Accounting treatment for tax penalty

One of our Accounting & Audiitng blog reader inquired us the following:

" How should penalty on late repayment for tax been accounted for?"

Should it be a tax expense? Should it be other expenses?

To clarify: penalty imposed by inland revenue authority on late repayment for tax should not be accounted for as tax expense; it should be accounted for as administrative expense/ other expense.

No depreciation charge on asset held for sale

This is to confirm that if a property is classified as asset held for sale, no depreciation is to be recorded.

To illustrate, Company ABC entered into Sales & Purchase agreement with 3rd party to dispose one of its property. The Sales & Purchase agreement may take months to complete. In this instance, Company ABC re-classified the property from Property, Plant & Equipment to Asset held for Sale upon entering the Sales & Purchase agreement.

Asset held for sale is de-recognised from the balance sheet upon the completion of the Sales & Purchase agreement.

#91- No depreciation charge on asset held for sale

This is to confirm that if a property is classified as asset held for sale, no depreciation is to be recorded.

To illustrate, Company ABC entered into Sales & Purchase agreement with 3rd party to dispose one of its property. The Sales & Purchase agreement may take months to complete. In this instance, Company ABC re-classified the property from Property, Plant & Equipment to Asset held for Sale upon entering the Sales & Purchase agreement.

Asset held for sale is de-recognised from the balance sheet upon the completion of the Sales & Purchase agreement.

#89- Accounting treatment for tax penalty

One of our Accounting & Audiitng blog reader inquired us the following:

" How should penalty on late repayment for tax been accounted for?"

Should it be a tax expense? Should it be other expenses?

To clarify: penalty imposed by inland revenue authority on late repayment for tax should not be accounted for as tax expense; it should be accounted for as administrative expense/ other expense.

#79 Goodwill written off ( Part II)

In previous Goodwill written off post, we posted a question for our reader whether the goodwill should be written off after the Company and its subsidiaries has switched its businesses.

Goodwill is considered the premium the Company pay , during acquisition, in anticipation of future economic benefits. In the above case, Company A paid higher premium for Company B's existing customer base in computer hardware industry.

Company A and Company B have shifted its focus to computer software business, the goodwill the Company A paid for no longer exist. As such, the goodwill should be written off accordingly! There's no probable ground that the future economic benefit is going to flow into the Group.

Small Business Accounting- Interest Expense

What are the entries to record interest expense incurred on borrowings from bank ? Upon occurrence of interest expense:

Dr. Interest Expense (P/L)
Cr. Interest Payable (B/S)

Upon repayment of interest payable to bank:

Dr. Interest Payable (B/S)
Cr. Cash (B/S)

#75 Auditing Interest Expense

What's the most effective way of auditing interest expense recorded?

In order to verfiy the reasonableness of interest expense recorded, we used the following formula:

Principal x Average Interest Rate x Period = Interest Expense

Some of the auditor would perform vouching to bank advice by tracing the amount reflected on bank advice to amount stated on General Ledger. However, vouching only ensure the existence, it does not address completeness.

As a result, reasonableness is always useful to check for the completeness of expenses recorded.

#74 Accounting entries to record impairment

Previously, we discussed about the objective of IAS 36- Impairment of Assets and all other related topics. We will proceed further on the accounting entries of impairment. Generally, upon recognition of impairment, the following entries should be passed:

Dr. Impairment Loss (Profit & Loss)
Cr. Provision for Dimunition in Value (Balance Sheet)

Provision for Dimunition in Value is a contra account to the existing asset account. For instance, the contra account of Stocks, in this case, is Provision for Stocks Obsolescence. The Provision for Dimunition in Value has properly disclosed the impact of impairment on the existing asset, that could be useful to financial statement users.

#73- Downgrading of Credit Rating

Media giant, Eastman Kodak Co. has recently received a downgrade on its credit rating to "B-" from "B". The downgrade was due to the company's high rate of cash consumption and concern that the cash balance will quickly be utilised. The outlooks are unfavorable for Eastman Kodak Co.

A credit rating defines the financial strength of borrowers and help inventor to determine the likelihood of repayment of bonds, etc. The credit rating is always used as a reference by the princaipal banker of the Company being rated.

The downgrading of credit rating has an direct impact on the Company's interest expense. The lower the rating, the higher the interest rate. As such, as the Company's auditors, we should always beware of the credit rating position of the Company we are auditing and form expecation and the interest expense of the Company.

A credit rating is also One OF THE TOOLS to evaluate the financial position (i.e. strength ) of the Company, and assist in forming going concern assumption for the Company.

#68 Evaluation of Doubtful Debt

Subsequent to the topic of #67 Identification of Doubtul Debt, we would like to proceed further on how to evaluate the exposure to doubtful debt. A very critical question to ask: Does all long outstanding debt represents doubtful debt, for which the provision need to be provided for ? The answer is very subjective, and involved a lot of professional judgement.

Let's start the evaluation with asking our readers a few scenarios as below:

[Scenario A] XYZ Company has outstanding amout due from Company A (aged > 90 days), who is long standing customer of XYZ Company for the past 10 years with no history of default in repayment. The long outstanding amount is attributable to the slow-repaying from Company A.

[Scenario B]XYZ Company has outstanding amount due from Company B(aged > 90 days), who is long standing customer of XYZ COmpany for the past 20 years with no history of default in repayment. Company B usually paid the amounts on time. There is no dispute involved in the outstanding amount due from Company B.


We invite our 'Accouting & Auditing blog' readers to evaluate the recoverability of outstanding amount due from Company A and Company B respectively.

#67 Identification of Doubtful Debt

How do we identify potential doubtful client while performing audit ?

