IAS 19 Employee benefits.
Source of guidance on financial reporting
54. FReM section 7.2 provides guidance on the treatment for the Carbon reduction commitment
(CRC) scheme.
Risks of misstatement
55. The following paragraphs highlight the potential risks of misstatement in respect of accruals,
and set out actions for auditors to undertake to assess whether the body has followed the
required treatment.
Accruals are not identified
56. Auditors should assess whether the body has identified all cases where
ordered goods have been delivered or services rendered during 2017/18; and
it has not been invoiced, and payment has not been made, by 31 March 2018.
Untaken holiday accrual is not recognised
57. Auditors should assess whether the body has identified and accrued for any untaken holiday
(i.e. annual leave and flexitime balances) at 31 March 2018 that can be carried forward and
used during 2018/19.
58. The issues in respect of the untaken annual leave accrual are summarised and discussed in
the following table:
4 Accruals
Page 16 Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
Issue Comment
Identification of
relevant costs
The accrual should be measured as the additional amount that the body
expects to pay as a result of the unused entitlement that has accumulated at 31
March 2018. This should include salary as well as associated employer's
national insurance and pension contributions. The reference to ‘expectation to
pay’ does not relate to an additional payment over and above an employee’s
normal salary. Instead it refers to the circumstance where an employee
receives their salary for the current year but takes a day off that is part of their
entitlement from an earlier year.
Calculating the
accrual
The accrual should be based on the proportion of the annual salary and
associated costs which relates to the number of untaken days.
Identifying
number of
untaken days
For most staff, contracts of employment specify the rate at which leave is paid,
e.g. 1/261 of the annual salary per day. In order to establish the accrual
required for an individual employee, the following two scenarios need to be
considered
Where the employee’s leave year is aligned with the financial year (i.e.
ends on 31 March 2018), the accrual will be based on any leave carried
forward at the end of the leave year.
Where the employee’s leave year is not aligned with the financial year, the
leave earned by the employee to 31 March 2018 will need to be
calculated. This is then compared with the leave taken by that date to
establish whether leave is owed to or by the employee.
Charging/crediting
operating
expenditure
The difference between the accrual at 31 March 2017 and 31 March 2018
should be charged (increase) or credited (decrease) to operating expenditure.
59. Auditors should assess whether
the accrual includes salary as well as associated employer's national insurance and
pension contributions
the body has gathered reliable information on the number of days of untaken leave as at
31 March 2018
where the body has calculated the accrual on the basis of a sample of staff, the sample
reflects all groups of staff
4 Accruals
Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
Page 17
the accrual at 31 March 2017 has been reversed in 2017/18 and replaced with the
accrual at 31 March 2018
operating
expenditure.
Carbon reduction commitment allowances accrual is not recognised
60. Bodies which qualify to participate in the CRC scheme (based on their level of carbon dioxide
emissions) are required to account for it based on IFRIC 3 Emission rights. The CRC scheme
has the following features
The second phase of the CRC scheme commenced in April 2014 and runs until March
2019.
Each phase is divided into compliance years which run from 1 April to 31 March.
Allowances can be purchased in government sales of allowances or, if available, on the
secondary market.
In phase 2, bodies can order and buy allowances
prospectively in April against emissions that they predict will be produced in the
current or future compliance years
retrospectively in June/July following the end of the compliance year.
The production of carbon emissions gives rise to a liability.
61. The issues in respect of the CRC accrual are summarised and discussed in the following
table:
Issue Comment
Obligating event The obligating event occurs when a participating body has used energy
that it will be required to report on, and produced CO2 emissions that
require it to purchase and surrender allowances in accordance with the
CRC scheme’s requirements at the reporting date. Therefore the
obligation to meet the participating body’s CRC responsibilities arises
during 2017/18.
Calculating the
accrual
The measurement of the obligation should be based on the requirements
of IAS 37 and is the best estimate of the expenditure required to settle
the obligation at 31 March 2018.
Prospective
purchase of
allowances
Where the body purchased allowances prospectively in April 2017 for the
purpose of settling 2017/18 or future years’ CRC responsibilities,
auditors should assess whether
4 Accruals
Page 18 Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals
Issue Comment
the unused allowances at 31 March 2018 have been classified as
current intangible assets (explained at section 8 of module 7) or
inventory if held for trading
2017/18 allowances to be surrendered have been charged as an
expense
a liability (accrual) has been recognised for the surrender of the
allowances to the CRC Registry by October 2018.
Retrospective
purchase of
allowances
Where the body purchased allowances retrospectively in June/July 2018,
auditors should assess whether
2017/18 allowances to be surrendered have been charged as an
expense
a liability (accrual) has been recognised for the surrender of the
allowances to the CRC Registry by October 2018.
Surrendering
allowances
By the 31 October 2018, participating authorities are required to
surrender purchased allowances to the CRC Registry in accordance with
their liabilities in relation to emissions reported for the financial year
2017/18. Auditors should assess whether
the 2016/17 allowances surrendered to the CRC Registry in October
2017 has reduced the current intangible asset and the accrual at 31
March 2018
the cost of the CRC allowances to be surrendered (in October 2018)
has been charged to service segments in 2017/18 on a reasonable
basis that fairly reflects the production of carbon emissions.
Unused allowances Allowances are valid for the remainder of the phase in which they are
purchased. Any unused allowances at 31 March 2018 purchased in
phase 2 are recognised as an asset and can be carried forward to
2018/19. Any unused allowances purchased in phase 1 (i.e. before
2014/15) are invalid, and auditors should check that they have been
written off.
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission
check that organisations spending public money use it properly, efficiently and effectively.
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 3
Contents
1 Introduction ..................................................................................................................... 4
Purpose of module ............................................................................................................ 4
Contact points for this module ........................................................................................... 4
Definition ........................................................................................................................... 4
Changes in 2017/18 .......................................................................................................... 4
Summary of financial reporting requirements .................................................................... 4
Sources of guidance on financial reporting requirements .................................................. 5
2 Loans and receivables .................................................................................................... 6
Purpose of section............................................................................................................. 6
Definition ........................................................................................................................... 6
Risks of misstatement ....................................................................................................... 6
3 Available-for-sale financial assets ................................................................................. 9
Purpose of section............................................................................................................. 9
Definition ........................................................................................................................... 9
Risks of misstatement ....................................................................................................... 9
4 Derivatives and embedded derivatives ........................................................................ 13
Purpose of section........................................................................................................... 13
Definition ......................................................................................................................... 13
Risks of misstatement ..................................................................................................... 13
5 Presentation and disclosure ........................................................................................ 17
Purpose of section........................................................................................................... 17
Risks of misstatement ..................................................................................................... 17
1 Introduction
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
1 Introduction Purpose of module
1. This module of technical guidance note 2018/1(CG) provides information on, and guidance on
the risks of misstatements in, the following complex financial instruments
Loans and receivables.
Available-for-sale financial assets.
Derivatives and embedded derivatives.
2. Trade payables (i.e. creditors) and financial guarantees are also financial instruments but are
covered in module 2.
Contact points for this module
3. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected].
Helen Cobb, Senior Advisor (Professional Support) - [email protected].
Definition
4. A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity. The term covers
financial liabilities, e.g. loans from other parties (borrowing)
financial assets, e.g. loans to other parties, and investments
derivatives and embedded derivatives.
Changes in 2017/18
5. There are no changes in financial reporting requirements in 2017/18.
Summary of financial reporting requirements
6. The FReM requires bodies to account for financial instruments in accordance with IAS 39
Financial instruments: recognition and measurement, IAS 32 Financial instruments:
presentation and IFRS 7 Financial instruments: disclosures. There are some interpretations to
the standards at FReM section 6.2.
7. The 2007/08 FReM first adopted the equivalent UK financial instrument standards. The
transitional provisions of the UK standards remain in effect where they continue to be relevant.
In particular, recognition and derecognition decisions prior to 1 April 2006 need not be
reconsidered.
1 Introduction
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 5
8. For the avoidance of doubt, IFRS 9 does not apply until 2018/19.
Sources of guidance on financial reporting requirements
9. The HM Treasury guide Financial instruments and IFRS provides guidance on accounting for
financial instruments in the central government sector, particularly in respect of IAS 39. It
includes a number of examples of how the standards might be applied, and should be read in
conjunction with them.
10. The Scottish Government has also issued Application note - Investments and Application note
- Financial instruments to provide guidance on this area.
11. IPSASs 28 to 30 provide guidance for public sector bodies.
2 Loans and receivables
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
2 Loans and receivables Purpose of section
12. This section of the module provides information on, and guidance on the risks of misstatement
in, loans and receivables.
Definition
13. Loans and receivables are generally loans or other advances made by central government
bodies to third parties that have fixed or determinable payments and are not quoted in an
active market.
Risks of misstatement
14. The following paragraphs highlight potential risks of misstatement in respect of loans and
receivables, and set out actions for auditors to assess whether the body has followed the
required treatment.
Loans and receivables are not identified
15. Auditors should assess whether the body has identified all its financial instruments that meet
the definition of loans and receivables. The two defining characteristics for this classification
are summarised in the following table:
Characteristic Explanation
Fixed or
determinable
payments
This criterion does not require that payments are scheduled out precisely,
but that the contractual arrangement defines the dates and the amounts of
payments, e.g. principal and interest payments are either fixed or are
determined by terms in the contract that refer to a source measure (such as
LIBOR) that allows calculation. The classification excludes
equity instruments as they do not have fixed or determinable payments
instruments the body intends to sell immediately.
Not quoted in an
active market
This means quoted prices are not readily and regularly available or, if they
are available, those prices do not represent actual and regularly occurring
market transaction on an arm’s-length basis.
Loans and receivables are not properly measured at initial recognition
16. Auditors should assess whether loans and receivables have been measured initially at
fair value in accordance with IFRS 13 (explained at section 5 of module 5) - which is
usually the transaction price, i.e. the amount of the originating transaction (e.g. payment
2 Loans and receivables
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 7
of loan advance) unless the transaction was not based on market terms, e.g. soft loans;
plus
transaction costs. Bodies have the option to charge transaction costs immediately to net
expenditure where they are not material.
Loans and receivables are not properly measured subsequently
17. After initial recognition, loans and receivables should be carried on the statement of financial
position at amortised cost. The discount rate should be the higher of the calculated single
effective interest rate that exactly discounts estimated future cash receipts over the expected
life of the instrument to the initial net carrying amount and the real discount rate set by
Treasury. The rate set for 2017/18 by Treasury in PES(2017)10 is 0.3%.
18. Auditors should assess whether the carrying amount of loans and receivables at 31 March
2018 is
the carrying amount on initial recognition
plus the interest credited to net expenditure in 2017/18
less the cash received (both interest and principal)
less any impairment.
Interest income is not properly calculated
19. The interest credited to net expenditure should be determined by applying the effective
interest rate to the carrying amount. The effective interest rate is the rate that exactly
discounts estimated future cash receipts over the expected life of the instrument to the initial
net carrying amount.
20. In most cases the effective interest rate is equal to the contractual interest rate. However, it is
necessary for the body to perform an effective interest rate calculation for 'soft loans'.
21. Auditors should assess whether interest income
has been credited to net expenditure
is free from misstatement.
Soft loans advanced are not properly accounted for
22. 'Soft loans' are loans made by a body at below prevailing market rates for policy reasons. The
fair value of a soft loan does not equal the consideration given as it needs to reflect that the
contractual interest rate is lower than the market rate.
23. Auditors should assess whether
the fair value of a soft loan has been estimated as the present value of all future cash
receipts discounted using the prevailing market rate of interest for a similar instrument
and for an organisation with a similar credit rating. Section 6 of FReM interprets IAS 39
by stating that entities should use the higher of the rate intrinsic to the financial instrument
2 Loans and receivables
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
and the real financial instrument discount rate set by HM Treasury as applied to the flows
expressed in current prices.
the difference between the fair value of the soft loan and the amount of the cash lent has
been charged to net expenditure (unless the loan is to a subsidiary in which case it
should be recorded as an investment).
24. Subsequent accounting requires the loan’s effective interest rate to be used. This rate will be
higher than the contractual interest rate as the initial carrying amount of the loan is less than
the principal sum required to be repaid. Auditors should check whether
the carrying amount of the loan has been written up over its term to the amount it would
have been if a market rate had been used
interest income has been credited to net expenditure over and above the contractual
interest.
Impairments are not properly accounted for
25. Loans and receivables are impaired where there is objective evidence of impairment as a
result of a past event that occurred subsequent to the initial recognition of the asset, e.g. the
significant financial difficulty of the borrower. Bodies are required to make an assessment at
the end of each year as to whether there is objective evidence of impairment.
26. An impairment will arise where the estimated recoverable amount is less than the amortised
cost at which the asset is being carried. The estimated recoverable amount is the present
value of the cash flows now expected to take place over the remaining term of the instrument
(discounted at the original effective interest rate).
27. Auditors should confirm that the body made an assessment at 31 March 2018 as to whether
there is objective evidence of impairment. Where an impairment has been identified, auditors
should assess whether
the impairment loss equals the extent to which the carrying amount of the asset exceeds
the recoverable amount
the carrying amount at 31 March 2018 has been reduced to the recoverable amount
the loss has been charged to net expenditure..
3 Available-for-sale financial assets
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 9
3 Available-for-sale financial assets Purpose of section
28. This section of the module provides information on, and guidance on the risks of misstatement
in, available-for-sale financial assets.
Definition
29. Available-for-sale financial assets are financial assets that
do not meet the definition of loans and receivables; and
are not held for trading.
Risks of misstatement
30. The following paragraphs highlight potential risks of misstatement in respect of available-for-
sale financial assets, and set out actions for auditors to assess whether the body has followed
the required treatment.
Available-for-sale financial assets are not identified
31. Auditors should assess whether the body has identified all its financial instruments that meet
the definition of available-for-sale financial assets.
32. Available-for-sale financial assets are usually
equity investments in companies
other investments with fixed or determinable payments which are traded in an active
market, e.g. bonds and gilts.
Available-for-sale assets are not properly measured at initial recognition
33. Auditors should assess whether available-for-sale assets have been measured initially at
fair value determined in accordance with IFRS 13 (explained at section 5 of module 5).
This is normally the transaction price, i.e. the amount of the originating transaction such
as the payment for an equity share or the purchase of a bond; plus
transaction costs. As with loans and receivables, bodies have the option to charge
transaction costs immediately to net expenditure where they are not material.
Available-for-sale financial assets are not properly measured
34. Available-for-sale financial assets are carried at fair value after initial recognition without any
deduction for transaction costs that would be incurred on sale or other disposal. They
3 Available-for-sale financial assets
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
therefore need to be regularly re-measured. Bodies should use the valuation techniques set
out in IFRS 13 to measure available-for-sale financial assets. This includes, for example, the
quoted price in an active market for an identical instrument. Auditors should
confirm that fair value has been established by using any published price quotations in an
active market or, in the absence of that information, a suitable valuation technique in
accordance with IFRS 13
confirm that there has not been any deduction for transaction costs that would be
incurred on disposal
assess whether the calculation of fair value is free from misstatement.
35. Some equity instruments do not have a quoted price in an active market for an identical
instrument, and fair value cannot be otherwise reliably estimated. When the range of
reasonable fair value estimates is significant and the probabilities of the various estimates
cannot be reasonably assessed, the body may measure the instrument subsequent to initial
recognition, at cost. If a body wishes to use this approach, auditors should assess whether
the body has made a reasonable effort to identify a reliable basis of valuation.
Interest income has not been properly calculated
36. The interest credited to net expenditure for assets with fixed or determinable payments should
be determined by applying the effective interest rate to the carrying amount. The effective
interest rate is the rate that exactly discounts estimated future cash receipts over the expected
life of the instrument to the initial net carrying amount.
37. Auditors should assess whether interest income
has been credited to net expenditure
is free from misstatement.
Dividends are not properly accounted for
38. Auditors should assess whether dividends on equity investments have been credited to net
expenditure when they become receivable.
Changes in fair value of available-for-sale financial assets are not properly accounted for
39. The gain or loss arising from a change in the fair value of an available-for-sale financial asset
should be recognised in other comprehensive income and expenditure and transferred to a
revaluation reserve (except for impairment losses). The gain or loss is the difference between
fair value and the amortised cost (calculated using the effective interest rate), with the
calculation based on the ‘clean’ price of the instrument, i.e. excluding accrued interest.
40. Auditors should
3 Available-for-sale financial assets
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 11
confirm that gains and losses (other than impairment losses) arising from changes in fair
value have been recognised in other comprehensive income and expenditure and taken
to a revaluation reserve
confirm that the gain or loss is the difference between fair value and amortised cost
based on the 'clean' price
assess whether changes in fair value are free from misstatement.
Impairment losses of available-for-sale financial assets are not properly accounted for
41. Auditors should confirm that the body made an assessment at 31 March 2018 as to whether
there is objective evidence of impairment. Where an impairment has been identified, the
cumulative net loss on fair value previously recognised in other comprehensive income and
expenditure should be
removed from a revaluation reserve
recognised in net expenditure.
42. The cumulative net loss is
the difference between the amortised acquisition cost and current fair value; less
any impairment loss previously recognised in net expenditure.
43. Auditors should assess whether the cumulative net loss on fair value previously recognised
in other comprehensive income and expenditure has been recognised in net expenditure.
Derecognition is not properly accounted for
44. When an available-for-sale financial asset is derecognised, auditors should assess whether
the cumulative gain or loss previously recognised in other comprehensive income and
expenditure (and recorded in a revaluation reserve) has been recognised in net expenditure.
Investments held for trading are incorrectly classified
45. Investments that are held for trading should be included in the category of fair value through
profit or loss rather than available-for-sale financial assets. The definition of ‘held for trading’
in this context is met if it is
acquired principally for the purpose of selling it in the short term; or
part of a portfolio of identified investments that are managed together and for which there
is evidence of a recent actual pattern of short-term profit taking. This may be the case
where instructions to a fund manager allow buying and selling to generate profits from
short-term fluctuations in price; or
a derivative (explained in section 4).
46. Auditors should assess whether the body
has identified any investments that are held for trading
3 Available-for-sale financial assets
Page 12 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
classified any such as investments as fair value through profit or loss.
Investments held for trading are not properly accounted for
47. Investments held for trading should be accounted for in a similar way to available-for-sale
financial assets, except that
transaction costs at initial recognition do not adjust fair value
changes in fair value are recognised in net expenditure.
48. Auditors should assess whether any investments held for trading have been properly
accounted for.
4 Derivatives and embedded derivatives
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 13
4 Derivatives and embedded derivatives Purpose of section
49. This section of the module provides information on, and guidance on the risks of misstatement
in, derivatives and embedded derivatives.
Definition
50. A derivative is a financial instrument with all three of the following characteristics
Its value changes in response to the change in a specified rate.
It requires no initial net investment or one that is smaller than would be required for
similar types of contracts.
It is settled at a future date.
51. A derivative is embedded when it is hosted within a wider contract.
Risks of misstatement
52. The following paragraphs highlight potential risks of misstatement in respect of derivatives and
embedded derivatives, and set out actions for auditors to assess whether the body has
followed the required treatment.
Derivatives are not identified
53. Auditors should assess whether the body has identified any derivatives that it holds. Typical
examples of derivatives in the private sector are forwards, swap and option contracts.
However, forward purchase contracts are expected to be the likeliest form of derivatives that a
central government body may hold. These are agreements to buy an investment at a specified
price and date. It is a derivative from the point the contract is entered into (the trade date) to
the date of settlement.
Derivatives are not properly accounted for
54. The accounting for a forward purchase contract is summarised in the following table
4 Derivatives and embedded derivatives
Page 14 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
Event Accounting
Forward purchase contract
entered into (trade date)
Fair value of derivative is zero
Increase in fair value of
underlying investment in
intervening period
Derivative has a positive value
Decrease in fair value of
underlying investment in
intervening period
Derivative has a negative value
Payment made and receipt of
investment at settlement date
Investment recognised at fair value
Difference between fair value and payment made (i.e. gain or
loss on derivative) recognised net expenditure
55. Where the body has entered into a forward purchase contract that was settled during 2017/18,
auditors should confirm that
the fair value of the underlying investment has been recognised as an asset in the
balance sheet
the difference between the fair value of the underlying investment at the settlement date
and consideration paid under the forward contract (i.e. the gain or loss on the derivative)
has been recognised in net expenditure
the derivative has been recognised as a financial asset (if it has a positive value) or a
financial liability (if it has a negative value) and classified at fair value through profit and
loss.
56. If the settlement date is after the year end, the gain or loss should be calculated at the year
end and recognised in net expenditure, with the derivative recognised as an asset (positive
value) or liability (negative value) in the balance sheet
57. Where the body has entered into a forward purchase contract that is not settled at 31 March
2018, auditors should check that
the difference between the fair value of the underlying investment at 31 March 2018 and
consideration to be paid under the forward contract (i.e. the gain or loss on the derivative)
has been recognised in net expenditure
the derivative has been recognised as a financial asset (if it has a positive value) or a
financial liability (if it has a negative value) and classified at fair value through profit and
loss.
Separable embedded derivatives are not identified
58. Auditors should assess whether the body has identified any embedded derivatives that
require to be accounted for separately when it first becomes a party to the contract.
4 Derivatives and embedded derivatives
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 15
Embedded derivatives arise where there are terms and conditions of a wider contract (the host
contract) that behave like a free-standing derivative. Any contract entered into by a body
could potentially have a derivative embedded in it. For example, all contracts other than short-
term agreements are likely to have terms in them for the adjustment of prices for inflation that
will make reference to such things as the retail prices index (RPI).
59. Where the following criteria are met, an embedded derivative is required to be separated from
its host contract and accounted for at fair value through profit or loss
The economic characteristics and risks of the embedded derivative are not closely related
to those of the host contract (e.g. provisions for price increases in a service contract are
to be based on an index that does not reasonably reflect how the cost of the service is
likely to change).
A separate instrument with the same terms would meet the definition of a derivative.
The host contract is not already being accounted for as fair value through profit or loss.
60. Examples of embedded derivatives which might need to be accounted for separately are
summarised in the following table.
Examples of embedded derivatives Separate accounting as derivative?
Service concession arrangements where an
element of the unitary payment varies in
accordance a relevant index (e.g. RPI).
No - likely to be closely related to the host
contract and will not need to be accounted for
separately
Service concession arrangements where an
element of the unitary payment varies in
accordance with an underlying measure that is
based on a multiplier of a relevant index (e.g.
RPI plus a percentage).
Yes - may need to be accounted for separately
as index does not reasonably reflect how the
cost of the service is likely to change
61. Bodies should make the assessment when they first become a party to the contract.
Subsequent reassessment is prohibited unless there is either
a change in the terms of the contract that significantly modifies the cash flows that
otherwise would be required under the contract; or
a reclassification of a financial asset out of the fair value through profit or loss category.
Embedded derivatives are not properly accounted for
62. Once the body has concluded whether an embedded derivative should be separated,
auditors should assess whether it has been properly accounted for. This is summarised in
the following table:
4 Derivatives and embedded derivatives
Page 16 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
Where separation is required Where separation is not required
The embedded derivative should be accounted
for as if it were a standalone derivative.
The host contract should be accounted for as if
the terms and conditions represented by the
embedded derivative were not included.
The host contract should be accounted for in
terms of its overall status, with the potential
changes in variables relating to the embedded
derivative being taken into account in the
assessment of fair values and amortised cost
as appropriate to the financial instrument, in
the same way as for other variable aspects of
the contract.
5 Presentation and disclosure
Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 17
5 Presentation and disclosure Purpose of section
63. This section of the module provides information on, and guidance on the risks of misstatement
in, the presentation and disclosure of financial instruments.
Risks of misstatement
64. The following paragraphs highlight potential risks of misstatement in respect of the disclosure
or presentation of financial instruments, and set out actions for auditors to assess whether the
body has followed the required treatment.
Financial instruments are not properly presented in the statement of financial position
65. Auditors should confirm that the carrying amounts of each of the following categories have
been presented in the statement of financial position (or disclosed in the notes) at 31 March
2018, where applicable
loans and receivables
soft loans (where material)
available-for-sale financial assets
equity instruments that do not have a quoted price in an active market for an identical
instrument at cost
financial liabilities at amortised cost
fair value through profit or loss assets and liabilities.
66. Auditors should confirm that a financial asset and a financial liability have not been offset
(i.e. presented net in the statement of financial position) unless the body
currently has a legally enforceable right to set off the recognised amounts; and
intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
67. Auditors should assess whether financial liabilities have been properly classified between
short term and long term as summarised in the following table:
5 Presentation and disclosure
Page 18 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments
Short term Long term
Liabilities due to be settled within 12 months
after 31 March 2018 including
the portion of long term financial liabilities
due to be settled within 12 months
interest due but unpaid
Liabilities due to be settled outwith 12 months
Information on fair value is not properly disclosed
68. Auditors should
confirm that the body has complied with the disclosure requirements for financial
instruments set out in IFRS 7 and IFRS 13, where they are material.
assess whether the disclosures are complete, clear, concise, and free from misstatement.
69. The IFRS 7 requirements include the disclosure of the fair value of financial instruments in a
way that permits them to be compared with their carrying amount. This requires a calculation
of the net present value of the cash flows that are scheduled to take place over the remaining
life of each loan, discounted at the rate available currently in relation to the same loan from a
comparable lender. The treatment is different for variable and fixed rate loans as summarised
in the following table:
Fair value for variable rate loans Fair value for fixed rate loans
Fair value is the same as the amortised cost. Fair value is different from amortised cost if the
fixed rate is different from prevailing market
interest rates.
The discount rate could either be the rate
available for new borrowing or the early
repayment rate. Auditors should assess
whether the body has
considered which measure is more relevant
to the users of the accounts
disclosed an adequate explanation of
whichever methodology they have adopted,
and assumptions used.
70. The requirements include disclosing
the methods used
when a valuation technique is used, the assumptions applied in measuring fair values in
accordance with IFRS 13.
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Technical guidance note 2018/1 (CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission
check that organisations spending public money use it properly, efficiently and effectively.
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Page 3
Contents
Group financial statement ............................................................................................................ 4
Purpose of module ............................................................................................................ 4
Contact points for this module ........................................................................................... 4
Changes in 2017/18 .......................................................................................................... 4
Definition ........................................................................................................................... 4
Summary of financial reporting requirements .................................................................... 4
Specific auditor requirements ............................................................................................ 5
Sources of guidance on financial reporting ........................................................................ 5
Risks of misstatement ....................................................................................................... 6
Appendix 1 ...................................................................................................................... 13
Group financial statement
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Group financial statement Purpose of module
1. This module of technical guidance note 2018/1(CG) provides information on, and guidance on
the risks of misstatements in, group financial statements.
Contact points for this module
2. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected].
Helen Cobb, Senior Adviser (Professional Support) - [email protected].
Changes in 2017/18
3. There are no changes in financial reporting requirements in 2017/18.
Definition
4. Group financial statements are those in which the assets, liabilities, reserves, income,
expenses and cash flows of the body and its subsidiaries, plus the investments in associates
and interests in joint ventures, are presented as those of a single economic entity.
Summary of financial reporting requirements
5. The FReM requires bodies to prepare group financial statements in accordance with the
following standards as adapted by FReM section 6.2
IFRS 10 Consolidated financial statements
IFRS 11 Joint arrangements
IFRS 12 Disclosure of interests in other entities
IAS 28 Investments in associates and joint ventures.
6. The FReM's adaptations are concerned with the extent to which each standard applies to
different types of central government body, and are summarised in the following table:
Group financial statement
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
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Body IFRS 10 IAS 28 and IFRS 11
Scottish Government Applies only to entities within the
consolidation boundary set by
Office of National Statistics (ONS)
Applies only to entities classified by
ONS as outside of the public sector
Investments in a public body that is
not consolidated should be reported
in accordance with IAS 39 Financial
instruments - Recognition and
measurement.
Agencies Applies only entities within the
Scottish Government's
consolidation boundary
NDPBs and other
bodies
Apply in full without adaptation
Specific auditor requirements
7. ISA (UK) 600 Special considerations - audits of group financial statements deals with special
considerations that apply to group audits, in particular those that involve component auditors
(i.e. auditors of other group entities). If the auditor of a parent body (i.e. the group auditor)
plans to request a component auditor to perform work on the financial information of a
component, the group auditor is required to obtain an understanding of
whether the component auditor understands, and will comply with, the ethical
requirements and is independent
the component auditor’s professional competence
whether the group audit team will be able to be involved in the work of the component
auditor to the extent necessary
whether the component auditor operates in a regulatory environment that actively
oversees auditors.
8. Group auditors are expected to use Audit Scotland's annual Audit quality report to inform their
assessment of component auditors' professional competence, where applicable.
Sources of guidance on financial reporting
9. The FReM provides guidance on accounting boundaries at paragraphs 4.1.1 to 4.1.4. Further
guidance is provided by the Treasury in IFRS group accounting standards: application
guidance.
10. IPSAS 35 Consolidated and separate financial statements, IPSAS 36 Investments in
associates, and IPSAS 37 Interests in joint ventures provide additional guidance for public
sector bodies.
Group financial statement
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Risks of misstatement
11. The following paragraphs highlight potential risks of misstatement in respect of group financial
statements, and set out actions for auditors to assess whether the body has followed the
required treatment.
Entities in which the body has an interest are not identified
12. IFRS 10 defines 'interest in another entity' as an involvement that exposes a body to variability
of returns from the performance of the other entity. A body has an interest in another entity if
it
holds equity or debt instruments in that entity
provides funding, liquidity support, credit enhancement and guarantees to the entity
has control or joint control of, or significant influence over, that entity.
13. A body does not have an interest in another entity solely because of a typical customer-
supplier relationship.
14. For NDPBs and similar bodies, auditors should assess whether the body has identified all
the entities in which it has an interest.
15. Auditors of the Scottish Government and agencies should confirm that the body has treated
as a subsidiary only those public bodies designated for consolidation in accordance with
criteria set by ONS.
Entities which the body controls are not treated as subsidiaries
16. IFRS 10 set out the components of control. These are summarised in the following table:
Aspect of control Explanation
Power over an entity Power is defined as existing rights that give the body the current
ability to direct the relevant activities of the entity (i.e. those
activities that significantly affect the returns to the body from that
entity's performance).
IPSAS 35 explains that the main indicator of whether a body has
power over an entity is when it has the right to direct the financial
and operating policies of that entity. This may be through
voting rights granted by shares; or
contractual or other binding arrangements.
Exposure, or rights, to
variable returns from
involvement with the entity
This is the case when the financial and non-financial returns that
the body seeks from its involvement with the entity have the
potential to vary as a result of that entity’s performance.
Group financial statement
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
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Aspect of control Explanation
Ability to use power over
the entity to affect the
amount of the returns
This is the case where the body is able to direct the entity to further
the body's objectives.
17. Where the body has voting rights, the assessment of power is straight-forward. Normally, a
body controls another entity if it holds more than half of the voting rights. Disclosure is
required if
it does not control another entity even though it holds more than half the voting rights
it does have control over another entity but holds less than half of the voting rights.
18. However, the assessment of whether contractual or other binding arrangements give rise to
power is more complex. IFRS 12 uses the term structured entity to describe an entity that has
been designed so that the relevant activities are directed by means of contractual
arrangements.
19. Auditors of NDPBs and similar bodies may find it helpful to use the checklist at Appendix 1 of
this module to help assess whether the body has identified the entities over which it has
control through contractual arrangements at 31 March 2018. Further information on assessing
control is provided at paragraphs B2 to B72 of IFRS 10, and there are examples on page 80
of IPSAS 35.
20. A body cannot control an entity when it has to act together with another body to direct the
relevant activities. In such cases, because no single body can direct the activities without the
co-operation of the others, no single body controls the other entity.
Subsidiaries are not properly accounted for
21. Auditors should assess whether the body has accounted for subsidiaries by
combining like items of assets, liabilities and reserves at 31 March 2018, and income,
expenses and cash flows during 2017/18
offsetting (i.e. eliminating) the carrying amount of the body's investment in each
subsidiary and the body's portion of reserves of each subsidiary
eliminating in full intragroup assets and liabilities, reserves, income, expenses and cash
flows relating to transactions between entities of the group
presenting any minority interests separately in the group balance sheet in reserves
treating changes in the body’s ownership interest in a subsidiary that do not result in a
loss of control as reserve transactions.
Group financial statement
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Entities over which the body has significant influence are not treated as associates
22. IAS 28 applies in full to NDPBs and similar bodies. It only applies to the Scottish Government
and agencies in respect of investments in private sector bodies.
23. Auditors should assess whether the body has identified all the entities over which it has
significant influence (and therefore the entity is an associate) at 31 March 2018.
24. Significant influence is defined in IAS 28 as the power to participate in the financial and
operating policy decisions of the entity. The existence of significant influence by an body is
usually demonstrated by at least one of the following
20% or more of the voting power
representation on the board of directors or equivalent governing body of the other entity
participation in policy-making processes, including decisions about dividends or other
distributions
material transactions between the body and the entity, interchange of managerial
personnel, or provision of essential technical information.
25. Auditors of the Scottish Government and agencies should check that investments in other
public sector bodies not designated for consolidation have been accounted for in accordance
with IAS 39.
Joint ventures are not properly identified
26. IFRS 11 applies in full to NDPBs and other bodies. It only applies to the Scottish Government
and agencies in respect of investments in private sector bodies.
27. Auditors should assess whether the body has identified all its joint ventures at 31 March
2018. A joint venture is an arrangement where
parties are bound by a contractual arrangement
the contractual arrangement gives two or more of those parties joint control of the
arrangement. Joint control exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control
the joint venturers have rights to the net assets of the arrangement.
28. Joint arrangements also include joint operations. In contrast with a joint venture, joint
operations do not involve a separate vehicle or, if they do, the joint operators have rights to
the assets, and obligations for the liabilities, relating to the arrangement (rather than the net
assets). Auditors should check whether any joint operation at 31 March 2018 is recognised
in the body's single entity financial statements.
Group financial statement
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
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Associates and joint ventures are not properly accounted for
29. IAS 28 requires bodies to account for investments in an associate or a joint venture using the
equity method. The equity method is a method of accounting whereby the body should
initially recognise the investment at cost
adjust thereafter for the post-acquisition change in the body's share of net assets of the
associate/joint venture.
30. Where surpluses or deficits resulting from transactions between the body and the associate or
joint venture are included in the carrying value of assets of either entity, the body’s share of
those surpluses or deficits should be eliminated. This may be needed, for example, in relation
to sales of assets between the body and the associate or joint venture.
31. Auditors should assess whether the body has
used the equity method to account for investments in an associate or a joint venture at 31
March 2018
eliminated its share of surpluses or deficits resulting from transactions with an associate
or joint venture, where necessary
included its share of the investee’s profit or loss in the group surplus or deficit on the
provision of services
included its share of the investee’s other comprehensive income and expenditure in the
group other comprehensive income and expenditure.
Group financial statements are not prepared where the body's interest is material
32. Auditors should confirm that the body has prepared group financial statements unless it its
interest in the other entities is immaterial. Auditors are expected to start from a presumption
that the requirements for group financial statements should be followed, unless the body can
demonstrate that its interests are clearly not material. Auditors should assess whether the
body has
focussed on the potential effect of an omission on the decisions or assessments of users
made on the basis of the financial statements
satisfied itself that the principal users of the financial statements would be able to see the
complete economic activities of the body and its exposure to risk
demonstrated that the body’s overall financial position or performance has not been
misrepresented
considered potential omissions collectively as well as individually. It could be the case
that none of the interests that a body has in other entities would be material individually
but they are as a collective
assessed the qualitative aspects of materiality judged in the surrounding circumstances
before considering the amounts involved
Group financial statement
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
assessed the amounts with reference to all elements of the body’s financial statements
and not concentrated solely on the statement of financial position.
33. When assessing the qualitative aspects of materiality, auditors should check that the body
has considered the following situations which are indications that its interests are material
The body depends on these entities for the continued provision of its statutory services.
There are user expectations that would fail to be met if group financial statements were
not provided.
The additional information concerns aspects of the body’s activity that have been
identified as particularly significant in its strategic objectives.
There is political concern about the level to which the body is exposed to commercial risk.
There have been concerns about the extent to which the body has passed on control of
its assets to other parties.
34. Where group financial statements have not been prepared, but auditors have formed the view
that they are required, auditors should request that the body prepares them. Where the
body declines to do so, auditors should discuss the matter with Audit Scotland's Professional
Support, and consider qualifying their opinion on the financial statements.
Presentation of group financial statements
35. Where group financial statements are required, auditors should check that the body has
produced the following instead of the single entity financial statements
Group statement of changes in taxpayers equity.
Group SOCNE.
Group statement of financial position.
Group cash flow statement.
Accounting dates are not aligned
36. The financial statements of the body and its subsidiaries should be prepared as at the same
date, where possible. However, the IFRS 10 application guidance allows a subsidiary's year
end to be within three months of the 31 March 2018 (i.e. 31 December 2017 to 30 June 2018).
37. When the subsidiary's year end is outwith the six month window, the body should direct the
subsidiary to prepare additional financial statements as at 31 March 2018 for the purposes of
inclusion in the group financial statements.
38. Auditors should confirm that
the year end of each subsidiary is within three months of the 31 March 2018; or
additional financial statements for the subsidiary has been prepared as at 31 March 2018.
Group financial statement
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
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Accounting policies are not aligned
39. Auditors should assess whether the group financial statements have been prepared using
uniform accounting policies. The accounting policies of the subsidiaries may have to be
aligned with the policies of the body, for the purposes of the group financial statements, if they
are materially different.
Information on group financial statements is not properly disclosed
40. Auditors should
confirm that the body has followed disclosure requirements of IFRS 12 for group financial
statements
assess whether the disclosures are complete, clear, concise, and free from misstatement.
41. Disclosure requirements include information that enables users to evaluate the nature of, and
changes in, the risks associated with its interests in structured entities. For example, the body
should have disclosed
the terms of any contractual arrangements that could require them to provide financial
support to a consolidated structured entity
the type and amount of financial or other support provided where there was no
contractual obligation, and the reasons for providing the support
any current intentions to provide financial or other support.
42. There are also specific requirements in respect of unconsolidated structured entities including
disclosing a summary of the following
The carrying amounts of the assets and liabilities in the financial statements relating to
their interests in unconsolidated structured entities, and the line items in the balance
sheet in which those assets and liabilities are recognised.
The amount that best represents the body’s maximum exposure to loss from its interests
in unconsolidated structured entities, including how the maximum exposure to loss is
determined.
A comparison of the carrying amounts of the assets and liabilities of the body that relate
to its interests in unconsolidated structured entities and the body’s maximum exposure to
loss from those entities.
43. In cases where a body has sponsored an unconsolidated structured entity in previous periods
but it does not have an interest in the entity at 31 March 2018, the body is instead required to
disclose
how it has determined which structured entities it has sponsored
income from those structured entities during 2017/18, including a description of the types
of income presented
the carrying amount (at the time of transfer) of all assets transferred to those structured
entities during 2017/18.
Group financial statement
Page 12 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
44. The disclosure requirements for unconsolidated structured entities are required even where
group financial statements are not prepared. Auditors should confirm that the required
disclosures have been made in the body's single-entity financial statements, where group
financial statements are not prepared).
Group financial statement
Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
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Appendix 1
Identifying entities controlled under contractual arrangements
Question Notes for auditors
Does the body
have the right to
direct the
financial and
operating
policies of the
entity?
IPSAS 35 gives examples of rights obtained by a body through contractual or
other binding arrangements to direct the financial and operating policies of
another entity. They include rights to
give policy directions to the governing body of that entity that give the
body the ability to direct its relevant activities
appoint, reassign or remove members of the entity’s key management
personnel who have the ability to direct the relevant activities
approve or veto operating and capital budgets relating to the relevant
activities of the entity
direct the other entity to enter into, or veto any changes to, transactions for
the benefit of the entity
veto key changes to the other entity, such as the sale of a major asset.
This applies even if the rights have not yet been exercised. The rights should
be 'substantive', i.e. the body must have the practical ability to exercise that
right.
A body that is acting as an agent of another principal body does not control
an entity when the body is exercising decision-making rights delegated to it
by the principal.
Bodies often provide funding for the activities of other entities, but IPSAS 35
states that a body does not have power over another entity solely because
the entity is economically dependent on it.
Has the body
established a
structured
entity?
Usually, a body designs a structured entity to pass on exposure of risks or
rewards of the body. Indicators of a structured entity relationship include
the body having involvement in the design of the entity, and the
transaction terms and features of the involvement give rights to the body
that are sufficient to give it power over the entity
contractual arrangements in place that involve activities that are closely
related to the entity, and these activities are, in substance, an integral part
of the entity's overall activities
the entity being designed so that the direction of its activities and its
returns are predetermined unless particular circumstances arise or events
occur.
Group financial statement
Page 14 Audit of 2017/18 annual report and accounts (CG) - module 4 group financial statements
Question Notes for auditors
Does the body
have the right to
direct the
financial and
operating
policies of the
structured
entity?
In addition to the general considerations listed above, it is helpful to consider
the purpose and design of the entity
what the relevant activities are
how decisions about those activities are made.
In the case of a structured entity established with predetermined activities,
the right to direct the relevant activities may have been exercised at the time
that the entity was established. IPSAS 35 advises that having the ability to
determine the purpose and design of an entity may be more relevant to the
control assessment than any ongoing decision-making rights.
Do the returns
that the body
seeks from its
involvement
with the other
entity have the
potential to vary
as a result of
that entity’s
performance?
A body is exposed, or has rights, to variable benefits from its involvement
with another entity when the returns that it seeks from its involvement have
the potential to vary as a result of the other entity’s performance.
While IFRS 10 refers to financial returns (e.g. dividends), IPSAS 35 refers
also to non-financial benefits. Non-financial benefits can occur when the
activities of another entity are congruent with the objectives of the body and
support it in achieving its objectives, e.g. service potential generated by the
entity on behalf of a body. Congruent activities may be undertaken voluntarily
or the body may have the power to direct the other entity to undertake those
activities.
IPSAS 35 provides the following examples of non-financial benefits
The ability to benefit from the specialised knowledge of another entity.
The value to the body of the other entity undertaking activities that assist
the body in achieving its objectives.
Improved outcomes, or more efficient delivery of outcomes.
More efficient or effective production and delivery of goods and services,
or having a higher level of service quality than would otherwise be the
case.
Does the body
have the ability
to use its power
to affect the
nature or
amount of the
benefits from its
involvement
with the entity?
A body controls another entity if it has the ability to use its power to affect the
nature or amount of the benefits from its involvement with the entity.
The existence of congruent objectives alone is insufficient for a body to
conclude that it controls another entity. In order to have control the body
would also need to have the ability to direct the entity to work with it to further
the body's objectives.
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts
Commission. Together they ensure that the Scottish Government and public sector bodies in
Scotland are held to account for the proper, efficient and effective use of public funds.
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Page 3
Contents
1 Introduction ..................................................................................................................... 6
Purpose of module ............................................................................................................ 6
Contact points for this module ........................................................................................... 6
2 Leases and lease type arrangements ............................................................................ 7
Purpose of section............................................................................................................. 7
Changes in 2017/18 .......................................................................................................... 7
Definition ........................................................................................................................... 7
Summary of financial reporting requirements .................................................................... 7
Risks of misstatement ....................................................................................................... 7
Appendix to section 2 ...................................................................................................... 13
3 Service concession arrangements .............................................................................. 14
Purpose of section........................................................................................................... 14
Changes in 2017/18 ........................................................................................................ 14
Definition ......................................................................................................................... 14
Summary of financial reporting requirements .................................................................. 14
Risks of misstatement ..................................................................................................... 14
4 Heritage assets .............................................................................................................. 19
Purpose of section........................................................................................................... 19
Changes in 2017/18 ........................................................................................................ 19
Definition ......................................................................................................................... 19
Summary of financial reporting requirements .................................................................. 19
Risks of misstatement ..................................................................................................... 19
5 Fair value measurement ............................................................................................... 22
Purpose of section........................................................................................................... 22
Changes in 2017/18 ........................................................................................................ 22
Definition ......................................................................................................................... 22
Summary of financial reporting requirements .................................................................. 22
Risks of misstatement ..................................................................................................... 22
6 Investment property ...................................................................................................... 26
Purpose of section........................................................................................................... 26
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Changes in 2017/18 ........................................................................................................ 26
Definition ......................................................................................................................... 26
Summary of financial reporting requirements .................................................................. 26
Risks of misstatement ..................................................................................................... 26
7 Intangible assets ........................................................................................................... 28
Purpose of section........................................................................................................... 28
Changes in 2017/18 ........................................................................................................ 28
Definition ......................................................................................................................... 28
Summary of financial reporting requirements .................................................................. 28
Risks of misstatement ..................................................................................................... 28
8 Assets held for sale ...................................................................................................... 31
Purpose of section........................................................................................................... 31
Changes in 2017/18 ........................................................................................................ 31
Definition ......................................................................................................................... 31
Summary of financial reporting requirements .................................................................. 31
Risks of misstatement ..................................................................................................... 31
9 Cash, cash equivalents and bank overdraft ................................................................ 33
Purpose of section........................................................................................................... 33
Changes in 2017/18 ........................................................................................................ 33
Definition ......................................................................................................................... 33
Summary of financial reporting requirements .................................................................. 33
Risks of misstatement ..................................................................................................... 33
10 Grant-in-aid (NDPBs) .................................................................................................... 35
Purpose of section........................................................................................................... 35
Changes in 2017/18 ........................................................................................................ 35
Definition ......................................................................................................................... 35
Summary of financial reporting requirements .................................................................. 35
Sources of guidance on financial reporting ...................................................................... 35
Risks of misstatement ..................................................................................................... 35
11 Events after the reporting period ................................................................................. 38
Purpose of section........................................................................................................... 38
Changes in 2017/18 ........................................................................................................ 38
Definition ......................................................................................................................... 38
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Page 5
Summary of financial reporting requirements .................................................................. 38
Risks of misstatement ..................................................................................................... 38
12 Miscellaneous disclosures ........................................................................................... 42
Purpose of section........................................................................................................... 42
New accounting standards .............................................................................................. 42
Key assumptions and judgements ................................................................................... 43
Operating segments ........................................................................................................ 44
Related parties disclosure ............................................................................................... 46
Agency arrangements disclosure .................................................................................... 48
1 Introduction
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
1 Introduction Purpose of module
2. This module of technical guidance note 2018/1(CG) provides information on, and guidance on
the risks of misstatements in, the following financial statement areas
Leases and lease-type arrangements.
Service concession arrangements.
Heritage assets.
Fair value measurement.
Investment property.
Intangible assets.
Assets held for sale.
Cash, cash equivalents, and overdrafts.
Grant in aid.
Events after the reporting period.
Miscellaneous disclosures.
Contact points for this module
3. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected]
Helen Cobb, Senior Adviser (Professional Support) - [email protected].
2 Leases and lease type arrangements
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Page 7
2 Leases and lease type arrangements Purpose of section
4. This section of module 5 provides information on, and guidance on the risks of misstatements
in, leases and lease-type arrangements.