We have to identify the doubtul receivable before assessing the potential provision for doubtful debt for respective client. Be noted that, provision for doubtful debt should be assessed on a specified basis. General provision is no longer allowed in IAS 39. IAS 39 requires existence of objective evidence of impairment on doubtful receivable. General provision does not take into consideration of any evidence.

Let's come back to the topic on how do we identify slow moving debtors step-by-step:

1. Obtained trade debtor aging listing ( by customer) as at the balance sheet date
2. Pay attention to debtors who have outstanding debts overdue more than 60-90 days
( the number of days could be changed according to the industry norm)
3. Selected the debtors ( with significant outstanding long outstanding debts according to the audit materiality of the engagement

In short, we analyze the debtors who has: 1) long outstanding balance ( generally overdue more than 60- 90 days) and 2) the long outstanding balance is considered material for the purpose of audit.

#65 Impairment Testing

Auditing & Accounting experts foreseen that impairment testing on intangible assets, fixed assets, investments, assets, etc has to be assessed crtically in a detailed basis in the coming year, subsequent to the credit crunch.

The recession has driven the stock prices down, the value of the intangible assets sank accordingly. The recession acts as a trigerring points for the impairment testing.

Hence, the auditors should highlight to the clients that the impairment testings have to be performed earlier ( rather than sometimes near the audit), as the impairment testings required a lot of times. Rigid assessment by auditors are required, given the fact that financial statements users will be using the financial statements more cautiously.

#63 Impact of client's Key Performance Indicator on audit

During current credit crunch climate, auditors must be aware and gain an understanding of the management's Key Performance Indicator, as it represents the risky areas, where the management is likely to manipulate the results in order to meet the Key Performance Indicator.

Meeting a Key Performance Indicator means that the management might receive higher remunerations / incentive, and the jobs are highly secured with low risk of being retrenched.

#62 Deliveries without Billings

In construction industry and service industry (that involved installation service), there are instances that goods are delivered to customer, while billings have not been done. Can the Company, who delivered the goods, recognize revenue upon deliveries of the goods? Can the Company recognize revenue even if the installation services have not been done?

It depends on the term of the contract. In industry norm, the deliveries of goods to client’s location do not constitute a probable ground to recognize revenue.

Then, how should we record the goods delivered to client’s location?

The answer is: the items delivered are stocks in nature. As such, it should be recorded as part of the inventory recorded in the Company’s balance sheet.

#49- Impairment on Property

We received the following query from our reader:

".. other than an independent valuation, what other alternative method can we use to test for impairment on property.."

Before we proceed to answer the following question, let's assume that the property above relates to building, land or any other commercial related building employed by the Company in the course of doing ordinary busines..

To answer your question, if the property is involved in the ordinary course of business ( e.g. shophouse where a business do its trading), then the alternative method includes:
1) Discounted Cash Flow Analysis
2) Profitability forecast for the next 5 years
3) Obtained market price of the similar property in the area nearby

To elaborate on point 1 and 2 above, if the business is able to generate sufficient cash flow and be in profit position. The auditor can conclude that there is no indcation of impairment on the property. As the asset employed is sufficient to sustain the business operations of the Company, and hence no impairment.

Besides that, the auditor could obtained the last transation price of the similar property in nearby area to compare the market price to book value of the property, in order to assess the existence of indication of impairment.

#34 Accounting for Fixed Asset written off

When the Company decide to write off the fixed asset, the following entries will be passed:

Dr. Accumulated Depreciation
Dr. Loss on Asset written off (if any)
Cr. Fixed Asset ( at cost)

The company would write off the fixed asset in the following circumstances:

1) The company may write off the fixed asset, if the assets are no longer in feasible use.
2) The fixed assets have been fully depreciated.

In case 1 above, the company might incurred a loss on fixed asset written down if the net book value is > nil. Whereas, when the assets have been fully depreciated ( as in case 2), no losses will be incurred upon written off.

#30 Auditing for Rental expense

In normal circumstances, the audit approach for rental expense is to examine the rental agreement entered between both parties. The rental expense is stated clearly in the agreement.

Things to pay attention: if there are any other expenses stated in the agreement. Also, we could test vouched the monthly billing to check the monthly expense charged.

#29- Review of Legal Expenses

As an auditor, we would examine the nature of the legal expense even if it is not materil/ significant from the audit engagement point of view.

The rationale is to examine the nature of the expense incurred and to search for any outstanding litigation against the company, or the company is involving in any legal cases. As the damages for litigation could be tremendous, and needed to be disclosed to the financial statement users.

Hence, careful examination is required.

Alternatively, ' Legal Confirmation' could be sent to the client's lawyers to confirm if there is any on-going legal cases against the company.

#28 Auditing audit fees

How do we conduct the auditing process for audit fees as an auditors? What do we have to do?

Firstly, we have to obtained the agreed/ proposed audit fees for current year. And we used the formula below to assess the sufficiency for recorded audit fees:

Agreed audit fees + Reversal of Overprovision (if any) - Additional Accrual for Underprovision (if any)+ Additional audit related charges incurred during the year

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#25 Auditing Management Fees earned from Inter-company

In certain circumstances, the principal activities of the holding company is mainly investment holding. The transactions throughout the year might be minimal, and the expenses are minimal as well. The only revenue earned is the management fees earned from its subsidiaries. How do we verify the management fees earned is not materially misstated?

Firstly, we should read the details of the agreement between the holding company and the subsidiaries, with respect to the calculation of management income. For instance, 80% of total revenue or 100% of expenses. These terms are not uncommon in today business world.

If we are auditing the holding company accounts and issuing financial statement for the holding company. We must ensure that the subsidiaries, where the holding company earned management fee, get audited as well.

This is because the revenue of the holding company is totally dependent on the subsidiaries' revenue. These are the cases applicable for company level financial statement.