Changes in 2017/18
5. There are no changes to the financial reporting requirements in 2017/18.
Definition
6. A lease is an agreement whereby the lessor conveys to the lessee in return for payment the
right to use an asset for an agreed period of time.
7. A lease-type arrangement does not take the legal form of a lease but conveys a right to use
an asset in return for payment.
Summary of financial reporting requirements
8. The FReM requires bodies to account for leases in accordance with IAS 17 Leases, SIC 15
Operating lease – incentives, and IFRIC 4 Determining whether an arrangement contains a
lease. For the avoidance of doubt, IFRS 16 does not apply until 2019/20.
Risks of misstatement
9. The following paragraphs highlight potential risks of misstatement in respect of leases and
lease-type arrangements, and set out actions for auditors to undertake to assess whether the
body has followed the required treatment.
Leases are not properly classified
10. IAS 17 requires a lease to be classified as either a finance lease or an operating lease.
Auditors should assess whether the body has
identified all its lease agreements
classified the agreements between finance leases and operating leases.
11. The difference between the two types of lease is that a finance lease transfers substantially all
the risks and rewards incidental to ownership of an asset. Classification should have been
made at the inception of the lease and depends on the substance of the transaction, rather
than the form of the contract. IAS 17
2 Leases and lease type arrangements
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
provides examples of situations that individually or in combination would normally lead to
a lease being classified as a finance lease
gives indicators of situations that could also lead to a finance lease
advises that the above examples and indicators may not be conclusive, and the lease
should be classified as an operating lease if it is clear from other features that the lease
does not transfer substantially all risks and rewards incidental to ownership.
12. Auditors should assess whether
lease classification has been made by the body at the inception of the lease
the body has considered the examples and indicators of a finance lease provided by IAS
17. Auditors may find it useful to use the checklist in the appendix to this section
where the lessee and lessor agree to change the lease (other than by renewing the
lease), this has been regarded as a new agreement if the changed provisions result in a
different classification of the lease
changes in estimates (e.g. in respect of the economic life or the residual value of the
leased property) or changes in circumstances (e.g. default by the lessee) have not
resulted in a new classification of the lease for accounting purposes
the land and buildings elements of a lease have been considered separately for the
purposes of lease classification. The land element is normally classified as an operating
lease unless title is expected to pass to the lessee by the end of the lease term.
Separate consideration is not required
where the whole lease is quite clearly an operating lease
where the amount that would initially be recognised for the land element is
immaterial
for investment properties (explained in section 6) where the body is the lessee.
Finance leases are not properly accounted for where body is lessee
13. The accounting treatment required by the accounting code for finance leases where the body
is the lessee is summarised in the following table:
Statement of financial position Statement of comprehensive net expenditure
Assets and liabilities recognised at the fair
value of the property or, if lower, the present
value of the minimum lease payments
[Note: the discount rate is the rate implicit in
the lease, i.e. the rate that, at the inception of
the lease, causes the present value of the
minimum lease payments to be equal to the
asset's fair value.
Depreciation charge for year
[Note: where it is not certain that ownership of the
asset will transfer at the end of the lease, the
asset should be depreciated over the shorter of
the lease term and its useful economic life.]
2 Leases and lease type arrangements
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Page 9
Statement of financial position Statement of comprehensive net expenditure
Any initial direct costs added to the value of
the asset
Contingent rents
Reduction in outstanding liability
Finance charge for year
Impairment and gains or losses on
revaluation (through revaluation reserve)
Impairment and gains or losses on revaluation
(not through revaluation reserve)
14. For finance leases where the body is the lessee, auditors should assess whether
assets and liabilities have been recognised in the statement of financial position at
amounts equal to the fair value of the property or, if lower, the present value of the
minimum lease payments
any initial direct costs have been added to the value of the asset
the minimum lease payments have been accurately apportioned between the finance
charge (interest) and the reduction of the outstanding liability
the finance charge has been properly calculated so as to produce a constant periodic rate
of interest on the remaining balance of the liability
contingent rents have been charged as expenses
leased assets have been depreciated, impaired, and subject to revaluation in a manner
consistent with owned assets.
Operating leases are not properly accounted for where body is lessee
15. For operating leases where the body is the lessee, auditors should assess whether
lease payments have been recognised as an expense on a straight-line basis over the
lease term unless another systematic basis is more representative of the benefits
received by the body
lease incentives have been recognised in accordance with SIC 15 as a reduction in the
lease expense over the lease term on a straight-line basis unless another systematic
basis is more representative of the benefits received by the body
any payment made on entering into a lease has been recognised as prepaid lease
payments and amortised over the lease term in accordance with the pattern of benefits
provided.
Finance leases are not properly accounted for where body is lessor
16. For finance leases where the body is the lessor, auditors should assess whether
2 Leases and lease type arrangements
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
the assets have been recognised as a long term debtor at an amount equal to the net
investment in the lease (i.e. the minimum lease payments plus any unguaranteed
residual value discounted at the interest rate implicit in the lease)
the lease payment receivable has been treated as repayment of principal and finance
income
the finance income has been calculated so as to produce a constant periodic rate of
return on the net investment.
Operating leases are not properly accounted for where body is lessor
17. For operating leases where the body is the lessor, auditors should assess whether
the assets are properly presented in the statement of financial position
costs incurred in earning the lease income have been recognised in operating
expenditure
the depreciation policy for depreciable leased assets is consistent with the normal
depreciation policy for similar assets, and depreciation has been charged to operating
expenditure
income has been recognised on a straight-line basis over the lease term, or another
systematic basis that is more representative of the time pattern in which the benefit
derived from the leased asset is diminished
the cost of any lease incentives has been recognised as a reduction of rental income over
the lease term, on a straight-line basis or another systematic basis that is more
representative of the time pattern in which the benefit derived from the leased asset is
diminished
initial direct costs incurred in negotiating and arranging an operating lease have been
added to the carrying amount of the leased asset and recognised as an expense over the
lease term on the same basis as the lease income.
Sale and lease back transactions are not properly accounted for
18. A sale and leaseback transaction involves an body selling an asset and then leasing it back.
The lease classification should be determined as soon as practicable as this determines the
subsequent accounting treatment. The required treatment for any excess of sales proceeds
over the carrying amount (i.e. gain or loss on disposal) is summarised in the following table:
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Type of lease Treatment of gain or loss
Finance lease Amortise over the lease term
Operating lease Treatment depends on whether the disposal is at fair value
at fair value Recognise gain or loss immediately
below fair value (and the
loss is compensated for by
future lease payments below
market price)
Amortise loss in proportion to the lease payments
above fair value Amortise over the period for which the asset is expected to
be used
19. Auditors should assess whether the gain or loss on any sale and lease back arrangement in
2017/18 has been properly accounted for.
Arrangements containing a lease are not identified
20. IFRIC 4 specifies the accounting treatment for arrangements that do not take the legal form of
a lease but which convey a right to use an asset in return for payment. Bodies are required to
determine, in accordance with IFRIC 4, whether such an arrangement contains a lease, i.e.
where
fulfilment of the arrangement is dependent on the use of a specific asset, e.g. it is not
economically feasible or practicable for the lessor to perform its obligation through the
use of alternative assets
the arrangement conveys a right for the lessee to control the use of the asset, e.g. where
the lessee can operate the underlying asset in a manner it determines, or controls
physical access to the underlying asset.
21. The determination is required to be made at the inception of the arrangement. A
reassessment should be carried out only if one of the following conditions is met
There has been a change in the assessment of whether fulfilment of the arrangement is
dependent on a specified asset.
There has been a change in the contractual terms or a substantial change to the asset.
A renewal option has been exercised or an extension agreed to (unless initially included
in the lease term).
There has been a substantial change to the asset.
22. Payments under the arrangement require to be separated between those for the lease and
those for other elements (e.g. services) on the basis of their relative fair values. In some
cases this may require to be estimated. Where it is impracticable to separate the payments,
the appropriate treatment where the body is the lessee is summarised in the following table:
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Finance lease Operating lease
Recognise an asset and a liability at an
amount equal to the fair value of the
underlying asset
Treat payments in excess of the repayment
of the liability plus the imputed finance
charge as payments for other elements of
the arrangement
Treat all payments under the arrangement as
lease payments
23. Auditors should assess whether
the determination of whether the arrangement contains a lease has been carried out by
the body at the inception of the arrangement
the determination has been made in accordance with IFRIC 4
a reassessment is carried out if one of the specified conditions is met
the lease element of the arrangement has been identified on a reliable basis (or
combined payments have been accounted for properly).
Information on leases is not properly disclosed
24. Auditors should
confirm that the body has met the disclosure requirements of IAS 17
assess whether the disclosures are complete, clear, concise and free from misstatement.
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Appendix to section 2
Checklist - indicators of finance lease
Indicators Yes/No/N/A
1 Does the lease transfers ownership of the asset to the lessee by the
end of the lease term?
[Note: Generally land will always be an operating lease but in this situation it
would be classified as a finance lease.]
2 Does the lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date the option
becomes exercisable?
3 Is the lease term for the major part of the economic life of the asset?
[Note: This is relevant even if title is not transferred.]
4 Does the present value of the minimum lease payments at the
inception of the lease amount to substantially all of the fair value of the leased
asset?
[Note: This indicator does not apply to leases on non-commercial terms, i.e.
nominal or at peppercorn rents.]
5 Is the leased property of such a specialised nature that only the lessee
can use it without major modification?
6 Would the lessor's losses associated with the cancellation of the lease
by the lessee be borne by the lessee?
7 Do any gains or losses from the fluctuation in the fair value of the
residual accrue to the lessee?
8 Does the lessee have the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent?
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Page 14 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
3 Service concession arrangements Purpose of section
25. This section of module 5 provides information on, and guidance on the risks of misstatements
in, service concession arrangements.
Changes in 2017/18
26. There are no changes to the financial reporting requirements in 2017/18.
Definition
27. A service concession arrangement is a contractual arrangement between a public body and a
private sector operator in which the operator
uses an asset to provide a public service on behalf of the body for a specified period of
time
is compensated for its services over the period of the arrangement.
Summary of financial reporting requirements
28. The FReM requires bodies to account for service concession arrangements in accordance
with an interpretation of IFRIC 12 Service concession arrangements. IFRIC 12 gives
guidance on the accounting by operators for service concession arrangements. The FReM
uses the principles of IFRIC 12 as a basis for its accounting requirements set out at
paragraphs 7.1.48 to 7.1.64, but applies them from the perspective of the public body.
29. Additional provisions are included in the FReM from IPSAS 32 Service concession
arrangements: Grantor.
30. Disclosure requirements are set out in SIC 29 Disclosure of service concession arrangements.
Risks of misstatement
31. The following paragraphs highlight potential risks of misstatement in respect of service
concession arrangements, and set out actions for auditors to undertake to assess whether the
body has followed the required treatment.
Service concession arrangements are not identified
32. Auditors should assess whether the body has identified its service concession arrangements
which are those where it
controls or regulates
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Page 15
the services the operator must provide with the service concession asset
to whom the operator must provide them
the price; and
location.
controls any significant residual interest in the asset at the end of the period of the
arrangement.
33. The asset is usually constructed or developed by the operator but may also be an upgrade to
an existing asset of the body. Examples of service concession assets include roads, bridges,
prisons, and telecommunications networks. They also include assets for the direct use of an
body which contribute to the provision of services to the public, e.g. office and administrative
buildings.
34. Other features of typical service concession arrangements are
the operator is responsible for at least some of the management of the service
concession assets and related services and does not merely act as an agent of the body
the contract sets initial prices levied by the operator and regulates price revisions over the
period of the service arrangement
the operator is obliged to hand over the service concession asset to the body in a
specified condition at the end of the period of the arrangement, for little or no incremental
consideration, irrespective of which party initially financed it.
35. Public private partnership (PPP) and private finance initiative (PFI) contracts are generally
service concession arrangements, but some contracts that were not planned as PFI/PPP
arrangements could also meet the 'controls' criteria.
36. Arrangements that will not be service concessions include
a contract solely to construct a property for a body
a lease of a property where the only services provided by the lessor are directly related to
the property itself (e.g. repairs and maintenance) and where the amounts paid are not
usually abated for failure to carry out these services
arrangements to outsource the operation of internal services (such as catering, cleaning,
building maintenance and finance) that have no specifications relating to a particular
asset.
Service concession assets are not properly accounted for
37. The recognition criteria for the asset (which is the same as for other property, plant and
equipment explained in module 1) may be met during the construction or development period.
Service concession assets should be depreciated, revalued and reviewed for impairment in
the same way as other property, plant and equipment.
38. Auditors should
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confirm that a service concession asset constructed or developed by the operator has
been initially recognised at fair value (or an existing asset of the body has been
reclassified and the upgrade costs recognised at fair value)
assess whether fair value agrees to the element of the payments paid to the operator for
the asset in accordance with the contract (or where not separable, the estimate of fair
value is reasonable)
check that the body has recognised the service concession asset during the construction
period if the recognition criteria are met
assess whether the asset has been subsequently revalued to current value
confirm that depreciation, impairment and gains or losses on revaluation have been
treated in the same way as other property, plant and equipment.
Service concession liabilities are not properly accounted for
39. Where a body recognises a service concession asset constructed or developed by the
operator, the body is required to recognise a liability initially measured at the same amount as
the asset but adjusted by the amount of any other consideration, e.g. cash.
40. Recognition of the liability depends on whether the contract terms can be separated between
the service element and the construction element. This is summarised in the following table:
Separable Not separable
Separate the contract into the
service element which is expensed as
incurred; and
construction element which should be
analysed between the repayment of the
liability and an interest charge in accordance
with the requirements for a finance lease
(explained at section 2)
Divide the unitary payment into
an estimate of the service element
an interest element determined using the
rate implicit in the contract (or if that is not
available, the cost of capital rate)
the repayment of the liability
41. Auditors should assess whether
a liability has been recognised and initially measured at the same amount as the service
concession asset adjusted for any other consideration
the service element has been charged to operating expenditure. Where it cannot be
separated, auditors should assess whether the service element estimate is reasonable
the construction element has been accounted for as if it were a finance lease and
allocated into a repayment of the liability and a finance charge. Where it cannot be
separated, auditors should assess whether the estimate is reasonable.
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Existing assets not used in the arrangement are not properly accounted for
42. A body may provide the operator with access to existing assets of the body (that are not to be
used in the service concession arrangement) in exchange for reduced or eliminated
payments. The accounting treatment depends on whether the transfer is permanent as
explained in the following table:
Permanent transfer or finance lease Other arrangements
Derecognise the asset
Recognise the reduction in the liability in the
statement of financial position (and any other
consideration received)
Recognise any difference between the
carrying amount and the total consideration
received in the surplus or deficit in the
provision of services
Account for arrangement as an operating lease
43. Auditors should assess whether the body has properly accounted for any existing assets
transferred to the operator in order to reduce payments.
Prepayments are not properly accounted for
44. Service concession arrangements may be structured to require payments to be made before
the related service concession asset is recognised on the statement of financial position.
Auditors should assess whether these payments have been
recognised as prepayments
applied to reduce the outstanding liability when it is recognised.
45. Any prepayments should be taken into account when estimating the fair value of the asset and
liability and the separation of payments into the liability, interest and service charge elements.
Information on service concession arrangements is not properly disclosed
46. Auditors should
confirm that the body has made the disclosures required by
paragraph 5.4.26 of the FReM in respect of total commitments including the interest
element, analysed by payment period
SIC 29 in respect of a description of the arrangement, significant terms that may
affect future cash flows, and the nature and extent of matters such as rights to use or
obligations to acquire specified assets
IFRS 7 in respect of embedded derivatives in cases where an element of the unitary
payment varies in accordance with an underlying measure that, rather than being
3 Service concession arrangements
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based on a relevant index, is a multiplier of a relevant index (e.g. RPI plus a
percentage).
assess whether the disclosures are complete, clear, concise, and free from misstatement.
4 Heritage assets
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Page 19
4 Heritage assets Purpose of section
47. This section of module 5 provides information on, and guidance on the risks of misstatements
in, heritage assets.
Changes in 2017/18
48. There are no changes in financial reporting requirements in 2017/18.
Definition
49. Heritage assets are those that are held and maintained principally for their contribution to
knowledge and culture.
Summary of financial reporting requirements
50. As there is no IFRS that deals with tangible heritage assets, the FReM sets out its
requirements at paragraphs 7.1.30 to 7.1.47.
Risks of misstatement
51. The following paragraphs highlight potential risks of misstatement in respect of heritage
assets, and set out actions for auditors to undertake to assess whether the body has followed
the required treatment.
Heritage assets are not identified
52. Auditors should assess whether the body has reviewed its property, plant and equipment to
identify those that are held principally for their contribution to knowledge and culture. Heritage
assets include historical buildings, archaeological sites, scientific equipment of historical
importance, civic regalia, museum and gallery collections and works of art.
53. Auditors should assess whether assets which, in addition to being held for their heritage
characteristics, are also used by the body for other activities or to provide other services have
been classified as operational assets and accounted for as property, plant and equipment.
Heritage assets are not properly valued
54. Heritage assets should be carried at valuation rather than a current value or fair value basis.
FReM paragraph 7.1.38 specifies that
valuations may be made by any method that is appropriate and relevant, e.g. insurance
valuations may be appropriate for museum collections
valuations need not be carried out or verified by external valuers
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there is no prescribed minimum period between valuations.
55. However, the FReM requires that bodies review the carrying amounts of heritage assets
carried at valuation with sufficient regularity to ensure they remain current. Auditors should
assess whether the valuations are free from misstatement. If the body uses insurance
valuations, auditors should assess whether
the body has appropriate evidence to demonstrate that they provide an appropriate
valuation basis for the asset in question
the valuation is current at 31 March 2018.
56. Where it is not practicable to obtain a valuation (e.g. where there is no market for the item and
it is not possible to provide a reliable estimate of the replacement cost), auditors should
check that the body has measured them at historical cost (less accumulated depreciation and
impairment).
Heritage assets are not properly accounted for
57. Heritage assets require to be recognised in the statement of financial position where a body
has information on the cost or value of a heritage asset; or
can obtain it at a cost commensurate with the benefits.
58. Depreciation is not required on heritage assets which have indefinite lives, but auditors
should assess whether an impairment review has been carried out where an asset has
suffered physical deterioration or breakage, or where new doubts arise as to its authenticity.
59. When assessing materiality of heritage assets, the nature of the item may be particularly
relevant, and the body should not limit its assessment to solely the amount involved.
60. Auditors should assess whether
heritage assets have been recognised in the statement of financial position at 31 March
2018 where the body has information on the cost or value
depreciation has been charged unless the asset has an indefinite life
an impairment review has been carried out, where required
the body has considered the nature of the asset, as well as the cost, when considering
materiality.
Information on heritage assets is not properly disclosed
61. The disclosure requirements for heritage assets are detailed at FReM paragraphs 7.1.42 to
7.1.47. Some disclosures vary depending on whether or not the assets are recognised in the
statement of financial position. They are summarised in the following table:
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Disclosure Recognised in
statement of financial
position
Not recognised in
statement of
financial position
Indication of nature and scale
Applies
Policy for acquisition, preservation, management and
disposal
accounting policies
Summary of transactions during 2017/18 (with
comparatives) disclosing
cost of acquisitions
value acquired by donation
carrying value of disposals and proceeds
impairment losses.
Reconciliation of carrying amount at 1 April 2017 and
31 March 2018 showing
additions and disposals
revaluation changes
impairment losses
depreciation
Applies Not applicable
Valuation information
date of the valuation
valuation methods
details of any valuer
Applies Not applicable
Reasons for non-recognition Not applicable Applies
62. Auditors should
confirm that the required disclosures have been made for heritage assets
assess whether the disclosures are complete, clear, concise, and free from misstatement.
5 Fair value measurement
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5 Fair value measurement Purpose of section
63. This section of module 5 provides information on, and guidance on the risks of misstatements
in, items measured at fair value.
Changes in 2017/18
64. There are no changes in financial reporting requirements in 2017/18.
Definition
65. Fair value is defined in IFRS 13 Fair value measurement as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
Summary of financial reporting requirements
66. IFRS 13 sets out the measurement and disclosure requirements for fair value. The FReM
requires bodies to measure their assets and liabilities in accordance with IFRS 13 where the
FReM requires or permits fair value measurement.
67. Although IFRS 13 is applied without adaptation, IAS 16 and IAS 38 have been adapted and
interpreted for the public sector context to limit the circumstances in which a valuation is
prepared under IFRS 13. Items which the FReM requires or permits to be measured at fair
value include surplus assets, financial instruments, investment property, intangible assets
(where there is an active market), assets held for sale, debtors and creditors, and revenue
recognition.
Risks of misstatement
68. The following paragraphs highlight potential risks of misstatement in respect of fair value
measurement, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Items at fair value are not properly measured
69. The measurement requirements for fair value are set out in IFRS 13. Fair value is defined in
IFRS 13 as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most advantageous) market at the measurement date
under current market conditions (i.e. an exit price) regardless of whether that price is available
from a market or estimated using a valuation technique. This is a very technical definition and
it is important that body's staff understand what the various terms mean. Some key terms are
explained in the following table.
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Term Explanation
Orderly transaction This assumes the body has access to the market before the measurement
date (i.e. 31 March 2018) to allow for the usual marketing activities.
Principal market This is the market with the greatest volume and level of activity for the asset
or liability.
Most advantageous
market
This is the market that maximises the amount that would be received to sell
the asset or minimises the amount that would be paid to transfer the liability.
Exit price This is the price that would be received to sell an asset or paid to transfer a
liability. It takes into account the body's ability to generate economic
benefits by either using the asset in its highest and best use or by selling it
to a buyer that would use the asset in its highest and best use.
70. It is assumed that buyers and sellers in the principal (or most advantageous) market for the
asset or liability are
independent of each other, i.e. they are not related parties
knowledgeable, and have a reasonable understanding based on all available information
willing and able to enter into a transaction for the asset or liability.
71. Auditors should assess whether the body has
used the IFRS 13 definition of fair value for applicable assets and liabilities
not adjusted the price used to measure the fair value of the asset or liability for
transaction costs (the treatment of transaction costs varies)
taken into account the characteristics of the asset or liability that market participants
would take into account when measuring fair value, e.g. the condition and location of the
asset, and any restrictions on its sale or use.
72. Auditors should assess whether the body has measured fair value for applicable assets and
liabilities using valuation techniques that are consistent with one or more of the three main
approaches summarised in the following table:
Approach Explanation
Market This approach uses prices and other relevant information generated by market
transactions involving identical or comparable (i.e. similar) assets and liabilities.
Cost This approach reflects the amount that would be required currently to replace the
service capacity of an asset (often referred to as current replacement cost).
Income This approach converts future cash flows to a discounted amount. The fair value
measurement is determined on the basis of the value indicated by current market
expectations about those future amounts.
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73. Auditors should assess whether the body has followed the fair value hierarchy prescribed by
IFRS 13 which categorises into three levels the inputs to the above valuation techniques.
Inputs are the assumptions that buyers and sellers would use when pricing the asset or
liability, and are described as either observable or unobservable. They are summarised in the
following table:
Level Inputs Explanation
1 Quoted prices that
are observable in
active markets for
identical assets or
liabilities
This provides the most reliable evidence and auditors should
confirm that it has been used without adjustment whenever the
information is available. The assets and liabilities might be
exchanged in multiple active markets and therefore the emphasis is
on determining
the principal market for the asset or liability or, in the absence of
a principal market, the most advantageous market; and
whether the body can enter into a transaction for the asset or
liability at the price in that market at the measurement date.
Fair value should be measured as the product of the quoted price
for the individual asset or liability and the quantity held by the body.
2 Inputs other than
quoted prices that
are observable for
the asset or liability,
either directly or
indirectly
Inputs include
quoted prices for similar assets or liabilities in active markets
quoted prices for identical or similar assets or liabilities in
markets that are not active
inputs other than quoted prices that are observable.
Adjustments will vary depending on factors specific to the asset or
liability. Those factors include the
condition or location of the asset
extent to which inputs relate to items that are comparable to the
asset or liability
volume or level of activity in the markets within which the inputs
are observed.
3 Unobservable inputs When relevant observable inputs are not available, unobservable
inputs have to be used. Unobservable inputs should reflect the
assumptions that buyers and sellers would use when pricing the
asset or liability, including assumptions about risk. Auditors
should assess whether the body (probably using the services of a
relevant expert) has developed unobservable inputs using the best
information available in the circumstances.
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Information on fair value measurement is not properly disclosed
74. The disclosure requirements for fair value are set out in IFRS 13. Auditors should
confirm that the required disclosures have been made for all assets and liabilities
measured at fair value, with the exception of those excluded by IFRS 13 (e.g. leases)
assess whether information is disclosed to help users assess the valuation techniques
and inputs used to develop the measurements for assets and liabilities that are measured
at fair value after initial recognition
assess whether information is disclosed to help users assess the effect of recurring fair
value measurements using significant unobservable inputs (level 3) on net operating
expenditure or other comprehensive income and expenditure for the period
assess whether the disclosures are complete, clear, concise, and free from misstatement.
6 Investment property
Page 26 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
6 Investment property Purpose of section
75. This section of module 5 provides information on, and guidance on the risks of misstatements
in, investment property.
Changes in 2017/18
76. There are no changes in the financial reporting requirements in 2017/18.
Definition
77. An investment property is one held solely to earn rentals and/or for capital appreciation, and
not used to deliver services or for administrative purposes.
Summary of financial reporting requirements
78. The FReM requires bodies to account for investment properties in accordance with IAS 40
Investment properties (as interpreted by section 6.2). The FReM interprets IAS 40 by
defining investment properties as those held solely to earn rentals and/or for capital
appreciation, and not used to deliver services or for administrative purposes
requiring investment property to be accounted for under the fair value model in
accordance with IFRS 13.
Risks of misstatement
79. The following paragraphs highlight potential risks of misstatement in respect of investment
properties, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Investment properties are not identified
80. Auditors should assess whether the body has reviewed its properties to identify those that
are held solely to earn rentals and/or for capital appreciation.
81. Where a body uses part of a building itself and leases the remainder to other parties to earn a
rental, auditors should check that the building has been classified as follows
Where the elements of the building could be disposed of individually, each element
should have been accounted for separately, i.e. as owner-occupied property or as
investment property.
Where the building cannot be split between the relevant elements, the whole building
should have been classified as owner-occupied unless that element is insignificant, in
which case the whole building should have been classified as an investment property.
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82. Auditors should check that any building held to earn rentals or for capital appreciation has
been accounted for as property, plant and equipment (rather than investment property) where
the body owns and occupies it for use in the delivery of services, or the production of
goods, or for administrative purposes; or
the rentals arise from the body's regeneration policy.
Investment properties are not properly valued
83. The FReM interprets IAS 40 and requires investment property, after initial recognition at cost,
to be carried at fair value. Fair value should be in accordance with IFRS 13 (as explained at
section 5 of this module). In order to reflect market conditions each year end, it is expected
that an annual valuation will be required.
84. Auditors should
confirm that the investment properties are carried at fair value
confirm that an annual revaluation has taken place
assess whether the valuation at 31 March 2018 is free from misstatement.
85. Exceptionally, there may be evidence when a property first becomes an investment property
that the fair value is not reliably determinable. Bodies are therefore permitted in those
circumstances to measure them at historical cost (less accumulated depreciation and
impairment). Auditors should assess whether the fair value was not reliably determinable for
any new investment property measured at historical cost.
Investment properties are not properly accounted for
86. Investment properties held at fair value should not be depreciated. However, auditors should
check that investment property held at cost is being depreciated over its useful life, with the
residual value assumed to be zero.
87. Auditors should assess whether changes in fair value during 2017/18 are free from
misstatement and have been included in net operating expenditure.
7 Intangible assets
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7 Intangible assets Purpose of section
88. This section of module 5 provides information on, and guidance on the risks of misstatements
in, intangible assets.
Changes in 2017/18
89. There are no changes to the financial reporting requirements in 2017/18.
Definition
90. An intangible asset is defined in the accounting code as an identifiable non-monetary asset
without physical substance.
Summary of financial reporting requirements
91. The FReM requires bodies to account for intangible assets in accordance with IAS 38
Intangible assets (as adapted by section 6.2).
Risks of misstatement
92. The following paragraphs highlight potential risks of misstatement in respect of intangible
assets, and set out actions for auditors to undertake to assess whether the body has followed
the required treatment.
Intangible assets are not identified
93. IAS 38 requires a body to recognise an intangible asset if (and only if) it is controlled by the
body as a result of past events, and future economic or service benefits are expected to flow
from the asset to the body. Auditors should assess whether
the body has reviewed its expenditure during 2017/18 to identify amounts that meet the
IAS 38 definition of an intangible asset. For example, it is expected that in most cases
purchased computer software will meet the definition and should therefore be recognised
as an intangible asset
allowances purchased prospectively under the carbon reduction scheme have been
classified as intangible assets (as explained in module 2)
expenditure to acquire or generate an item during 2017/18 that does not meet the
definition of an intangible asset (e.g. research expenditure) has been recognised in
operating expenditure when it is incurred
subsequent expenditure incurred on an intangible asset has been recognised as an
expense unless exceptionally it meets the recognition criteria.
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Internally generated intangible assets are not recognised
94. Auditors should assess whether development (but not research) expenditure has been
recognised as an internally generated intangible asset when it meets the following criteria
The technical feasibility of completing the intangible asset so that it will be available for
use or sale must be demonstrated.
There must be an intention to complete the intangible asset and use or sell it.
The body must be able to use or sell the intangible asset.
The body must be able to demonstrate how the intangible asset will generate future
economic benefits or future service potential, e.g. existence of a market for the output of
the intangible or, if it is to be used internally, the usefulness of the intangible asset.
Adequate resources must be available to complete the development of the asset and to
use or sell it.
The body must be able to reliably measure the expenditure incurred during the
development of the intangible asset.
95. SIC 32 Intangible assets – website costs provides specific guidance on the types of
expenditure to be considered for internally generated website projects. It states that
expenditure incurred on developing a website for promoting and advertising a body’s own
products and services should be recognised as an expense. As the primary purpose of a
public body's website is to provide information about services or objectives, auditors should
confirm it has not been recognised as an intangible asset where it was developed internally.
Intangible assets are not properly valued
96. Following initial recognition at cost, although IAS 38 permits the use of either the cost or
revaluation model, the FReM adaptation requires the revaluation model to be adopted. The
application of the model depends on whether an active market exists as summarised in the
following table:
Existence of active
market?
Treatment
Yes Measure asset at current value in existing use
No Measure asset at lower of depreciated replacement cost or value in use
(using indices or some suitable model)
97. Auditors should assess whether intangible assets
were measured initially at cost
measured at 31 March 2018
at current value in existing use (where an active market exists)
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lower of depreciated replacement cost or value in use (where no active market
exists).
Intangible assets are not properly accounted for
98. Intangible assets with an indefinite life are not amortised but they should be tested for
impairment. Auditors should
confirm that an intangible asset recognised at 31 March 2018
with a finite useful life has been amortised; or
with an indefinite life has been tested for impairment.
assess whether amortisation and impairment
is free from misstatement
has been included in operating expenditure.
8 Assets held for sale
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8 Assets held for sale Purpose of section
99. This section of module 5 provides information on, and guidance on the risks of misstatements
in, assets held for sale.
Changes in 2017/18
100. There are no changes to the financial reporting requirements in 2017/18.
Definition
101. Assets are classified as held for sale if their carrying amount will be recovered principally
through a sale rather than their continued use.
Summary of financial reporting requirements
102. The FReM requires bodies to account for assets held for sale in accordance with IFRS 5 Non-
current assets held for sale and discontinued operations.
103. Fair value should be measured in accordance with IFRS 13.
Risks of misstatement
104. The following paragraphs highlight potential risks of misstatement in respect of assets held for
sale, and set out actions for auditors to undertake to assess whether the body has followed
the required treatment.
Assets held for sale are not properly identified
105. Auditors should assess whether the body has reviewed its property, plant and equipment at
31 March 2018 to identify any assets where their carrying amount will be recovered principally
through a sale rather than their continued use.
106. Where an asset is categorised as being held for sale at 31 March 2018, auditors should
assess whether it is available for immediate sale in its present condition, and that the sale is
highly probable. For the sale to be highly probable
the appropriate level of management must be committed to a plan of sale, and an active
programme to locate a buyer and complete the plan must have been initiated
the asset must be actively marketed at a reasonable price
the sale should be expected to be completed within one year of the classification. Where
a sale is not completed within one year due to circumstances beyond the body's control,
the asset may remain categorised as being held for sale provided there is sufficient
evidence that the body remains committed to the sale.
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107. In the event that the criteria have not been met, auditors should assess whether the body
has considered whether the following circumstances apply
Assets which do not meet the criteria of an asset held for sale because the body is not
actively marketing the asset may meet the criteria to be classified as investment property
(explained at section 6).
Where an asset does not meet the criteria to be classified as either held for sale or as an
investment property, it should be classified as a surplus asset within property, plant and
equipment (explained in module 1).
Assets held for sale are not properly valued
108. IFRS 5 requires a body to measure an asset classified as held for sale at the lower of its
carrying value and fair value less costs to sell. Fair value should be determined in accordance
with IFRS 13 (as explained at section 5 of this module). Auditors should assess whether the
valuation at 31 March 2018 is free from misstatement.
109. When the sale is expected to occur beyond one year, auditors should assess whether
the body has measured the cost to sell at its present value
any increase in the present value of the costs to sell that arises from the passage of time
has been treated as a financing cost
the fair value has been kept up to date.
110. For any assets reclassified as held for sale during 2017/18, auditors should assess whether
immediately before the reclassification, the carrying amount is up to date
following reclassification, the subsequent amount of revaluation gains recognised has
been limited to the cumulative impairment loss that has been previously recognised.
Assets held for sale are not properly accounted for
111. Auditors should assess whether
any impairment loss or revaluation decrease on assets held for sale has been recognised
in operating expenditure, even where there is a balance on the revaluation reserve in
respect of that asset
assets classified as held for sale have not been depreciated.
9 Cash, cash equivalents and bank overdraft
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9 Cash, cash equivalents and bank overdraft Purpose of section
112. This section of module 5 provides information on, and guidance on the risks of misstatements
in, cash, cash equivalents and bank overdrafts.
Changes in 2017/18
113. There are no changes to the financial reporting requirements in 2017/18.
Definition
114. Cash is cash on hand and demand deposits.
115. Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
116. Overdrafts are a form of short term borrowing from a bank.
Summary of financial reporting requirements
117. The FReM requires bodies to comply with IAS 7 Statement of cash flows. IAS 7 requires cash
equivalents to be reported along with cash in the statement of financial position and the cash
flow statement.
Risks of misstatement
118. The following paragraphs highlight potential risks of misstatement in respect of cash, cash
equivalents and bank overdrafts, and set out actions for auditors to undertake to assess
whether the body has followed the required treatment.
Cash equivalents are not properly identified
119. Auditors should assess whether the body has
identified its cash on hand
identified its demand deposits, which are generally accepted to be deposits that are
repayable on demand and available within 24 hours without penalty
adopted a reasonable policy for determining cash equivalents. There are no strict criteria
relating to items treated as cash equivalents but the body's policy should cover short-
term, highly liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value. There is no particular
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definition of 'short term' in this context, IAS 7 suggests that this would be a period of no
more than three months from the date of acquisition of the investment
disclosed the policy it has adopted for determining cash equivalents.
Overdrafts are not properly presented
120. IAS 7 is not clear regarding the presentation of bank overdrafts. However, Audit Scotland's
Professional Support considers that it is acceptable for a body to offset them against cash and
cash equivalent balances in the cash flow statement where they are an integral part of the
body's cash management. For an overdraft to be integral to cash management, the balance
should often fluctuate from being in credit to being overdrawn.
121. Auditors should confirm that an overdraft is
only offset against cash and cash equivalents (rather than being presented as a liability)
where it is integral to the body's cash management; or
presented separately as a liability where the account is rarely if ever in credit and is in
effect an arrangement for borrowing.
10 Grant-in-aid (NDPBs)
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10 Grant-in-aid (NDPBs) Purpose of section
122. This section of module 5 provides information on, and guidance on the risks of misstatements
in, grant-in-aid received by NDPBs.
Changes in 2017/18
123. There are no changes to financial reporting requirements in 2017/18.
Definition
124. Grant-in-aid refers to pre-funding provided to NDPBs to finance their ongoing operating
expenditure within broad parameters set by Scottish Ministers.
Summary of financial reporting requirements
125. The FReM requires bodies to account for grants in accordance with IAS 20 Accounting for
government grants and disclosure of government assistance.
Sources of guidance on financial reporting
126. Guidance on grant-in-aid is provided by
the FReM at chapter 8
the grant and grant-in-aid section of the SPFM.
Risks of misstatement
127. The following paragraphs highlight potential risks of misstatement in respect of grant-in-aid,
and set out actions for auditors to undertake to assess whether the body has followed the
required treatment.
Grant-in-aid is not properly recognised
128. Grant-in-aid should not be recognised until there is reasonable assurance that the body will
comply with any conditions that could lead to it being returned. Any conditions attached to the
grant-in-aid will normally be set out in the offer letter from the sponsor body. The types of
conditions, and their impact on the recognition of the grant-in-aid, are summarised in the
following table:
10 Grant-in-aid (NDPBs)
Page 36 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
Type of condition Impact on recognition
Conditions that require the grant-in-aid to be
returned if they are not complied with
Grant-in-aid should not be recognised until there
is reasonable assurance that the conditions will
be complied with
Restrictions that limit or direct the purposes for
which the grant-in-aid may be used but do not
require it to be returned if it is not used as
specified
No impact on recognition of the grant-in-aid
A condition that requires the grant-in-aid to be
returned if a specified future event occurs
No impact on the recognition of the grant-in-aid
[Note: a return obligation does not arise until
such time as it is expected that the condition will
be breached, and a liability should not be
recognised until that point.]
129. Grant-in-aid relating to capital expenditure should be treated in the same manner as revenue
grant-in-aid, and recognised once any conditions that could lead to it being returned have
been satisfied. The FReM removes the option under IAS 20 of deducting the grant from the
carrying amount of the asset.
130. Auditors should consider grant-in-aid received during 2017/18, and assess whether there is
reasonable assurance that conditions will be complied with. There is no definition of what
constitutes 'reasonable assurance' in this context. However, auditors should assess whether
there are indications that the body is willing and able to comply with the conditions.
Grant-in-aid is not properly presented
131. The presentation of grant-in-aid depends on whether conditions that could lead to its return
have actually been satisfied at 31 March 2018 (as opposed to 'reasonable assurance that they
will be). The options and correct treatments are summarised in the following table:
Conditions satisfied Conditions not yet satisfied Conditions not going to be
satisfied
Treat as contributions from
controlling parties and
recognise as financing (i.e.
credited to the general fund)
rather than as income - as
required by FReM paragraph
8.1.13
Recognise as a deferred credit
balance (and then credit to
general fund once the
conditions have been met)
Recognise a liability at 31
March 2018 for any grant-in-aid
not yet repaid (transfer from
deferred credit balance)
132. Auditors should assess whether
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grant-in-aid has been credited to the general fund where all conditions that could lead to
its return have been satisfied by 31 March 2018
grant-in-aid has been included in a deferred credit balance where conditions that could
lead to its return are outstanding at 31 March 2018
where it is clear that the conditions that could lead to the grant-in-aid being returned are
not going to be met, and it becomes repayable, a liability has been recognised.
11 Events after the reporting period
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11 Events after the reporting period Purpose of section
133. This section of module 5 provides information on, and guidance on the risks of misstatements
in, events after the reporting period.
Changes in 2017/18
134. There are no changes to the financial reporting requirements in 2017/18.
Definition
135. Events after the reporting period are those events that occur between the end of the reporting
period and the date when the financial statements are authorised for issue.
Summary of financial reporting requirements
136. The FReM requires bodies to account for events after the reporting period in accordance with
IAS 10 Events after the reporting period.
137. IAS 10 requires the annual accounts to reflect events after the end of the reporting period up
to the date they were authorised for issue.
Risks of misstatement
138. The following paragraphs highlight potential risks of misstatement in respect of events after
the reporting period, and set out actions for auditors to undertake to assess whether the body
has followed the required treatment.
Events after the reporting period are not identified
139. Auditors should assess whether that the body has identified all events occurring between 31
March 2018 and the date the annual report and accounts have been authorised for issue by
the Accountable Officer. In accordance with ISA (UK) 560 Subsequent events, this
assessment should involve auditors
obtaining an understanding of any procedures the body has established to ensure that
events after 31 March 2018 are identified
enquiring of the body whether any events have occurred which might affect the annual
report and accounts. This should focus on establishing the up-to-date status of items that
were accounted for on the basis of preliminary or inconclusive data, e.g. developments
11 Events after the reporting period
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regarding contingencies, or whether any events have occurred that are relevant to the
measurement of estimates or provisions.
Relevant events after the reporting period are not properly adjusted for
140. Events after the reporting period should be classified as either adjusting or non-adjusting
events. The difference is explained in the following table:
Adjusting Non-adjusting
Definition
Events after 31 March 2018 that provide
evidence of conditions that existed at that date,
e.g. information that allows a more accurate
estimate or allows an actual amount to be used
instead of an estimate.
Events that are indicative of conditions that
arose after 31 March 2018
Examples
The settlement of a court case that confirms that
the body had a present obligation at 31 March
2018.
The determination after 31 March 2018 of the
proceeds from assets sold before that date.
Notification of changes to grant entitlements
(other than those caused by a change in grant
conditions after the year-end).
The receipt of information indicating that an
asset was impaired at 31 March 2018, or that
the amount of a previously recognised
impairment loss for that asset needs to be
adjusted.
The discovery of errors or frauds which have
caused the financial statements to be misstated.
Major purchases or disposals of assets, or
abnormally large changes in asset values after
31 March 2018.
The destruction of a significant property by fire
after 31 March 2018.
The announcement of a major restructuring.
New legal cases arising solely out of events that
occurred after 31 March 2018.
141. The financial statements should reflect material adjusting events. Any reliable information that
was not used that was available and could reasonably have been taken into account
represents a misstatement. Auditors should
confirm that the body has adjusted the amounts recognised in the financial statements,
including the notes, to reflect new information concerning conditions that existed at 31
March 2018
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assess whether the adjustments are complete and free from misstatement.
Non-adjusting events are not properly disclosed
142. Where a non-adjusting event is material, auditors should
confirm that the body has disclosed
the nature of the event
an estimate of its financial effect (or a statement that an estimate cannot be made)
assess whether the estimate is reasonable (or whether a reliable estimate cannot be
made)
assess whether the disclosures are complete, clear, concise, and free from misstatement.
Authorised for issue date is not properly disclosed
143. The FReM interprets IAS 10 by stating that
the authorised for issue date is normally the same date as the certificate and report of the
Controller and Auditor General. In Scotland, the equivalent is the independent auditor's
report
the disclosure of the authorised for issue date should not be on the title page.
144. Auditors should check that the date the accounts were authorised for issue has been
disclosed in accordance with IAS 10. The disclosure should read 'The Accountable Officer
authorised these financial statements for issue on [date of authorisation]".
Events after the authorised for issue date but before the independent auditor's report is signed are not identified
145. ISA (UK) 560 requires auditors to identify any events are occurring between 31 March 2018
and the date of the independent auditor’s report.
146. ISA (UK) 700 explains that the date of the auditor’s report informs the reader that the auditor
has considered the effect of events and transactions of which the auditor becomes aware and
that occurred up to that date. Auditors are required to consider events up to the date of their
report, which may be later than the date the annual report and accounts are authorised for
issue.
147. Auditors should therefore seek, where possible, to sign their report on the same day the
accounts are authorised for issue. Where that is not possible, auditors should ensure they
carry out a review to identify any adjusting or non-adjusting events since the accounts were
authorised for issue.
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Misstatements are identified after the independent auditor's report has been signed
148. There have been cases in previous years where an auditor has become aware of a material
misstatement in the audited annual report and accounts after the date of the independent
auditor's report. The appropriate action in these circumstances depends on whether the
misstatement has been identified before or after the annual accounts have been laid in
Parliament. This is summarised in the following table:
Before laying in Parliament After laying in Parliament
If this situation arises in respect of the 2017/18
annual report and accounts, auditors should
discuss the matter with the body and agree
the required correcting amendment
carry out necessary audit procedures in the
circumstances of the amendment
arrange for the annual report and accounts
to be re-signed and re-dated
extend the subsequent review procedures to
the date of the new independent auditor's
report
provide a new, re-dated independent
auditor's report.
Once the annual accounts have been laid before
Parliament, they cannot be revised and the
independent auditor's report cannot be re-
issued.
In these circumstances, auditors should ensure
that any material misstatement is corrected by
the retrospective restatement of a prior year
error (explained in the overview module) in the
2018/19 accounts.
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12 Miscellaneous disclosures Purpose of section
149. This section of module 5 provides information on, and guidance on the risks of misstatements
in, the disclosure of
new accounting standards
key assumptions and judgements
operating segments
related parties
agency arrangements.
New accounting standards
Changes in 2017/18
150. There are no changes in disclosure requirements for new accounting standards in 2017/18.
Summary of financial reporting requirement
151. The FReM requires bodies to comply with IAS 8 and disclose information relating to the
impact of an accounting change that will be required by a new standard that has been issued
but not yet adopted.
Risks of misstatement
152. The following paragraphs highlight potential risks of misstatement in respect of disclosure of
new accounting standards, and set out actions for auditors to undertake to assess whether the
body has followed the required treatment.
Information on new accounting standards is not disclosed
153. The standards introduced by the 2018/19 and 2019/20 FReM are expected to include
IAS 7 Statement of cash flows (Disclosure initiative)
IAS 12 Income taxes (Recognition of deferred taxes for unrealised losses.
IFRS 9 Financial instruments
IFRS 15 Revenue from contracts with customers
IFRS 16 Leases (from 2019/20).
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154. Auditors should check that the body has considered whether the impact of the new
standards will be material and, if so, has disclosed
the title of the new standard, indicating that it is expected to be adopted by the 2018/19 or
2019/20 FReM
the nature of the impending changes in accounting policy
the date by which application of the standard, as adopted by the FReM is required
the date at which the body will adopt the standard initially, e.g. 1 April 2018
a clear and concise discussion of the impact that initial application of the standard as
adopted by the FReM is expected to have on the body’s financial statements (or, if that
impact is not known or reasonably estimable, a statement to that effect).
Key assumptions and judgements
Changes in 2017/18
155. There are no changes to the disclosure requirements for key assumptions and judgements in
2017/18.
Summary of financial reporting requirements
156. IAS 8 requires bodies to disclose
the judgements that management has made in the process of applying the accounting
policies that have the most significant effect on the amounts recognised in the financial
statements
information about the key assumptions, and other key sources of estimation uncertainty,
at the end of the reporting period that have a significant risk of causing a material
adjustment to carrying amounts of assets and liabilities within the next financial year.
Risks of misstatement
157. The following paragraphs highlight potential risks of misstatement in respect of disclosure of
key assumptions and judgements, and set out actions for auditors to undertake to assess
whether the body has followed the required treatment.
Judgements are not identified
158. Auditors should assess whether the body has considered the judgements made in applying
the accounting policies that have the most significant effect on the amounts recognised in the
financial statements. Examples of judgements that auditors should expect an body to
considering are whether
a lease agreement is a finance or operating lease
land and buildings are investment properties
an item should be recognised as a provision or disclosed as a contingent liability
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valuation techniques are appropriate.
Information on judgements is not properly disclosed
159. The aim of the disclosure is to highlight significant areas where others may have formed
different judgements and provide justification for the view taken.
160. Auditors should assess whether a clear and concise explanation has been disclosed which
refers to
the determining factors that were taken into account in making the judgements
judgements to exclude material items, e.g. a decision not to disclose a future transaction
as a contingent liability.
Key assumptions are not identified
161. Auditors should assess whether the body has considered the key assumptions, and other
key sources of estimation uncertainty, at 31 March 2018 that have a significant risk of causing
a material adjustment to carrying amounts of assets and liabilities by 31 March 2019.
162. The disclosure requirement focusses on assets and liabilities whose carrying amount relies on
estimates which are dependent on complex judgements for which there is a risk that
correction or re-estimation with material effect during 2018/19 may be required.
163. Estimation uncertainty disclosures deal with situations where an body has incomplete or
imperfect information which will only be enhanced as a result of future events. Examples of
estimates that the body should be considering for inclusion in the note include
assumptions used in the calculation of depreciation
assumptions about future events affecting provisions and retirement benefits
assessments of the recoverable amounts of arrears and other debtors
fair values that are not based on recently observed market prices.
Information on key assumptions is not properly disclosed
164. Auditors should check whether the body, after considering the key assumptions and other
key sources of estimation uncertainty, has disclosed for the assets and liabilities affected
their nature
their carrying amount as at 31 March 2018.
Operating segments
Changes in 2017/18
165. There are no changes to the financial reporting requirements for operating segments in
2017/18.
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Definition
166. An operating segment is a component of the body that engages in activities and whose
operating results are reviewed regularly as part of internal management reporting.
Summary of financial reporting requirements
167. The FReM requires bodies to comply with IFRS 8 Operating segments in respect of operating
segments.
Risks of misstatement
168. The following paragraphs highlight potential risks of misstatement in respect of disclosure of
operating segments, and set out actions for auditors to undertake to assess whether the body
has followed the required treatment.
Reportable segments are not identified
169. Reportable segments should be based on a body's internal management reporting.
Information on a segment should be reported where
its reported revenue is 10% or more of the combined revenue of all segments; or
its assets are 10% or more of the combined assets.
170. A body is permitted to report segments that do not meet these criteria.
171. Where the operating segments identified by applying the criteria do not include at least 75% of
reported revenue, additional segments require to be reported until that level is reached.
172. Auditors should confirm that
information on a segment has been reported where the 10% limit is exceeded
reported revenue on reportable segments included in the disclosure meets the 75% level.
Information on reportable segments is not properly disclosed
173. IFRS 8 requires bodies to disclose information on reportable segments within the notes to the
financial statements. For each reportable segment, auditors should
confirm that the body has disclosed
a subjective analysis of the income and expenditure that are reported as part of
internal management reporting
a reconciliation between the segment reporting analysis and corresponding amounts
in the financial statements.
assess whether the disclosures are complete, clear, concise, and free from misstatement.
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Related parties disclosure
Changes in 2017/18
174. There are no changes in financial reporting requirements in 2017/18.
Definition
175. Parties are considered to be related if one party has the ability to control, or exercise
significant influence over, the other party, or if the body and another entity are subject to
common control.
Summary of financial reporting requirements
176. The FReM requires bodies to make related party disclosures in accordance with IAS 24
Related party disclosures. FReM section 6.2 contains a number of interpretations including
reduced disclosures for related party transactions with other public bodies
a requirements for materiality to be judged from the perspective of both the body and the
related party.
Risks of misstatement
177. The following paragraphs highlight potential risks of misstatement in respect of disclosure of
related parties, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Related parties are not identified
178. Auditors should assess whether the body has identified its related parties in accordance with
ISA (UK) 550. A related party includes
a person (or close family member of that person) who has control or significant influence
over the body, or is a member of the key management personnel
an entity controlled by a person identified above
an entity which is significantly influenced by a person who controls the body
subsidiaries, associates and joint ventures
pension funds for the employees of the body, or of any entity that is a related party
an entity, or any member of a group of which it is a part, that provides key management
personnel services to the body.
179. Where a body shares key management personnel with another entity, or where a member of
key management personnel of one entity has significant influence over the other entity, this
does not automatically mean that there is a related party relationship. Auditors should
assess whether it is likely that the person would be able to affect the policies of both entities in
their mutual dealings.
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180. Providers of finance in the course of their business; trade unions in the course of their normal
dealings; or an entity with which the relationship is solely that of an agency are not related
parties.
Related party transactions are not identified
181. A related party transaction is a transfer of resources or obligations between related parties,
regardless of whether a price is charged. This includes sales, transfers and exchanges of
non-current assets, leases, guarantees, the provision of goods and services, secondment of
staff and the making of loans and investments.
182. Auditors should assess whether the body has identified all of its transactions with related
parties.
Information on related parties is not properly disclosed
183. The FReM interprets IAS 24 and required disclosure requirements do not apply to related
party transactions with other central government bodies, NHS bodies or local authorities.
Auditors should check that the body has instead disclosed
the name of the parent department
the main entities within government with which the body has had dealings. There is no
requirement for information to be given on the transactions. .
184. For other related parties, a body is required to disclose
a description of the nature of the related party relationships
the amount of transactions that have occurred
the amount of outstanding balances
amounts incurred by the body for the provision of key management personnel services
that are provided by a separate management entity
185. Transactions and balances only need to be disclosed in the related parties note if they are not
disclosed elsewhere in the annual report and accounts. However, good practice would be to
make cross-reference in the related parties note to where the relevant disclosures can be
found, rather than simply to omit the information.
186. Auditors should
confirm that the body has met the disclosure requirements of IAS 24
assess whether
related party relationships where control exists have been disclosed irrespective of
whether there have been transactions between the related parties
transactions have not been disclosed on an aggregated basis where disclosure of an
individual transaction is necessary for an understanding of its impact
the body has judged materiality from the perspective of both the body and the related
party
12 Miscellaneous disclosures
Page 48 Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
the disclosures are complete, clear, concise, and free from misstatement..
Agency arrangements disclosure
Changes in 2017/18
187. There are no changes to the disclosure requirements for agency transactions in 2017/18.
Definition
188. A body is an agent when it is acting as an intermediary, and is a principal when it is acting on
its own behalf.
Summary of financial reporting requirements
189. The accounting treatment of transactions should reflect whether a body is acting as an agent
or principal.
Risks of misstatement
190. The following paragraphs highlight potential risks of misstatement in respect of disclosure of
agency arrangements, and set out actions for auditors to undertake to assess whether the
body has followed the required treatment.
Agency arrangements are not identified
191. Auditors should assess whether the body has identified the transactions when it is acting as
an agent. A body may be acting as an agent where
it does not have exposure to the significant risks and rewards associated with the sale of
goods or the rendering of services
the amount the body earns is predetermined.
192. For example, the body is likely to be an agent where it is acting as a distribution point for grant
monies to other bodies and bears no significant risk in the transaction.
193. IAS 18 Revenue sets out the following features that would indicate that an body is acting as a
principal
The body has the primary responsibility for providing the goods or services to the
customer or for fulfilling the order, for example by being responsible for the acceptability
of the products or services ordered or purchased by the customer.
The body has inventory risk before or after the customer order, during shipping or on
return.
The body has latitude in establishing prices, either directly or indirectly, for example by
providing additional goods or services.
The body bears the customer’s credit risk for the amount receivable from the customer.
12 Miscellaneous disclosures
Audit of 2017/18 annual report and accounts (CG) - module 5 other financial statement areas
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Agency arrangements are not properly accounted for
194. Where a body has acted as an agent in a transaction during 2017/18, auditors should
assess whether
the transactions have been excluded from its 2017/18 statement of comprehensive net
expenditure
the statement of financial position reflects the debtor or creditor position at 31 March
2018 in respect of cash collected or expenditure incurred on behalf of the principal
the net cash position at 31 March 2018 is included in the financing activities in the cash
flow statement
any commission received for acting as an agent during 2017/18 has been recognised as
income.
Information on agency arrangements is not properly disclosed
195. Auditors should
confirm that the nature and amount of any significant agency income and expenditure has
been disclosed in the notes to the financial statements
assess whether the disclosures are complete, clear, concise, and free from misstatement.
Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts
Commission. Together they ensure that the Scottish Government and public sector bodies in
Scotland are held to account for the proper, efficient and effective use of public funds.
Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
Page 3
Contents
Regularity of expenditure and income ........................................................................................ 4
Purpose of module ............................................................................................................ 4
Contact points for this module ........................................................................................... 4
Summary of Accountable Officers' responsibilities ............................................................ 4
Summary of auditors' responsibilities ................................................................................ 4
Risks of irregularities ......................................................................................................... 5
Regularity of expenditure and income
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
Regularity of expenditure and income Purpose of module
1. This module of technical guidance note 2018/1(CG) provides guidance on auditor's
responsibilities for the regularity of expenditure and income, and the risks of irregularities. It
also sets out test procedures for auditors to carry out.
Contact points for this module
2. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Neil Cameron, Manager (Professional Support) - [email protected]
Helen Cobb, Senior Adviser (Professional Support) - [email protected].
Summary of Accountable Officers' responsibilities
3. Accountable Officers have a personal responsibility in respect of expenditure and income to
ensure
regularity, which involves compliance with relevant legislation and guidance issued by the
Scottish Ministers
propriety, which involves respecting Parliament’s intentions and conventions and
adhering to values and behaviours appropriate to the public sector.
Summary of auditors' responsibilities
4. Auditors of central government bodies are required by section 22(1) of the Public Finance and
Accountability (Scotland) Act 2000 to report their findings on whether
the expenditure and income shown in the account were incurred or applied in accordance
with
any enactment by virtue of which the expenditure was incurred or the income
received
any applicable guidance (whether as to propriety or otherwise) issued by the Scottish
Ministers.
the relevant Budget Act
sections 4 to 7 of the Public Finance and Accountability (Scotland) Act 2000.
the sums paid out of the Scottish Consolidated Fund (SCF) for the purpose of meeting
the expenditure shown in the financial statements were applied in accordance with
section 65 of the Scotland Act 1998.
Regularity of expenditure and income
Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
Page 5
5. Auditors are therefore required to express an opinion in their independent auditor's report on
whether expenditure and income were incurred or applied, in all material respects, in
accordance with applicable enactments and guidance issued by the Scottish Ministers. This is
generally referred to as the regularity opinion.
6. Practice note 10 (PN 10) Audit of financial statements of public sector bodies in the UK
provides guidance on the audit of regularity in part 2.
7. Auditors should adopt an integrated audit approach to covering the audit of the financial
statements supplemented by additional testing of regularity, where necessary.
Risks of irregularities
8. The following paragraphs highlight potential risks of irregularities in expenditure and income,
and set out test procedures for auditors to undertake to assess whether the body has followed
the requirements.
Governing legislation not complied with
Test procedure 1 - compliance with governing legislation
Auditors should assess whether expenditure has been incurred and income applied in
accordance with the body's governing legislation
9. In order to incur expenditure, a body is required to have the statutory power to undertake the
activity giving rise to the expenditure. It is likely that these powers will be set out in the
legislation governing the audited body and its activities, such as the Act that establishes the
body and any regulations issued under it.
10. Auditors should obtain an understanding of the governing legislation for each body sufficient
to identify events, transactions and practices which may have a material effect on the
regularity of expenditure and income in the financial statements.
11. In considering the governing legislation, auditors should distinguish between those
which are specific to the body and provide direct authority for its financial transactions.
The auditor’s work on legislation or regulations need only focus on those authorities that
are relevant to the entity’s financial transactions, such as those that govern the powers of
the entity to make payments or receive money, or set out the value of such payments or
receipts
and those which provide the general framework within which it conducts its activities (e.g.
those relating to health and safety, environmental protection and employment). It is not
concerned with administrative rules or regulations that are not directly linked to financial
transactions. Non-compliance with the general framework does not affect the auditor’s
opinion on regularity.
Regularity of expenditure and income
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
12. Auditors should consider how the Accountable Officer complies with the governing legislation
and where relevant, addresses the risk of material irregularity through controls. This involves
an assessment of the general control environment and control procedures relating to
individual transaction streams that are designed to prevent or detect and correct material
irregularities.
13. Auditors may need to assess whether regulations are appropriately translated into relevant
procedures and guidelines. This would involve reviewing the legislation to identify the
provisions that authorise activities and reviewing the process for their translation and
interpretation in subsidiary regulations and guidelines. It may also extend to the process for
translation of those regulations into working manuals or other key documentation.
14. Audit procedures designed to obtain assurance over the regularity of transactions are usually
based on a combination of tests of controls and substantive procedures. Evidence in relation
to regularity can be gathered as part of an integrated approach with the audit of financial
statements. Additional testing to identify activities and transactions that are not in accordance
with the framework of authorities may be necessary.
Applicable guidance not complied with
Test procedure 2 - compliance with applicable guidance
Auditors should assess whether expenditure has been incurred and income applied in
accordance with applicable guidance
15. The guidance contained in the SPFM, and any other relevant guidance issued by the Scottish
Ministers e.g. finance guidance notes, should be regarded as applicable guidance by all
bodies. Treasury guidance has no direct application unless explicitly adopted by the Scottish
Ministers.
16. As with legislation, auditors should focus on guidance that is relevant to the body's financial
transactions.
17. A particular issue is losses and special payments which the Parliament could not have
contemplated when approving the annual Budget Act and subsequent Amendment Orders. A
formal approval procedure is therefore required in order to regularise such transactions and is
set in the losses and special payments section of the SPFM. This includes disclosure in the
annual report and accounts (explained at module 7).
Regularity of expenditure and income
Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
Page 7
Expenditure not authorised in Budget Act
Test procedure 3 - Budget Act
Auditors should assess whether expenditure
has been authorised in the relevant Budget Act
does not exceed the amount authorised.
18. Section 1 of the Public Finance and Accountability (Scotland) Act 2000 provides that the use
of resources by the Scottish Administration and other bodies funded directly from the Scottish
Consolidated Fund must be authorised on an annual basis by Budget Act.
19. The Budget Act (as amended by Order) and supported by budget documents specifies the
purpose for which resources may be used and the maximum amount of related expenditure in
the particular financial year to which the Budget Act relates.
20. The principles and procedures for the annual budgeting process, the format of the budget
documents and procedures for in-year reallocation of budgetary provision are the subject of a
written agreement between the Scottish Government and the Scottish Parliament Finance
Committee.
21. Section 3 of the Public Finance and Accountability (Scotland) Act 2000 sets out contingency
arrangements to allow for the use of resources in certain circumstances where expenditure
has not been authorised by Budget Act. This is intended to cover instances where there is an
urgent need, but no time to seek parliamentary approval. All use of the power requires to be
reported to the Parliament and the procedure should only be used exceptionally when it is not
practical to seek a Budget revision.
22. Auditors of bodies directly funded from the SCF should assess whether expenditure for
2017/18 has been authorised in the relevant Budget Act and does not exceed the amount
authorised. Where this is not the case, auditors should confirm that contingency
arrangements under section 3 have been made.
Section 4 to 7 not complied with
Test procedure 4 - compliance with sections 4 to 7
Auditors should assess whether expenditure has been incurred and income applied in
accordance with sections 4 to 7 of the 2000 Act
23. Section 64 of the Scotland Act 1998 makes provision for the SCF. The UK Parliament
provides the Secretary of State for Scotland with the resources to pay into the SCF. The
management of those resources falls thereafter to the Parliament and to the Scottish
Ministers.
Regularity of expenditure and income
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income
24. Section 65(2) of the Scotland Act requires sums paid out of the SCF under that section (or
other enactment) to meet expenditure of the Scottish Administration to be in accordance with
sections 4 to 6 of the 2000 Act. Section 7 is concerned with the application of receipts.
25. Auditors of bodies directly funded from the SCF should assess whether expenditure has been
incurred and income applied in accordance with sections 4 to 7 of the 2000 Act.
Section 65 not complied with
Test procedure 5 - compliance with section 65
Auditors should assess whether the sums paid out of the SCF for the purpose of meeting
the expenditure shown in the financial statements were applied in accordance with
section 65 of the Scotland Act 1998
26. Section 65(3) of the Scotland Act provides that sums paid out of the SCF should not be
applied for any purpose other than that for which they were paid out.
27. Auditors of bodies directly funded from the SCF should assess whether sums paid out of the
SCF during 2017/18 were applied for the purpose for which they were paid out.
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
29 January 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. It provides services to the Auditor General for Scotland and the Accounts
Commission. Together they ensure that the Scottish Government and public sector bodies in
Scotland are held to account for the proper, efficient and effective use of public funds.
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 3
Contents
1 Introduction ..................................................................................................................... 5
Purpose of module ............................................................................................................ 5
Contact points for this module ........................................................................................... 5
Summary of auditors' responsibilities for non-financial statements .................................... 5
2 Remuneration and staff report ....................................................................................... 7
Purpose of section............................................................................................................. 7
Changes in 2017/18 .......................................................................................................... 7
Definition ........................................................................................................................... 7
Summary of financial reporting requirements .................................................................... 7
Sources of guidance on financial reporting requirements .................................................. 7
Summary of auditors' responsibilities ................................................................................ 8
Risks of misstatement ....................................................................................................... 8
3 Performance report ....................................................................................................... 17
Purpose of section........................................................................................................... 17
Changes in 2017/18 ........................................................................................................ 17
Definition ......................................................................................................................... 17
Summary of financial reporting requirements .................................................................. 17
Sources of guidance on financial reporting requirements ................................................ 17
Summary of auditors' responsibilities .............................................................................. 17
Risks of misstatement ..................................................................................................... 18
4 Governance statement .................................................................................................. 25
Purpose of section........................................................................................................... 25
Changes in 2017/18 ........................................................................................................ 25
Definition ......................................................................................................................... 25
Summary of financial reporting requirements .................................................................. 25
Summary of auditors' responsibilities .............................................................................. 25
Risks of misstatement ..................................................................................................... 26
5 Other non-financial statements .................................................................................... 31
Purpose of section........................................................................................................... 31
Changes in 2017/18 ........................................................................................................ 31
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Summary of corporate reporting requirements ................................................................ 31
Summary of auditors' responsibilities .............................................................................. 31
Risks of misstatement ..................................................................................................... 31
Appendix 1 .................................................................................................................................. 36
Auditor action checklist - performance report................................................................... 36
Appendix 2 .................................................................................................................................. 37
Checklist - required content of performance report .......................................................... 37
Appendix 3 .................................................................................................................................. 38
Auditor action checklist - governance statement .............................................................. 38
Appendix 4 .................................................................................................................................. 39
Checklist - required content of annual governance statement ......................................... 39
1 Introduction
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 5
1 Introduction Purpose of module
1. This module of technical guidance note 2018/1(CG) provides guidance on auditors'
responsibilities for, and the risks of misstatement in, the following non-financial statements
included in the annual report and accounts
Remuneration and staff report (section 2).
Performance report (section 3).
Governance statement (section 4).
Other non-financial statements (section 5).
Contact points for this module
2. The contact points in Audit Scotland's Professional Support for this module of the technical
guidance note are
Paul O'Brien, Senior Manager (Professional Support) - [email protected]
Neil Cameron, Manager (Professional Support) - [email protected].
Summary of auditors' responsibilities for non-financial statements
3. Auditors are required to audit a specified part of the remuneration and staff report and
conclude as to whether it has been properly prepared in accordance with the accounts
direction.
4. ISA (UK) 720 deals with auditors' responsibilities for information in the annual report and
accounts other than the financial statements and audited part of the remuneration and staff
report.
5. The basic requirements of ISA (UK) 720 are in respect of what it refers to as 'other
information'. It also deals with additional obligations on auditors to report on 'statutory other
information'. These terms are explained the following table along with auditors' responsibilities
for each and the application to the central government sector:
1 Introduction
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Other information Statutory other information
Definition in ISA
(UK) 720
Financial or non-financial
information (other than financial
statements and the independent
auditor’s report) included in the
annual report and accounts
Reports that are required to be prepared
and issued by an entity in relation to which
the auditor is required to report publicly in
accordance with law or regulation
Auditors'
responsibilities
under ISA (UK)
720
Read and consider whether there
are material inconsistencies
between the other information and
the financial statements
auditor's knowledge obtained in
the audit
Remain alert for material
misstatements caused by
information being misleading
Conclude whether a material
misstatement exists
Report any uncorrected material
misstatement in the independent
auditor's report
In addition to responsibilities for other
information, read and consider whether the
statutory other information has been
prepared in accordance with applicable
legal requirements
Where required by law or regulation, form
an opinion on whether the statutory other
information is consistent with the financial
statements and has been prepared in
accordance with applicable legal
requirements
Misstatements Information is incorrectly stated or
otherwise misleading
Information is incorrectly stated, has not
been prepared in accordance with legal
requirements, or is otherwise misleading
Application to
central
government
bodies
Any statements or information that
a body voluntarily includes in the
annual report and accounts (other
than in the financial statements or
the audited part of the
remuneration and staff report)
All information in the annual report and
accounts required by the FReM (other than
the financial statements, the audited part of
the remuneration and staff report, and the
independent auditor's report)
Reporting by
auditors
Material misstatements should be
reported in the independent
auditor's report
In addition to reporting material
misstatements, auditors express an opinion
on whether the
information given in the performance
report and governance statement is
consistent with the financial statements
the performance report and governance
statement has been prepared in
accordance with the accounts direction.
2 Remuneration and staff report
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 7
2 Remuneration and staff report Purpose of section
6. This section of the module provides guidance on auditors' responsibilities for, and the risks of
misstatements in, the audited part of the remuneration and staff report.
Changes in 2017/18
7. FReM paragraph 5.3.28 has been amended to require information to be disclosed in the staff
report section on employee matters, such as diversity issues and equal treatment in
employment, arising from The Companies, Partnerships and Groups (Accounts and Non-
Financial Reporting) Regulations 2016.
Definition
8. A remuneration and staff report is a component of the accountability report within the annual
report and accounts which discloses information about the remuneration and pension
entitlements of directors, as well as other staff-related matters.
Summary of financial reporting requirements
9. Accounts directions require compliance with the disclosure requirements of the FReM. FReM
paragraphs 5.3.15 to 5.3.28 set out the requirements for the remuneration and staff report.
10. The application of each requirement to Scottish bodies is explained in this section but in
summary required disclosures include
remuneration policy
a single total figure for remuneration and pension entitlement for each director
compensation payments to directors, payments to past directors, and fair pay disclosure
specified information on all staff.
Sources of guidance on financial reporting requirements
11. Guidance on the remuneration and staff report is provided by the Cabinet Office in an
employer pension notice (EPN) and section 13 of the Employer pension guide. Professional
Support will advise auditors when the 2017/18 EPN is available.
12. Guidance on fair pay disclosure is provided in Hutton review of fair pay - implementation
guidance.
2 Remuneration and staff report
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Summary of auditors' responsibilities
13. Auditors are required by section 22(1) of the 2000 Act to report as to whether the
remuneration and staff report complies with accounts directions. In order to meet this
requirement, auditors should audit a specified part of the remuneration and staff report and
conclude as to whether it has been properly prepared in accordance with the FReM.
14. The Auditor General requires auditors to report their conclusion in a separate opinion within
their independent auditor's report. This reflects a requirement in the Companies Act 2006
which relates to the private sector and is applied to central government bodies under the audit
appointment as a matter of good practice. The audited part of the remuneration and staff
report comprises the disclosures on
the single total figure for remuneration
pension entitlement
compensation payments
payments to past directors
analysis of staff costs and numbers
exit packages.
15. The model independent auditor's report for 2017/18 will be provided in a separate technical
guidance note and will include wording for the remuneration and staff report opinion.
16. The unaudited part of the remuneration and staff report (i.e. the remuneration policy and most
items in the staff report) is covered at section 5 of this module.
Risks of misstatement
17. The following paragraphs highlight potential risks of misstatement in respect of the audited
part of the remuneration and staff report, and set out actions for auditors to undertake to
assess whether the body has followed the required treatment.
Relevant directors are excluded from the remuneration disclosures
18. FReM paragraph 5.3.9 describes directors as the management board (including advisory and
non-executive members) having authority or responsibility for directing or controlling the major
activities of the body during the year.
19. FReM paragraph 5.3.17 presumes that information on named individuals will be given in all
circumstances. Non-disclosure is acceptable only for the reasons set out in that paragraph,
e.g. where disclosure would cause substantial distress to the employee. In other cases,
FReM paragraph 5.3.18 requires bodies to assess the director's reasons on a case-by-case
basis and consider whether to accept them. Where non-disclosure is agreed, the fact that
certain disclosure has been omitted should be disclosed.
2 Remuneration and staff report
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 9
20. Auditors should assess whether all relevant directors are included in the remuneration and
staff report. Where a relevant director is omitted, auditors should
assess whether non-disclosure is acceptable
confirm that the fact of non-disclosure has been disclosed.
21. Where auditors conclude that disclosure is required, auditors should request that the body
includes that individual. Where the body declines to do so, auditors should discuss the
matter with Audit Scotland's Professional Support and consider qualifying their opinion on the
remuneration and staff report.
Remuneration information has not been properly disclosed
22. FReM paragraph 5.3.21 requires bodies to disclose each component and the overall single
total remuneration figure in the format set out in the EPN. This is based on requirements in
regulations issued under the Companies Act and therefore, in accordance with FReM
paragraph 5.1.4, applies to Scottish bodies.
23. The components of the single total remuneration figure are summarised in the following table:
Component Explanation
Salary and allowances
in bands of £5,000
Salary covers both pensionable and non-pensionable amounts and
includes: gross salaries; overtime; recruitment and retention allowances;
and other taxable allowances and any ex-gratia payments.
It does not include reimbursement of legitimate expenses.
Performance pay or
bonuses in bands of
£5,000
These should relate to the year in which they become payable. If the
appraisal process does not allow sufficient time for the inclusion of any
bonuses relating to 2017/18 performance, bonuses based on 2016/17
performance should be disclosed.
Non-cash benefits The estimated value of any benefits-in-kind to the nearest £100
Value of pension
benefits
The value of pension benefits should be calculated as
the real increase in pension multiplied by 20; plus
the real increase in any lump sum; less
contributions made by the member.
The real increases exclude increases due to inflation or any change due
to a transfer of pension rights.
24. Where there are changes to relevant directors during 2017/18, the employer pension guide
suggests that
2 Remuneration and staff report
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
the annual remuneration (i.e. full year equivalent), together with their leaving/starting
date, should be disclosed in addition to the actual remuneration
where an employee has been promoted to (or 'acting up' as) a director from a position
that does not require disclosure, only the remuneration which relates to their new
appointment should be disclosed. Prior year comparator information is not required.
25. Auditors should assess whether
the single total figure of remuneration disclosures have been made in the format set out
in the EPN
remuneration has been disclosed beside the post and name of each relevant director in
the required bands
the components of remuneration required by the FReM have been used
the remuneration disclosures are complete, clear, concise, relevant, and free from
misstatement
total remuneration for 2017/18 and 2016/17 have been disclosed.
26. Where remuneration information has not been properly disclosed, auditors should request
that the body makes the necessary correction. Where the body declines to correct a material
misstatement, auditors should discuss the matter with Audit Scotland's Professional Support
and consider qualifying their opinion on the remuneration and staff report.
Pension entitlement information has not been properly disclosed
27. FReM paragraph 5.3.22 requires bodies to disclose pension entitlements for each director in
the format set out in the EPN. This is based on requirements in regulations issued under the
Companies Act and therefore applies to Scottish bodies.
28. The required information is summarised in the following table:
2 Remuneration and staff report
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 11
Disclosure Explanation and auditor action
Value of each relevant director's
accrued pension benefits and any
related lump sum at pension age
as at the end of the year
Bodies are required to disclose the pension that the individual
would receive if 31 March 2018 was their last day in service.
Auditors should assess whether the accrued pension benefit
and any related lump sum at 31 March 2018
includes any benefits that have accrued from the individual
buying added years
includes transfers of benefits from another pension fund
(unless the individual chooses not to transfer)
is disclosed in bands of £5,000
is complete and free from misstatement.
Real increase during the year in
the pension and any related lump
sum at pension age
This is the increase in the value of the pension over the year
after considering the effect of inflation.
Auditors should assess whether the real increase between
the accrued pension benefit and any related lump sum as at 31
March 2018 and the equivalent value as at 31 March 2017
is disclosed in bands of £2,500
is free from misstatement.
The value of the cash equivalent
transfer value (CETV) at the start
and end of the year, and the real
increase during the year, both to
the nearest £1,000.
CETV is the capital value of the pension and is worked out
using guidance provided by the scheme actuary. It is an
assessment of what it costs the scheme to provide these
pension benefits.
Auditors should assess whether the CETV at 1 April 2017
and 31 March 2018 is free from misstatement.
Auditors should assess whether the real increase in CETV
reflects the increase in accrued pension that is funded by
the employer
excludes the increase due to inflation
excludes contributions paid by the employee (including the
value of any benefits transferred from another pension
scheme).
29. The treatment of particular issues that may arise is summarised in the following table:
2 Remuneration and staff report
Page 12 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Issue Treatment and auditor action
Opt out Where a director has opted out of the pension arrangements for the whole of
2017/18, there are no pension figures to be reported but auditors should
assess whether a clear and concise footnote explanation has been disclosed.
If a director opts out or in during 2017/18, they should have been treated as a
leaver or joiner.
Pension sharing
order on divorce
Where a director's pension has been subject to a pension sharing order on
divorce, auditors should confirm that the gross pension before the pension
debit is applied has been disclosed.
Partial retirement Where a director has taken partial retirement during 2017/18, benefits should
have been reported as a combination of active and pensioner benefits.
Auditors should assess whether the body has disclosed
total pension
details of how much pension is in payment.
Partnership
pension account
Where a director has a partnership pension account the above disclosures do
not apply, and auditors should confirm that the employer’s contribution has
been disclosed.
30. Where pension entitlement information has not been properly disclosed, auditors should
request that the body makes the necessary correction. Where the body declines to correct a
material misstatement, auditors should discuss the matter with Audit Scotland's Professional
Support and consider qualifying their opinion on the remuneration and staff report.
Information on compensation payments is not properly disclosed
31. FReM paragraph 5.3.23 requires disclosure where a payment for compensation on early
retirement or for loss of office has been made to a director under the terms of an approved
compensation scheme. This is based on requirements in regulations issued under the
Companies Act and therefore applies to Scottish bodies.
32. Where a body has entered into a settlement agreement with an individual, it is expected that
disclosure will still be required. The SPFM makes it clear that bodies are required to report on
the use of settlement agreements and compensation payments in compliance with disclosure
requirements for the annual report and accounts. Any confidentiality clause should expressly
state that it does not prevent disclosure of information about the individual’s compensation
where required for the annual report and accounts.
33. Auditors should
confirm that the body has disclosed
the fact that such a payment has been made
a description of the compensation payment
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details of the total amounts paid. The cost to be used should include any top-up to
compensation provided by the body to buy out the actuarial reduction on an
individual’s pension.
assess whether the disclosures are complete, clear, concise and free from misstatement.
Information on payments to past directors is not properly disclosed
34. FReM paragraph 5.3.24 requires bodies to disclose any payments made to past directors.
Disclosure is required unless
already disclosed within a previous year's remuneration and staff report
disclosed in the 2017/18 single total remuneration disclosure or within the disclosure of
compensation for early retirement or loss of office.
35. All payments should be disclosed except
regular pension benefits which commenced in previous years
payments in respect of employment other than as a director.
36. Auditors should
confirm that relevant payments to past directors have been disclosed
assess whether the disclosures are complete, clear, concise and free from misstatement.
Information on fair pay is not properly disclosed
37. FReM paragraph 5.3.25 requires bodies to disclose information comparing the remuneration
of the highest paid director with the median remuneration of the body's staff. This is not a
Companies Act requirement, and there is no equivalent requirement in Scottish legislation or,
currently, the SPFM. However, the Scottish Government has confirmed that they consider this
disclosure should apply to Scottish bodies and has indicated that the SPFM will be amended
or other guidance issued to reflect this requirement.
38. Guidance from the Treasury on this requirement is provided in Hutton review of fair pay -
implementation guidance. Bodies are required to disclose (together with prior year
comparatives)
the median remuneration of the body's staff. This should be based on annualised, full-
time equivalent remuneration of all staff (including temporary and agency staff) as at 31
March 2018
the range of staff remuneration
the ratio between the median staff remuneration and the mid-point of the banded
remuneration of the highest paid director
an explanation for any significant changes in the ratio between 207/18 and 2016/17.
39. Auditors should
confirm that the required fair pay information has been disclosed
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assess whether the disclosures are complete, clear, concise, and free from misstatement.
Audited information in the staff report is not properly disclosed
40. FReM paragraph 5.3.28 sets out the information that requires to be disclosed in the staff
report section. The information in the staff report is not restricted to directors.
41. In accordance with FReM paragraph 5.1.4, the following table sets out the application of each
requirement to Scottish bodies and also indicates which applicable disclosures are audited
(i.e. covered by the opinion):
FReM requirement Application to
Scottish bodies
Explanation of application Audited
Number of senior civil
service staff by band No No requirement in Companies
Act, and no equivalent
requirement in Scottish
legislation or the SPFM.
N/A
An analysis of staff costs
and numbers Yes Based on Section 411 of the
Companies Act. Yes
An analysis of the number
of persons of each sex
who were directors, senior
civil servants and
employees
Yes Based on Section 414C(8) of
the Companies Act. No
Sickness absence data Yes No requirement in Companies
Act, and no equivalent
requirement in Scottish
legislation or the SPFM.
However, the Scottish
Government has indicated that
this requirement should apply
to Scottish bodies.
No
Staff policies applied
during the financial year
for disabled persons
Yes Based on regulations issued
under the Companies Act. No
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FReM requirement Application to
Scottish bodies
Explanation of application Audited
Employee matters such
as diversity issues and
equal treatment in
employment (new from
2017/18
Yes Based on The Companies,
Partnerships and Groups
(Accounts and Non-Financial
Reporting) Regulations 2016
No
Expenditure on
consultancy No No requirement in Companies
Act, and no Scottish legislation
nor the SPFM requires
disclosure in the accounts.
N/A
Summary data on the use
of off-payroll
arrangements
No No requirement in Companies
Act, and no equivalent
requirement in Scottish
legislation or the SPFM.
N/A
Summary data on the use
of exit packages agreed in
year
Yes The SPFM section requires
bodies to report on
compensation for severance,
early retirement or redundancy
to comply with the
requirements for annual
accounts disclosure.
Yes
42. In summary, there are only two FReM requirements that both apply to Scottish bodies and
require to be audited.
43. Firstly, the disclosure of an analysis of staff costs and numbers should distinguish between
staff with a permanent UK employment contract
other staff (e.g. short term contract staff, agency/temporary staff, locally engaged staff
overseas and inward secondments. Where the number of staff under any one category of
'other staff' is significant, that category should be separately disclosed.
44. Auditors should
confirm that the required analysis of staff costs and numbers has been disclosed
assess whether the disclosures are complete, clear, concise and free from misstatement.
45. Secondly, the summary data on the use of exit packages should be disclosed in the format
required by the Cabinet Office in their EPN. An exit package means any agreement by which
a body and an employee agree that the employee will relinquish employment with the body in
exchange for compensation. The required disclosures (together with comparatives) are
the number of exit packages agreed in each cost band
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the total cost of packages agreed in each band
an analysis between compulsory redundancies and other departures.
46. The disclosure requirement applies to those exit packages that have been agreed during
2017/18. A package is not 'agreed' until the offer has been accepted by the employee, and
preferably 'signed off' or reasonably certain to be by 31 March 2018. Any offers rejected after
1 April 2018 indicates the package had not been agreed. This disclosure therefore has a
more restricted scope than the termination benefits provision because (as explained at
module 2) they are recognised when a body can no longer withdraw an offer (i.e. it is not
necessary for a package to be agreed).
47. The requirement does not apply to any exit package that did not require the agreement of the
body (e.g. where a person exercises their statutory right to leave employment on the grounds
of ill health).
48. Auditors should
confirm that summary data on the use of exit packages has been disclosed in the format
required by the EPN
assess whether the disclosures are complete, clear, concise, and free from misstatement.
49. Bodies may choose to disclose some financial information in the staff report on a voluntary
basis, e.g. expenditure on consultancy, and data on the use of off-payroll arrangements.
Where a body chooses to include such disclosure in the staff report, it should be covered by
the remuneration and staff report opinion. Where this is the case, auditors should assess
whether the disclosures are complete, clear, concise and free from misstatement. As the
FReM requirement does not apply in Scotland, omission from the staff report would not be a
qualification issue.
50. Where information on staff costs and numbers, exit packages or other financial information
has not been properly disclosed, auditors should request that the body makes the necessary
correction. Where the body declines to correct a material misstatement, auditors should
discuss the matter with Audit Scotland's Professional Support and consider qualifying their
opinion on the remuneration and staff report.
51. Disclosures in the staff report that apply to Scottish bodies but do not require to be audited are
explained in section 5.
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3 Performance report Purpose of section
52. This section of the module provides guidance on auditors' responsibilities for, and the risks of
misstatement in, the performance report. It also sets out test procedures for auditors to carry
out.
Changes in 2017/18
53. FReM paragraphs 5.2.8 and 5.2.10 have been amended to require additional information to
be disclosed mainly arising from The Companies, Partnerships and Groups (Accounts and
Non-Financial Reporting) Regulations 2016.
54. Guidance on auditor's responsibilities has been revised to reflect ISA (UK) 720.
Definition
55. A performance report is a statement within the annual report and accounts which provides
information on the body, its main objectives and strategies and the principal risks that it faces.
Summary of financial reporting requirements
56. Section 5.2 of the FReM sets out the requirements for the performance report. The
requirements are based on the matters required by the Companies Act 2006 to be included in
a strategic report.
Sources of guidance on financial reporting requirements
57. Guidance on the strategic report issued by the Financial Reporting Council.
Summary of auditors' responsibilities
58. Auditors are required to read the performance report to identify
any material inconsistencies with the financial statements
whether it has been prepared in accordance with the accounts direction
any inconsistencies with auditor's knowledge obtained in the audit
instances where the information is misleading.
59. The test procedures that auditors should undertake to meet the above responsibilities are set
out throughout this section and are summarised in Appendix 1.
60. In addition to reporting material misstatements, auditors are required by the Auditor General to
express an opinion on whether the
information given in the performance report is consistent with the financial statements
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the performance report has been prepared in accordance with the accounts direction.
61. The Auditor General's requirements for separate opinions reflect responsibilities in the
Companies Act 2006 which relate to the private sector and are applied to central government
bodies under the audit appointment as a matter of good practice.
62. The model independent auditor's report for 2017/18 will be provided in a separate technical
guidance note and will include further guidance on reporting material misstatements and the
wording for the performance report opinions.
Risks of misstatement
63. The following paragraphs highlight potential risks of misstatement in the performance report,
and set out actions for auditors to undertake to assess whether the body has followed the
required treatment.
Performance report is not consistent with the financial statements
64. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the performance report and the financial statements.
Test procedure 1 - inconsistencies with financial statements
Auditors should
select amounts or other items in the performance report and compare them with
the corresponding amounts or other items in the financial statements
conclude whether an inconsistency means there is a misstatement
request that any misstatements be corrected
discuss any uncorrected material misstatement in the performance report with
Audit Scotland
report in the independent auditor's report
65. The performance report may include amounts or other items that are intended to be the same
as, to summarise, or to provide greater detail about, the amounts or other items in the financial
statements. Examples of such amounts or other items may include
tables, charts or graphs containing extracts of the financial statements
disclosure providing greater detail about an item shown in the financial statements
descriptions of the financial results.
66. In order to evaluate their consistency, auditors should select amounts or other items in the
performance report and compare them with the corresponding amounts or other items in the
financial statements. Auditors are not required to compare all amounts or other items in the
performance report that relate to the financial statements. When making the selection,
auditors should consider
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the significance of the amount or other item in the context in which it is presented, which
may affect the importance that users would attach to the amount or other item (e.g. a key
ratio or amount)
the relative size of the amount compared with amounts or items in the financial
statements or the performance report to which they relate
the sensitivity of the particular amount or other item in the performance report.
67. When checking the consistency of the selected items, auditors should
for information that is intended to be the same as information in the financial statements,
compare the information to the financial statements
obtain a reconciliation between an amount within the performance report and the financial
statements and
compare items in the reconciliation to the financial statements and the performance
report; and
check whether the calculations within the reconciliation are arithmetically accurate.
for information intended to convey the same meaning as disclosures in the financial
statements, compare the words used and consider the significance of differences in
wording used and whether such differences imply different meanings.
68. If auditors identify an inconsistency between information in the performance report and the
financial statements, auditors should
conclude whether there is a misstatement in the performance report
conclude whether there is a misstatement in the financial statements
request that the authority corrects any misstatement identified.
69. Further guidance on cases where a material misstatement in the performance report is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report
qualify their opinion on the performance report in respect of consistency with the financial
statements.
Performance report is not in accordance with accounts direction
70. Auditors should perform procedures necessary to conclude as to whether the performance
report has been prepared in accordance with the accounts direction.
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Test procedure 2 - non-compliance with accounts direction
Auditors should
use the checklist at Appendix 2 to assess whether information required by the
FReM has been omitted from the performance report
request that any misstatements be corrected
discuss any uncorrected material misstatement in the performance report with
Audit Scotland
report in the independent auditor's report
71. The accounts directions require compliance with the disclosure requirements of the FReM.
Auditors should assess whether information required by the FReM to be included in the
performance report has been omitted. This includes situations where required information has
been presented separately without appropriate cross-reference.
72. FReM paragraph 5.2.3 requires the performance report to provide a fair, balanced and
understandable analysis of the body's performance. Paragraph 5.2.6 requires the
performance report to have an overview and an analysis section.
73. The overview section should give the user information to understand the body, its purpose,
the key risks to the achievement of its objectives and how it has performed during the year.
The minimum contents are set out at FReM paragraph 5.2.8. In accordance with FReM
paragraph 5.1.4, the following table sets out the application of each requirement to Scottish
bodies.
FReM requirement Application to
Scottish
bodies
Explanation of application to Scottish
bodies
A short summary explaining the
purpose of the overview section No No requirement in Companies Act, and no
equivalent requirement in Scottish
legislation or the SPFM. A statement from the body's lead
Minister or Chief Executive providing
their perspective on performance
No
A statement of the purpose and
activities of the body including, from
2017/18, a brief description of the
business model and environment,
structure, objectives and strategies
Yes Based on Section 414C(2) of the
Companies Act and The Companies,
Partnerships and Groups (Accounts and
Non-Financial Reporting) Regulations
2016.
The key issues and risks that could
affect the body in delivering objectives Yes
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FReM requirement Application to
Scottish
bodies
Explanation of application to Scottish
bodies
(Primarily for arms-length bodies) an
explanation of the adoption of the
going concern basis where this might
be called into doubt.
Yes IAS 1 requires disclosure of material
uncertainties regarding the adoption of the
going concern basis and therefore this
applies to Scottish bodies.
A performance summary Yes Based on Section 414C(3) of the
Companies Act and therefore applies to
Scottish bodies.
74. The performance analysis is where bodies report on their most important performance
measures. The minimum requirements are set out at FReM paragraph 5.2.10, which includes
an analysis using financial information from the financial statements. The following table sets
out the application of each requirement to Scottish bodies.
FReM requirement Application to
Scottish
bodies
Explanation of application
Long term expenditure trend analysis No No requirement in Companies Act, and no
equivalent requirement in Scottish
legislation or the SPFM.
Information on how the entity
measures performance including, from
2017/18, narrative to explain the link
between performance indicators, risk
and uncertainty
Yes Based on Section 414C(3) of the
Companies Act.
A more detailed analysis and
explanation of the development and
performance of the entity during the
year including, from 2017/18, an
explanation of the relationships and
linkages between different pieces of
information
Yes
Information on social matters, respect
for human rights anti-corruption and
anti-bribery matters
Yes Based on The Companies, Partnerships
and Groups (Accounts and Non-Financial
Reporting) Regulations 2016.
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FReM requirement Application to
Scottish
bodies
Explanation of application
Reporting entities are expected to
provide information on environmental
matters including the impact of the
entity’s business on the environment
(new from 2017/18)
Yes Based on The Companies, Partnerships
and Groups (Accounts and Non-Financial
Reporting) Regulations 2016.
Entities must also comply with
mandatory sustainability reporting
requirements.
No A sustainability report does not require to
be published as part of the annual report
and accounts.
Performance on other matters as
promulgated by HM Treasury in PES
papers
No PES papers do not apply in Scotland and
there are no equivalent requirements in
Scottish legislation or the SPFM.
75. In order to assess whether required information has been omitted, auditors should check
whether the performance report includes the items summarised at appendix 2 to this module.
76. If auditors are of the opinion that the performance report has not been prepared in accordance
with the FReM this represents a misstatement, and auditors should request that the body
makes the necessary correction.
77. Further guidance on cases where a material misstatement in the performance report is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report
qualify their opinion on the performance report in respect of non-compliance with the
statutory guidance.
Performance report is inconsistent with auditor's knowledge
78. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the performance report and their knowledge obtained in the audit.
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Test procedure 3 - inconsistency with auditor's knowledge
Auditors should
consider whether there is a material inconsistency between the performance
report and the knowledge they have obtained in performing the audit
request that any misstatements be corrected
discuss any uncorrected material misstatement in the performance report with
Audit Scotland
report in the independent auditor's report
79. The performance report may be consistent with the financial statements and be prepared in
accordance with the accounts direction/FReM, but may still be inconsistent with the auditor’s
knowledge acquired in the course of performing the audit. ISA (UK) 720 requires auditors to
consider whether there is a material inconsistency between the performance report and the
auditor's knowledge obtained in the audit. The auditor’s knowledge obtained in the audit
includes the auditor’s understanding of the body and its environment.
80. In considering whether there is a material inconsistency between the performance report and
the auditor’s knowledge obtained in the audit, auditors may focus on those matters that are of
sufficient importance that a misstatement in relation to that matter could be material.
81. If auditors identify a material inconsistency between information in the performance report and
their knowledge, auditors should
conclude whether there is a misstatement in the performance report
consider whether their understanding of the body and its environment needs to be
updated
request the local authority to correct any misstatement identified.
82. Further guidance on cases where a material misstatement in the performance report is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
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Information in the performance report is misleading
Test procedure 4 - misleading information
Auditors should
consider whether any information in the performance report is misleading
request that any misstatements be corrected
discuss any uncorrected material misstatement in the performance report with
Audit Scotland
report in the independent auditor's report
84. A misstatement in the performance report can also exist when the information is misleading.
This includes situations where it omits or obscures information necessary for a proper
understanding of a matter disclosed in the performance report.
85. When reading the performance report, auditors should remain alert for instances where the
information is misleading.
86. If auditors identify any information in the performance report that is misleading, auditors
should
conclude whether there is a misstatement in the performance report
request the body to correct any misstatement identified.
87. Further guidance on cases where a material misstatement in the performance report is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
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4 Governance statement Purpose of section
88. This section of the module provides guidance on auditors' responsibilities for, and the risks of
material misstatement in, the governance statement. It also sets out test procedures for
auditors to carry out.
Changes in 2017/18
89. There are no changes in financial reporting requirements in 2017/18.
90. Guidance on auditor's responsibilities has been revised to reflect ISA (UK) 720.
Definition
91. The governance statement within the annual report and accounts provides users with a clear
understanding of a body's internal control structure and its management of resources.
Summary of financial reporting requirements
92. The FReM requires a governance statement to be published with the financial statements.
Paragraph 5.3.13 states that guidance on content is provided in the governance statements
section of the SPFM which sets out the essential features.
Summary of auditors' responsibilities
93. Auditors are required to read the governance statement to identify
any material inconsistencies with the financial statements
whether it has been prepared in accordance with the accounts direction
any inconsistencies with auditor's knowledge obtained in the audit
instances where the information is misleading.
94. The test procedures that auditors should undertake to meet the above responsibilities are set
out throughout this section and are summarised in Appendix 3.
95. In addition to reporting material misstatements, auditors are required by the Auditor General to
express an opinion on whether the
information given in the governance statement is consistent with the financial statements
the governance statement has been prepared in accordance with the accounts direction.
96. The Auditor General's requirements for separate opinions reflect responsibilities in the
Companies Act 2006 which relate to the private sector and are applied to central government
bodies under the audit appointment as a matter of good practice.
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97. The model independent auditor's report for 2017/18 will be provided in a separate technical
guidance note and will include further guidance on reporting material misstatements and the
wording for the governance statement opinions.
98. For the avoidance of doubt, auditors' responsibilities are not designed to provide positive
assurance on internal control. There is no requirement to form an opinion on the
effectiveness of the body's corporate governance procedures, and auditors are not required to
assess whether
all risks and controls have been addressed by the body
all risks are satisfactorily addressed by internal controls
the actions described in the statement will remedy any underlying weakness associated
with an internal control issue.
Risks of misstatement
99. The following paragraphs highlight potential risks of misstatement in the governance
statement, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Governance statement is inconsistent with the financial statements
100. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the governance statement and the financial statements.
Test procedure 1 - inconsistencies with financial statements
Auditors should
select amounts or other items in the governance statement and compare them
with the corresponding amounts or other items in the financial statements
request that any misstatements be corrected
discuss any uncorrected material misstatement in the governance statement with
Audit Scotland
report in the independent auditor's report
101. The governance statement may include amounts or other items that are intended to be the
same as, to summarise, or to provide greater detail about, the amounts or other items in the
financial statements. In order to evaluate their consistency, auditors should select amounts or
other items in the governance statement and compare them with the corresponding amounts
or other items in the financial statements.
102. When checking the consistency of the selected items, auditors should
for information that is intended to be the same as information in the financial statements,
compare the information to the financial statements
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obtain a reconciliation between an amount within the governance statement and the
financial statements and
compare items in the reconciliation to the financial statements and the governance
statement; and
check whether the calculations within the reconciliation are arithmetically accurate.
for information intended to convey the same meaning as disclosures in the financial
statements, compare the words used and consider the significance of differences in
wording used and whether such differences imply different meanings.
103. If auditors identify a material inconsistency between information in the governance statement
and the financial statements, auditors should
conclude whether there is a misstatement in the governance statement
conclude whether there is a misstatement in the financial statements
request the authority to correct any misstatement identified.
104. Further guidance on cases where a material misstatement in the governance statement is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report
qualify their opinion on the governance statement in respect of inconsistency with the
financial statements.
Governance statement is not in accordance with the accounts direction
105. Auditors should perform procedures necessary to conclude as to whether the governance
statement has been prepared in accordance with the accounts direction.
Test procedure 2 - non-compliance with SPFM
Auditors should
use the checklist at Appendix 4 to assess whether information required by the
SPFM has been omitted from the governance statement
request that any misstatements be corrected
discuss any uncorrected material misstatement in the governance statement with
Audit Scotland
report in the independent auditor's report
106. Accounts directions require compliance with the disclosure requirements of the FReM.
Paragraph 5.3.13 states that guidance on content is provided in the governance statements
section of the SPFM.
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107. Auditors should assess whether the body has undertaken a review of its system of internal
control during 2017/18 to establish the extent to which it complies with relevant requirements
set out in the SPFM.
108. Where the body has failed to undertake a review, auditors should
confirm that the failure has been disclosed and explained in the statement
consider whether the explanation is consistent with auditors' understanding
report the matter in the independent auditor's report as a qualification to the opinion on
the annual governance statement where the failure has not been disclosed or the
explanation provided is not consistent with auditor's understanding.
109. Auditors should assess whether any information required by the SPFM to be included in the
governance statement has been omitted. This includes situations where required information
has been presented separately without appropriate cross-reference. The essential features
required by the SPFM include an assessment of corporate governance with reference to
generally accepted best practice principles and relevant guidance. This includes guidance in
the SPFM and any sector specific guidance such as section 2 of On board: A guide for board
members of public bodies in Scotland.
110. In order to assess whether required information has been omitted, auditors should check
whether the governance statement includes the items summarised at appendix 4 to this
module.
111. Auditors should assess whether the statement relates to the governance system as it applied
during 2017/18, and whether any significant events between 31 March 2018 and the
authorised for issue date have been included. Auditors should assess whether the
descriptions are both supported by relevant documentation and appropriately reflect the
process. Appropriate evidence will usually be obtained by
considering whether the disclosures are consistent with the review of committee meeting
minutes
reviewing relevant supporting minutes
reviewing the Head of Internal Audit's report on the adequacy and effectiveness of
internal control.
112. Auditors should assess whether the body has considered the following indicators in deciding
whether a governance issue is significant
The issue seriously prejudices or prevents achievement of a key objective.
The issue has resulted in a need to seek additional funding to allow it to be resolved, or
has resulted in significant diversion of resources from another aspect of the business.
It has a material impact on the financial statements.
The audit committee, or equivalent, advises it should be considered significant for this
purpose.
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The Head of Internal Audit reports on it as being significant.
The issue, or its impact, has attracted significant public interest, or has seriously
damaged the reputation of the body.
113. If auditors are of the opinion that the annual governance statement has not been prepared in
accordance with the SPFM, this represents a misstatement, and auditors should request that
the body makes the necessary correction.
114. Further guidance on cases where a material misstatement in the governance statement is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report
qualify their opinion on the governance statement in respect of non-compliance with the
governance statement.
Governance statement is inconsistent with auditor's knowledge
115. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the governance statement and the auditor's knowledge obtained in the
audit.
Test procedure 3 - inconsistency with auditor's knowledge
Auditors should
consider whether there is a material inconsistency between the governance
statement and the knowledge they have obtained in performing the audit
request that any misstatements be corrected
discuss any uncorrected material misstatement in the governance statement with
Audit Scotland
report in the independent auditor's report
116. The governance statement may be consistent with the financial statements and be prepared
in accordance with the SPFM, but may still be inconsistent with the auditor’s knowledge
acquired in the course of performing the audit. ISA (UK) 720 requires auditors to consider
whether there is a material inconsistency between the governance statement and the auditor's
knowledge obtained in the audit. The auditor’s knowledge obtained in the audit includes the
auditor’s understanding of the body and its environment.
117. In considering whether there is a material inconsistency between the governance statement
and the auditor’s knowledge obtained in the audit, auditors may focus on those matters that
are of sufficient importance that a misstatement in relation to that matter could be material.
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118. If auditors identify an inconsistency between information in the governance statement and
their knowledge, auditors should
conclude whether there is a misstatement in the governance statement
consider whether their understanding of the body and its environment needs to be
updated
request the body to correct any misstatement identified.
119. Further guidance on cases where a material misstatement in the governance statement is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
Information in the annual governance statement is misleading
Test procedure 4 - misleading information
Auditors should
consider whether any information in the governance statement is misleading
request that any misstatements be corrected
discuss any uncorrected material misstatement in the governance statement with
Audit Scotland
report in the independent auditor's report
120. A misstatement in the governance statement can also exist when the information is
misleading. This includes situations where it omits or obscures information necessary for a
proper understanding of a matter disclosed in the governance statement.
121. When reading the governance statement, auditors should remain alert for instances where the
information is misleading.
122. If auditors identify any information in the annual governance statement that is misleading,
auditors should
conclude whether there is a misstatement in the governance statement
request the body to correct any misstatement identified.
123. Further guidance on cases where a material misstatement in the governance statement is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
5 Other non-financial statements
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 31
5 Other non-financial statements Purpose of section
124. This section of the module provides guidance on auditors' responsibilities for, and the risks of
misstatement in, the following other non-financial statements
Directors' report.
Statement of Accountable Officers responsibilities.
Parliamentary and accountability report.
Unaudited part of the remuneration and staff report.
Any voluntary reports in the annual report and accounts.
Changes in 2017/18
125. There are no changes in financial reporting requirements or auditors' responsibilities in
2017/18.
Summary of corporate reporting requirements
126. The FReM's corporate reporting requirements are set out at paragraphs 5.3.9 to 5.3.29.
Summary of auditors' responsibilities
127. Auditors are required to read each of the other non-financial statements to identify
any material inconsistencies with the financial statements
whether it has been prepared in accordance with the accounts direction
any inconsistencies with auditor's knowledge obtained in the audit
instances where the information is misleading.
128. Auditors are required to reporting material misstatements, but there is no requirement to
express an opinion.
Risks of misstatement
129. The following paragraphs highlight potential risks of misstatement in the other non-financial
statements, and set out actions for auditors to undertake to assess whether the body has
followed the required treatment.
Directors' report is not in accordance with the accounts direction
130. The required contents of the directors' report are set out at FReM paragraph 5.3.9 a) to f).
5 Other non-financial statements
Page 32 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
131. Auditors should confirm that no item required by the FReM has been omitted
Statement of responsibilities is not in accordance with accounts direction
132. The required contents of the statement of Accountable Officer’s responsibilities are set out at
FReM paragraphs 5.3.10 to 5.3.12. The Accountable Officer is required to
explain their responsibilities for preparing the financial statements
confirm that there is no relevant information of which the auditors are unaware
confirm that the annual report and accounts as a whole is fair, balanced and
understandable.
133. Auditors should confirm that no item required by the FReM has been omitted.
Parliamentary and accountability report is not in accordance with the accounts direction
134. FReM paragraph 5.3.28 sets out its requirements for the parliamentary accountability report.
135. Further detail is provided at FReM paragraph 3.2.12 which clarifies that the specific
disclosures apply to bodies covered my Managing public money (MPM).
136. In accordance with FReM paragraph 5.1.4, the following table sets out the application of each
requirement to Scottish bodies:
FReM requirement Application to
Scottish
bodies
Explanation of application
(Departments financed through
the Westminster or Northern
Ireland Assembly Estimates
process) Statement of
Parliamentary Supply and
supporting notes
No No requirement in Companies Act, and no
equivalent requirement in Scottish legislation or
the SPFM.
Regularity of expenditure (this
refers to the requirement for
departments that have incurred
losses or made special payments
or gifts to disclose details in a
note
No - but
equivalent
requirement
The equivalent requirement is in the losses and
special payments section of the SPFM which
requires total losses exceeding £250,000 and
total special payments exceeding £250,000 to
be disclosed in the annual accounts.
5 Other non-financial statements
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 33
FReM requirement Application to
Scottish
bodies
Explanation of application
Parliamentary accountability
disclosures as detailed in 3.2.12,
i.e.
No
No requirement in Companies Act, and no
equivalent requirement in Scottish legislation or
the SPFM.
(departments only) the names of
any public sector bodies outside
the boundary for which the
department had lead policy
responsibility
a brief description of the nature of
each of the entity’s material
remote contingent liabilities (that
is, those that are disclosed under
Parliamentary reporting
requirements and not under IAS
37) and, where practical, an
estimate of its financial effect
No - but
equivalent
requirement
The equivalent requirement is in the contingent
liabilities section of the SPFM which requires
disclosure in accordance with the FReM of
legally enforceable undertakings given in the
form of a guarantee or indemnity which would
bind the body into providing the resources in
the event of the guarantee or indemnity
maturing; or a letter or general statement of
comfort which could be considered to impose a
moral financial obligation.
(Public Sector Information
Holders only) a statement is
required if the entity has not
complied with the cost allocation
and charging requirements set out
in HM Treasury guidance
No No requirement in Companies Act, and no
equivalent requirement in Scottish legislation or
the SPFM.
a statement of losses and special
payments where the total
amounts incurred are over the
limits proscribed in Managing
public money
No - but
equivalent
requirement
The equivalent requirement is in the losses and
special payments section as noted above.
notation of gifts made over the
limits proscribed in Managing
public money
No - but
equivalent
requirement
The equivalent requirement is in the gifts
section of the SPFM which requires gifts to be
reported in notes to the annual accounts.
Individual gifts of more than £250,000 should
be noted separately.
5 Other non-financial statements
Page 34 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
FReM requirement Application to
Scottish
bodies
Explanation of application
entities should provide an
analysis of fees and charges
income where material
No - but
equivalent
requirement
The equivalent requirement is in the fees and
charges section of the SPFM which requires
the following information to be provided for
each service where the full annual cost is £1
million or more, or (if lower) where the amount
of the income and full cost of the service are
material to the financial statements
Financial objective performance against
that objective. The standard approach to
setting charges for public services is full
cost recovery, i.e. recovering a 3.5% return
on capital, but the SPFM lists some
exceptions, e.g. subsidised services.
Full cost of the service.
Income from charging for the service.
Surplus or deficit.
137. Auditors should confirm that no item required by the FReM that applies to Scottish bodies (or
equivalent SPFM) requirement has been omitted.
Unaudited part of the remuneration and staff report is not in accordance with the accounts direction
138. FReM paragraph 5.3.20 requires bodies to disclose their remuneration policy for the current
and future years within the remuneration and staff report. Section 2 of this module also lists
unaudited information in the staff report.
139. Auditors should confirm no item required by the FReM has been omitted.
Information in other non-financial statements is inconsistent with the financial statements
140. The required non-financial statements, along with any voluntary reports, may include amounts
or other items that are intended to be the same as, to summarise, or to provide greater detail
about, the amounts or other items in the financial statements.
141. If auditors identify an inconsistency between the other information and the financial
statements, auditors should
conclude whether there is a misstatement in the other non-financial statement
conclude whether there is a misstatement in the financial statements
5 Other non-financial statements
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 35
request the body to correct any misstatement identified.
Information in the other non-financial statements is inconsistent with auditor's knowledge
142. Auditors should consider whether there is a material inconsistency between the other non-
financial statements and the auditor's knowledge obtained in the audit.
143. If auditors identify a material inconsistency, they should
conclude whether there is a misstatement in the other non-financial statements
consider whether their understanding of the body and its environment needs to be
updated
request the body to correct any misstatement identified.
Information in the other non-financial statements is misleading
144. A misstatement in the other non-financial statements can also exist when the information is
misleading. This includes situations where the statement omits or obscures information
necessary for a proper understanding of a matter disclosed.
145. When reading the other non-financial statements, auditors should remain alert for instances
where the information is misleading. Auditors should request the body to correct any material
misstatement caused by misleading information.
Appendix 1
Page 36 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Appendix 1 Auditor action checklist - performance report
Test procedures Yes/No/N/A Initials/date W/P ref
1 Have you
selected amounts or other items in the performance
report and compared them with the corresponding
amounts or other items in the financial statements?
concluded whether an inconsistency with the
financial statements means there is a misstatement
in the performance report?
requested that any misstatement be corrected?
2 Have you
used the checklist at Appendix 2 to assess whether
information required by the statutory guidance has
been omitted from the performance report?
requested that any misstatements be corrected?
3 Have you
considered whether there is a material
inconsistency between the performance report and
the knowledge you have obtained in performing the
audit?
requested that any misstatements be corrected?
4 Have you
considered whether any information in the
performance report is misleading?
requested that any misstatements be corrected?
5 Have you discussed any uncorrected material
misstatement in the performance report with Audit
Scotland's Professional Support?
Appendix 2
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 37
Appendix 2 Checklist - required content of performance report
Required item Yes/No/N/A
1 Statement of the purpose and activities of the body including a brief
description of the business model and environment, organisational structure,
objectives and strategies
2 Key issues and risks that could affect the body in delivering its
objectives
3 Explanation of the adoption of the going concern basis where this
might be called into doubt
4 Performance summary
5 Information on how the body measures performance i.e. what the body
sees as its key performance measures, how it checks performance against
those measures and narrative to explain the link between KPIs, risk and
uncertainty
6 Detailed analysis and explanation of the development and
performance of the body during the year and an explanation of the
relationships and linkages between different pieces of information
[Note: This analysis is required to utilise a wide range of data including key
financial information from the financial statements]
7 Information on social matters, respect for human rights anti-corruption
and anti-bribery matters
8 Information on environmental matters including the impact of the
body's business on the environment
Appendix 3
Page 38 Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Appendix 3 Auditor action checklist - governance statement
Test procedures Yes/No/N/A Initials/date W/P ref
1 Have you
selected amounts or other items in the governance
statement and compared them with the
corresponding amounts or other items in the
financial statements?
concluded whether an inconsistency with the
financial statements means there is a misstatement
in the governance statement?
requested that any misstatement be corrected?
2 Have you
used the checklist at Appendix 4 to assess whether
information required by the SPFM has been omitted
from the governance statement?
requested that any misstatements be corrected?
3 Have you
considered whether there is a material
inconsistency between the governance statement
and the knowledge you have obtained in performing
the audit?
requested that any misstatements be corrected?
4 Have you
considered whether any information in the
governance statement is misleading?
requested that any misstatements be corrected?
5 Have you discussed any uncorrected material
misstatement in the governance statement with Audit
Scotland's Professional Support?
Appendix 4
Audit of 2017/18 annual report and accounts (CG) - module 7 non-financial statements
Page 39
Appendix 4 Checklist - required content of annual governance statement
Required item Yes/No/N/A
1 The governance framework, including information about the committee
structure.
2 The operation of the governing board during the period.
3 An assessment of corporate governance with reference to compliance
with generally accepted best practice principles and relevant guidance, and
explanations where a different approach has been adopted.
4 An assessment of the body's risk management arrangements and risk
profile, including details of significant risk-related matters arising during the
period.
5 A record of any written authorities provided to the Accountable Officer.
6 Details of any significant lapses of data security.
Other requirements Yes/No/N/A
7 The body should have undertaken a review of its system of internal
control during 2017/18 to establish the extent to which it complies with
relevant requirements set out in the SPFM.
8 The governance statement should
relate to the governance system as it applied during 2017/18
include any significant events up to the authorised for issue date.
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
Technical guidance note 2018/1(CG)
Prepared for appointed auditors in the central government sector
13 March 2018
Audit Scotland is a statutory body set up in April 2000 under the Public Finance and Accountability
(Scotland) Act 2000. We help the Auditor General for Scotland and the Accounts Commission
check that organisations spending public money use it properly, efficiently and effectively.
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 3
Contents
1 Introduction ..................................................................................................................... 5
Purpose of module ............................................................................................................ 5
Contact point for this module ............................................................................................. 5
2 Application of other modules to charitable NDPBs ...................................................... 6
Purpose of section............................................................................................................. 6
Summary of other modules' application ............................................................................. 6
3 Fund accounting ............................................................................................................. 8
Purpose of section............................................................................................................. 8
Summary of financial reporting requirements .................................................................... 8
Risks of misstatement ....................................................................................................... 8
4 Presentation of financial statements ........................................................................... 11
Purpose of section........................................................................................................... 11
Summary of financial reporting requirements .................................................................. 11
Risks of misstatement ..................................................................................................... 11
5 Donations and legacies ................................................................................................ 14
Purpose of section........................................................................................................... 14
Definition ......................................................................................................................... 14
Summary of financial reporting requirements .................................................................. 14
Risks of misstatement ..................................................................................................... 14
6 Disclosure of trustees' and staff remuneration ........................................................... 17
Purpose of section........................................................................................................... 17
Summary of financial reporting requirements .................................................................. 17
Risks of misstatement ..................................................................................................... 17
7 Trustees' annual report ................................................................................................. 19
Purpose of section........................................................................................................... 19
Definition ......................................................................................................................... 19
Summary of financial reporting requirements .................................................................. 19
Summary of auditors' responsibilities .............................................................................. 19
Risks of misstatement ..................................................................................................... 19
Appendix 1 .................................................................................................................................. 24
Page 4 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
Auditor action checklist - trustees' annual report .............................................................. 24
Appendix 2 .................................................................................................................................. 25
Checklist - required content of trustees' annual report ..................................................... 25
1 Introduction
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 5
1 Introduction Purpose of module
1. This module provides guidance on applying technical guidance note 2018/1(CG) to the audit
of the statement of accounts of non-departmental public bodies that are registered charities
(charitable NDPBs).
2. It also provides information on, and guidance on the risks of misstatements in, the following
areas of a charitable NDPB's statement of accounts
Financial reporting framework.
Fund accounting.
Financial statements.
Donations and legacies.
Disclosures on trustees' and staff remuneration.
Trustees' annual report.
Contact point for this module
3. The contact points in Professional Support for this module of the technical guidance note are
Neil Cameron, Manager (Professional Support) - [email protected]
Helen Cobb, Senior Adviser (Professional Support) - [email protected]
2 Application of other modules to charitable NDPBs
Page 6 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
2 Application of other modules to charitable NDPBs Purpose of section
4. This section of module 8 provides guidance on applying the other modules of technical
guidance note 2018/1(CG) to the audit of charitable NDPB statement of accounts.
Summary of other modules' application
5. The following tables summarise the application of the other modules to charitable NDPBs, and
either provide supplementary guidance in some areas or indicate the section of this module in
which it is provided.
Overview module
6. The following table summarises the application of the overview module which largely applies
in full, other than the presentation of financial statements, though there are additional
considerations:
Section Applicability Supplementary guidance
Section 1
Introduction Applies No further guidance required.
Section 2 Financial
reporting
framework
Applies The preparation of statement of accounts prepared by
registered charities is regulated by the Charities and
Trustee Investment (Scotland) Act 2005 (the 2005 Act)
and The Charities Accounts (Scotland) Regulations 2006
(the 2006 regulations). The 2006 regulations require the
statement of accounts to be prepared in accordance with
the methods and principles set out in the Charities SORP
(FRS 102).
FReM paragraph 1.4.1 confirms that charitable NDPBs
should comply with the 2006 regulations and the relevant
charities SORP. FReM paragraph 1.4.3 states that
charities should also follow the principles in the FReM and
provide the additional disclosures it requires where these
go beyond the SORP.
3 Fund accounting
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 7
Section Applicability Supplementary guidance
Section 3 Auditing
standards Applies The Financial Reporting Council's practice note 11
provides guidance on the application of ISAs to charities.
Section 5
Presentation of
financial
statements
Not applicable Guidance on the presentation of the financial statements
is provided at section 4 of this module.
Section 6
Accounting
policies, estimates
and prior year
errors
Applies in
principle
The principles apply but auditors should be alert to
differences in terminology used by FRS 102.
Modules 1 to 6
7. Modules 1 to 6 of the technical guidance note apply in principle to charitable NDPBs but
auditors should be alert to slight differences required by FRS 102 or the charities SORP.
8. Supplementary guidance in this module is provided on
fund accounting in section 3
donations and legacies in section 5.
Module 7 Non-financial statements
9. FReM paragraph 5.1.8 states that charitable NDPBs are not required to comply with chapter 5
(performance report and accountability report). The following table lists the sections in module
7 which apply to charitable NDPBs along with some supplementary guidance:
Section Applicability Supplementary guidance and action
Section 2
Remuneration and
staff reports
Not applicable Guidance on remuneration disclosures is provided at
section 6 of this module.
Section 3
Performance report
Not applicable Guidance on the trustees' annual report is provided at
section 7 of this module.
Section 4
Governance
statement
Applies No further guidance is required.
Section 5 Other
non-financial
statements
Not applicable Although there is no specific requirement for a charitable
NDPB to include a statement of Accountable Officer's
responsibilities, they all do in practice.
3 Fund accounting
Page 8 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
3 Fund accounting Purpose of section
10. This section provides information on, and guidance on the risks of misstatement in, accounting
for charitable funds.
Summary of financial reporting requirements
11. Module 2 of the SORP sets out the requirements for the analysis and presentation of a
charity's funds.
Risks of misstatement
12. The following paragraphs highlight potential risks of misstatement in respect of fund
accounting, and set out actions for auditors to undertake to assess whether the charity has
followed the required treatment.
Charitable funds are not properly accounted for
13. Fund accounting distinguishes between different classes of fund as set out in the following
table:
Class of fund Explanation
Unrestricted
funds
These can be spent or applied at the discretion of the trustees to further
any of the charity’s purposes. Unrestricted funds can be used to
supplement expenditure made from restricted funds.
They include funds that the trustees have decided to designate for a
particular purpose. This may be because the donor expressed a non-
binding preference as to the use of the funds, which falls short of
imposing a restriction in trust law.
Restricted
income funds
These require to be spent or applied within a reasonable period from
their receipt to further a specific purpose of the charity. Restrictions on
the use of the funds are generally declared by the donor when making
the gift. It is possible that a charity may have several individual
restricted funds, each for a particular purpose of the charity.
Permanent
endowment
funds (also
known as capital
funds).
An endowment where there is no power to convert the capital into
income is known as a permanent endowment fund, which must normally
be held indefinitely. Trust law requires a charity to invest the assets of
an endowment, or retain them for the charity’s use to further its
purposes.
3 Fund accounting
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 9
14. Auditors should assess whether
restricted income funds have been spent or applied during 2017/18
within a reasonable period from their receipt
to further one or more (but not all) of the charity’s charitable purposes. If the funds
can be applied to all the charity's purposes, or the charity only has one purpose, they
should be classified as unrestricted.
each restricted fund, and the income received and expenditure made from it, has been
separately identified in the accounting records
costs charged to a restricted income fund relate to the activities undertaken to further the
specific charitable purposes the fund was established to support. These costs include
both direct and support costs associated with the activities undertaken by the restricted
fund
expenditure has been charged to a restricted income fund which is in deficit only when
there is a realistic expectation that future income will be received to cover the shortfall
the only expenses charged to permanent endowment funds are those incurred on the
administration or protection of the investments or property of the endowment. Where the
endowment has insufficient funds to meet the expenses that can be charged to it (or the
terms of the trust prohibit the charging of expenses), the expenses have been charged to
restricted income funds
if the trustees exercised the power to spend or apply the capital of an expendable
endowment during 2017/18, the relevant funds have become
unrestricted funds where the terms of the gift permit expenditure for any of the
charity’s purposes
restricted income funds where the terms permit expenditure only for specific
purposes.
Transfers between funds have not been properly accounted for
15. The transfer line in the SOFA is used to record transfers between funds. The FRS 102 SORP
requires that the total transfers recorded between classes of fund in the reporting period nets
to nil. A transfer may be made between funds, for example
to transfer assets from unrestricted funds to finance a deficit on a restricted fund
where restricted funds have been lawfully released and transferred to unrestricted funds.
16. Auditors should check that any transfers during 2017/18 have been presented in the transfer
line in the SoFA.
Information on funds has not been properly disclosed
17. Charities SORP paragraph 2.28 requires a charity to
disclose information on
material individual fund balances
3 Fund accounting
Page 10 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
movements in the reporting period
the purposes for which the funds are held.
differentiate unrestricted funds (both general and designated), restricted income funds,
permanently endowed funds and expendable endowments.
18. Table 1 in the charities SORP provides an example of how the movements in material funds
may be shown. Further disclosures are required by SORP paragraph 2.29.
19. Auditors should
confirm that the trustees have complied with paragraphs 2.28 and 2.29 of the SORP in
2017/18
assess whether the disclosures are complete, clear, concise, and free from misstatement.
4 Presentation of financial statements
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 11
4 Presentation of financial statements Purpose of section
20. This section provides information on, and guidance on the risks of misstatement in, the
presentation of charities' financial statements.
Summary of financial reporting requirements
21. The financial statements for a charitable NDPB are set out in the charities SORP and the 2006
regulations. The SORP sets out its requirements for the
SOFA at module 4
balance sheet at module 10
cash flow statement at module 14.
Risks of misstatement
22. The following paragraphs highlight potential risks of misstatement in respect of the
presentation of financial statements, and set out actions for auditors to undertake to assess
whether the charity has followed the required treatment.
A complete set of financial statements is not properly presented
23. Regulation 8 requires a complete set of financial statements to comprise
a SoFA which shows the total incoming resources and application of the resources,
together with any movements in the total resources, of the charity during 2017/18
a balance sheet which shows the state of affairs of the charity as at 31 March 2018
a cash flow statement, if appropriate
notes to the accounts.
24. Auditors should assess whether the charity has
presented a complete set of financial statements for 2017/18
clearly identified the financial statements and distinguished them from the other
information in the statement of accounts
clearly identified each financial statement and the notes
offset assets and liabilities or income and expenses only where required or permitted by
the FRS 102 or the charities SORP
presented corresponding amounts in respect of 2016/17 for each item presented
4 Presentation of financial statements
Page 12 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
adopted the same format for the financial statements as 2016/17, unless there are
special reasons for a change that are explained in the notes
omitted any line where there is nothing to report in both the current and previous
reporting period.
Statement of financial activities is not properly presented
25. The SoFA is a single accounting statement that should include all income, gains, expenditure
and losses recognised for 2017/18. The SoFA provides the user with
an analysis of the income and endowment funds received and the expenditure by the
charity on its activities
a reconciliation of the movements in a charity’s funds for 2017/18.
26. The structure, format and headings of the SoFA are set out in Table 2 of the charities SORP.
Auditors should confirm that the columns of the SoFA distinguish between restricted income
funds, unrestricted funds, and endowment funds
27. If a class of funds is not considered material, it may be combined with another class of funds
and shown as a single combined funds column. Where the charity applies this approach, the
heading should be changed appropriately (e.g. to 'all unrestricted and restricted funds').
Balance sheet is not properly presented
28. The objective of the balance sheet is to show the resources available to the charity and
whether these are available for all purposes of the charity or have to be used for specific
purposes because of legal restrictions placed on their use.
29. Table 5 of the charities SORP sets out the format of a charity’s balance sheet and the
headings used to present its assets, liabilities and funds. The balance sheet may also be
presented in a columnar format that analyses balance sheet items by class of fund.
30. Auditors should assess whether
the balance sheet has been properly presented in accordance with table 5 or in a
columnar format
where the corresponding amount for 2016/17 is not comparable due to a change in
accounting policy, it has been adjusted and the reason for the adjustment explained in
the notes to the accounts
the balance sheet has been signed by one or more trustees, each of whom has been
authorised to do so by the trustee body
the balance sheet specifies the date the accounts, including the balance sheet, were
approved.
4 Presentation of financial statements
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 13
Statement of cash flows is not properly presented
31. The SORP requires the format of the statement of cash flows to follow the requirements of
section 7 of FRS 102. The SORP provides a template for the statement of cash flows in table
8.
32. The statement is required to analyse cash flows using three standard headings of operating
activities, investing activities and financing activities. The statement should include the
movement in cash balances of unrestricted funds and restricted funds including endowment
funds.
33. Auditors should assess whether the statement of cash flows is presented in accordance with
section 7 of FRS 102.
5 Donations and legacies
Page 14 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
5 Donations and legacies Purpose of section
34. This section provides information on, and guidance on the risks of misstatement in, donations
and legacies.
Definition
35. Donations and legacies include all income received by the charity that is, in substance, a gift
made to it on a voluntary basis. A donation or legacy may be for any purpose of the charity
(unrestricted funds) or for a particular purpose of the charity (restricted income funds or
endowment funds).
Summary of financial reporting requirements
36. Module 5 of the charities SORP sets out the requirements for the recognition of income
including legacies. Module 6 covers donated goods and services.
Risks of misstatement
37. The following paragraphs highlight potential risks of misstatement in respect of donations and
legacies, and set out actions for auditors to undertake to assess whether the charity has
followed the required treatment.
Income from donations is not properly recognised
38. Income from donations should be recognised when the charity becomes entitled to it.
Entitlement to a donation usually arises immediately on its receipt, unless there are any terms
or conditions which must be met before the charity is entitled to the resources. A condition
that simply restricts the use of a donation does not affect a charity’s entitlement (although it
does affect how the donation is reported in the accounts as explained in section 4).
39. Auditors should
confirm that donations received during 2017/18 have been recognised as income when
there is evidence of entitlement
assess whether the amount of income is complete and free from misstatement.
Income from legacies is not properly recognised
40. Legacies should be recognised as income when the three conditions set out in the following
table are met:
5 Donations and legacies
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 15
Condition Explanation
Evidence of
entitlement to the
legacy
Entitlement to a legacy cannot arise without the charity knowing of both
the existence of a valid will and the death of the benefactor. Evidence
of entitlement to a legacy exists when the charity has sufficient
evidence that a gift has been left to them and the executor is satisfied
that the property in question will not be required to satisfy claims in the
estate.
Receipt is probable Receipt is normally probable when
there has been grant of probate, i.e. authority to the executer of the
will to manage the disposal of assets
the executors have established that there are sufficient assets in the
estate, after settling any liabilities, to pay the legacy
any conditions attached to the legacy are either within the control of
the charity or have been met.
Amount can be
measured reliably
In some cases, there may be uncertainty as to the amount of the
payment. For example, the legacy may be subject to challenge or the
charity’s interest may be a residual one.
41. Auditors should
confirm that legacies arising during 2017/18 have been recognised as income when the
three above conditions have been met
assess whether the amount of income is complete and free from misstatement
where there is uncertainty that prevents the amount from being estimated reliably, confirm
that the legacy has been disclosed as a contingent asset.
42. Where a payment is received from an estate or is notified as receivable by the executors after
31 March 2018 (and before the accounts are authorised for issue) but it is clear that the
payment had been agreed by the executors prior to that date, auditors should confirm that it
has been treated as an adjusting event and accrued as income if receipt is probable.
Donated facilities and services are not properly accounted for
43. In accordance with SORP paragraph 6.13, facilities and services donated to a charity for its
own use which it would otherwise have purchased require to be recognised as income when
received.
44. Donated facilities and services should be measured on the basis of the value of the gift to the
charity. This is the amount that the charity would pay in the open market for an alternative
item that would provide a benefit to the charity equivalent to the donated item. Value to the
charity may be lower than, but cannot exceed, the price the charity would pay in the open
market for the item.
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45. An amount equivalent to the amount recognised as income for donated facilities and services
should have been recognised as an expense under the appropriate heading in the SoFA.
46. Auditors should confirm that the amount of the facilities and services have been
recognised in income as a donated service
recognised as expenditure
disclosed in the notes to the accounts.
Information on donated goods and services is not properly disclosed
47. SORP paragraph 6.31 requires a charity to disclose
the accounting policy for the recognition and valuation of donated goods, facilities and
services
the nature and amounts of donated goods, facilities and services receivable from non-
exchange transactions recognised in the accounts, for example, seconded staff, use of
property, etc.
48. Auditors should
confirm that the charity has followed the requirements of SORP paragraph 6.31 in
2017/18
assess whether the disclosures are complete, clear, concise, and free from misstatement.
6 Disclosure of trustees' and staff remuneration
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 17
6 Disclosure of trustees' and staff remuneration Purpose of section
49. This section provides information on, and guidance on risks of misstatement in, the disclosure
of trustees' and staff remuneration. s
Summary of financial reporting requirements
50. SORP module 9 sets out disclosure requirements for
trustee's remuneration and expenses
staff costs and employee benefits.
51. The FReM's requirements for a remuneration and staff report do not apply.
Risks of misstatement
52. The following paragraphs highlight potential risks of misstatement in respect of the disclosure
of trustees' and staff remuneration, and set out actions for auditors to undertake to assess
whether the charity has followed the required treatment.
Information on trustees' remuneration has not been properly disclosed
53. SORP paragraph 9.6 requires charities to disclose whether the trustees were paid any
remuneration or received any other benefits from an employment with their charity or a related
entity.
54. Auditors should confirm that the charity had disclosed either
a statement that none of the trustees have been paid any relevant remuneration or
received any other benefits during 2017/18; or
that one or more of the trustees has been paid remuneration or has received other
benefits. Auditors should assess whether the charity has also disclosed the information
set out at SORP paragraph 9.7.
Information on trustee's expenses has not been properly disclosed
55. Charities SORP paragraph 9.11 requires charities to disclose whether the trustees were
reimbursed expenses incurred in carrying out their duties or whether similar payments were
made by the charity direct to third parties on their behalf.
56. Auditors should confirm that the charity had disclosed either
that no trustee expenses have been incurred; or
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Page 18 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
that one or more of the trustees has claimed expenses or had their expenses met by the
charity. Auditors should confirm that the charity has also disclosed the information set
out at SORP paragraph 9.12 and assess whether the disclosures are free from
misstatement.
Information on staff costs and employee benefits has not been properly disclosed
57. SORP paragraphs 9.26 to 9.30 set out required disclosures in respect of staff costs and
employee benefits. Paragraphs 9.31 and 9.32 address the senior management personnel to
whom the trustees delegate day-to-day management of the charity's activities (referred to as
key management personnel).
58. Auditors should confirm that the charity has disclosed
details of their total staff costs and employee benefits during 2017/18, analysed in
accordance with paragraph 9.26
information on any redundancy or termination payments in accordance with paragraph
9.27
the average head count (number of staff employed)
the number of employees whose total employee benefits (excluding employer pension
costs) fell within each band of £10,000 from £60,000 upwards
the total amount of any employee benefits received by trustees and its key management
personnel for their services to the charity.
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7 Trustees' annual report Purpose of section
59. This section of the module provides guidance on auditors' responsibilities for, and the risks of
material misstatement in, the trustees' annual report. It also sets out test procedures for
auditors to carry out.
Definition
60. The trustees' annual report is a narrative statement from the trustees which the charity
regulations require to be included with the statement of accounts.
Summary of financial reporting requirements
61. Module 1 of the charities SORP sets out the requirements for the trustees' annual report . The
required contents are set out at SORP paragraphs 1.14 to 1.53.
62. The FReM requirement for a performance report does not apply to charitable NDPBs.
Summary of auditors' responsibilities
63. Auditors' responsibilities for a trustees' annual report are the same as for a other central
government bodies' performance report (explained in module 7).
64. The test procedures that auditors should undertake to meet the above responsibilities are set
out throughout this section and are summarised in Appendix 1.
65. The model independent auditor's report for 2017/18 is provided in technical guidance note
2018/4(CG) and includes wording for the trustees annual report opinions.
Risks of misstatement
66. The following paragraphs highlight potential risks of misstatement in the trustees' annual
report, and set out actions for auditors to undertake to assess whether the charity has
followed the required treatment.
Trustees' annual report is not consistent with the financial statements
67. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the trustees' annual report and the financial statements.
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Page 20 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
Test procedure 1 - inconsistencies with financial statements
Auditors should
select amounts or other items in the trustees' annual report and compare them
with the corresponding amounts or other items in the financial statements
conclude whether an inconsistency means there is a misstatement
request that any misstatements be corrected
discuss any uncorrected material misstatement in the trustees' annual report with
Audit Scotland's Professional Support
report in the independent auditor's report
68. The trustees' annual report may include amounts or other items that are intended to be the
same as, to summarise, or to provide greater detail about, the amounts or other items in the
financial statements. Examples of such amounts or other items may include
tables, charts or graphs containing extracts of the financial statements
disclosure providing greater detail about an item shown in the financial statements
descriptions of the financial results.
69. In order to evaluate their consistency, auditors should select amounts or other items in the
trustees' annual report and compare them with the corresponding amounts or other items in
the financial statements. Auditors are not required to compare all amounts or other items in
the trustees' annual report that relate to the financial statements. When making the selection,
auditors should consider
the significance of the amount or other item in the context in which it is presented, which
may affect the importance that users would attach to the amount or other item (e.g. a key
ratio or amount)
the relative size of the amount compared with amounts or items in the financial
statements or the trustees' annual report to which they relate
the sensitivity of the particular amount or other item in the trustees' annual report.
70. When checking the consistency of the selected items, auditors should
for information that is intended to be the same as information in the financial statements,
compare the information to the financial statements
obtain a reconciliation between an amount within the trustees' annual report and the
financial statements and
compare items in the reconciliation to the financial statements and the trustees'
annual report; and
check whether the calculations within the reconciliation are arithmetically accurate.
for information intended to convey the same meaning as disclosures in the financial
statements, compare the words used and consider the significance of differences in
wording used and whether such differences imply different meanings.
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Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 21
71. If auditors identify an inconsistency between information in the trustees' annual report and the
financial statements, auditors should
conclude whether there is a misstatement in the trustees' annual report
conclude whether there is a misstatement in the financial statements
request that the body corrects any misstatement identified.
72. Further guidance on cases where a material misstatement in the trustees' annual report is not
corrected will be provided in the technical guidance note on independent auditor's reports, but
in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report
qualify their opinion on the trustees' annual report in respect of consistency with the
financial statements.
Trustees' annual report is not in accordance with applicable requirements
73. Auditors should perform procedures necessary to conclude as to whether the trustees' annual
report has been prepared in accordance with the charities SORP.
Test procedure 2 - non-compliance with SORP
Auditors should
use the checklist at Appendix 2 to assess whether information required by the
SORP has been omitted from the trustees' annual report
request that any misstatements be corrected
discuss any uncorrected material misstatement in the trustees' annual report with
Audit Scotland
report in the independent auditor's report
74. Auditors should assess whether information required by the SORP to be included in the
trustees' annual report has been omitted. This includes situations where required information
has been presented separately without appropriate cross-reference.
75. The report is required to
provide a fair, balanced and understandable review of the charity’s structure, legal
purposes, objectives, activities, financial performance and financial position
identify the reporting period to which it relates and the date of its approval. One or more
of the charity’s trustees must sign and date the report on behalf of the trustees upon their
approval of the report.
76. In order to assess whether required information has been omitted, auditors should check
whether the trustees' annual report includes the items summarised at appendix 2 to this
module.
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Page 22 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
Trustees' annual report is inconsistent with auditor's knowledge
77. Auditors should perform procedures necessary to identify any material inconsistencies
between information in the trustees' annual report and their knowledge obtained in the audit.
Test procedure 3 - inconsistency with auditor's knowledge
Auditors should
consider whether there is a material inconsistency between the trustees' annual
report and the knowledge they have obtained in performing the audit
request that any misstatements be corrected
discuss any uncorrected material misstatement in the trustees' annual report with
Audit Scotland
report in the independent auditor's report
78. The trustees' annual report may be consistent with the financial statements and be prepared
in accordance with the applicable requirements, but may still be inconsistent with the auditor’s
knowledge acquired in the course of performing the audit. ISA (UK) 720 requires auditors to
consider whether there is a material inconsistency between the trustees' annual report and the
auditor's knowledge obtained in the audit. The auditor’s knowledge obtained in the audit
includes the auditor’s understanding of the charity and its environment.
79. In considering whether there is a material inconsistency between the trustees' annual report
and the auditor’s knowledge obtained in the audit, auditors may focus on those matters that
are of sufficient importance that a misstatement in relation to that matter could be material.
80. If auditors identify a material inconsistency between information in the trustees' annual report
and their knowledge, auditors should
conclude whether there is a misstatement in the trustees' annual report
consider whether their understanding of the charity and its environment needs to be
updated
request the charity to correct any misstatement identified.
81. Further guidance on cases where a material misstatement in the trustees' annual report is not
corrected is provided in technical guidance note 2018/4(CG) on independent auditor's reports,
but in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
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Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 23
Information in the trustees' annual report is misleading
Test procedure 4 - misleading information
Auditors should
consider whether any information in the trustees' annual report is misleading
request that any misstatements be corrected
discuss any uncorrected material misstatement in the trustees' annual report with
Audit Scotland
report in the independent auditor's report
82. A misstatement in the trustees' annual report can also exist when the information is
misleading. This includes situations where it omits or obscures information necessary for a
proper understanding of a matter disclosed in the trustees' annual report.
83. When reading the trustees' annual report, auditors should remain alert for instances where the
information is misleading.
84. If auditors identify any information in the trustees' annual report that is misleading, auditors
should
conclude whether there is a misstatement in the trustees' annual report
request the body to correct any misstatement identified.
85. Further guidance on cases where a material misstatement in the trustees' annual report is not
corrected is provided in technical guidance note 2018/4(CG) on independent auditor's reports,
but in summary auditors should
discuss the matter with Audit Scotland's Professional Support
describe the material misstatement in the independent auditors report.
Trustees' annual report is not properly signed
86. Auditors should confirm that the trustees' annual report has been signed by one or more of the
charity's trustees.
Appendix 1
Page 24 Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs
Appendix 1 Auditor action checklist - trustees' annual report
Test procedures Yes/No/N/A Initials/date W/P ref
1 Have you
selected amounts or other items in the trustees'
annual report and compared them with the
corresponding amounts or other items in the
financial statements?
concluded whether an inconsistency with the
financial statements means there is a
misstatement in the trustees' annual report?
requested that any misstatement be corrected?
2 Have you
used the checklist at Appendix 2 to assess
whether information required by the applicable
requirements has been omitted from the trustees'
annual report?
requested that any misstatements be corrected?
3 Have you
considered whether there is a material
inconsistency between the trustees' annual report
and the knowledge you have obtained in
performing the audit?
requested that any misstatements be corrected?
4 Have you
considered whether any information in the trustees'
annual report is misleading?
requested that any misstatements be corrected?
5 Have you discussed any uncorrected material
misstatement in the trustees' annual report with Audit
Scotland's Professional Support?
Appendix 2
Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 25
Appendix 2 Checklist - required content of trustees' annual report
Required item Yes/No/N/A
1 A summary of the purposes of the charity as set out in its governing
document; and the main activities undertaken in relation to those purposes
2 A summary of the main achievements of the charity
3 A review of the charity’s financial position at the end of the reporting
period
4 Any policy it has for holding reserves, the amounts of those reserves
and why they are held. If the trustees have decided that holding reserves is
unnecessary, the report must disclose this fact and provide the reasons
behind this decision
5 The identification of any fund that is materially in deficit, with an
explanation of the circumstances giving rise to the deficit and the steps
being taken to eliminate the deficit
6 The nature of the governing documents, how the charity is
constituted, and the methods used to appoint new trustees
7 Reference and administrative information including the name of the
charity, the names of all those who were the charity’s trustees on the date
the report was approved or who served as a trustee in the reporting period,
and the names of the directors of any corporate trustees on the date the
report was approved.