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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


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


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


Changes in 2017/18 ........................................................................................................ 21

Definitions ....................................................................................................................... 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.

http://www.audit-scotland.gov.uk/uploads/docs/report/2016/code_audit_practice_16.pdf

http://www.audit-scotland.gov.uk/our-work/technical-guidance

1 Introduction


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,

mailto:[email protected]


http://www.legislation.gov.uk/asp/2000/1/section/21




http://www.audit-scotland.gov.uk/uploads/docs/report/2016/code_audit_practice_16.pdf

1 Introduction


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


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


Read and consider the information in the other non-financial

statements in the annual report and accounts and report any material

misstatements


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


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-

[email protected]]

Training workshops To provide training to support this technical guidance note



2 Financial reporting requirements


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.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/669344/2017-18_Government_Financial_Reporting_Manual.pdf

http://www.scotland.gov.uk/Topics/Government/Finance/spfm/Intro

http://www.legislation.gov.uk/ssi/2006/218/pdfs/ssi_20060218_en.pdf



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.



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


Parliamentary and

accountability report

FReM paragraph 5.3.28 to

5.3.29


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.



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


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.

http://www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/2016-auditing-standards

http://www.frc.org.uk/auditors/audit-assurance/standards-and-guidance/2016-auditing-standards

http://www.audit-scotland.gov.uk/uploads/docs/um/tb_2016.pdf




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.




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


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.


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:


https://www.gov.uk/government/publications/government-financial-reporting-manual-2017-to-2018

https://www.nao.org.uk/report/nao-disclosure-guides-for-entities-who-prepare-financial-statements-in-accordance-with-the-government-financial-reporting-manual-frem/



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.



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.



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.



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.



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


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.


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.


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.




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.



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



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



29 January 2018


(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.


Page 3

Contents

1 Introduction ..................................................................................................................... 4

Purpose of module ............................................................................................................ 4

Contact points for this module ........................................................................................... 4

Changes in 2017/18 .......................................................................................................... 4

Definition ........................................................................................................................... 4


Sources of guidance on financial reporting ........................................................................ 5

Risks of misstatement ....................................................................................................... 5

2 Additions ......................................................................................................................... 6


3 Revaluations .................................................................................................................... 9


4 Depreciation and impairment ....................................................................................... 15


5 Disposals ....................................................................................................................... 21


6 Disclosures .................................................................................................................... 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


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.


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


Page 5


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.


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


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


Page 7

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.


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


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).


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


Page 9

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


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


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


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


Page 13

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.

3 Revaluations


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


Page 15

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.


the body has reviewed the useful lives and residual values at 31 March 2018



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.


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



Page 17

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.



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


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:



Page 19

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:



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.


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


Page 21

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


credit period by recognising the difference between the discounted amount and the total

payments received as interest income in operating expenditure.


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.

6 Disclosures


Page 23

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



29 January 2018


Page 3

Contents

1 Introduction ..................................................................................................................... 4



2 Provisions and contingencies ........................................................................................ 5

Changes in 2017/18 .......................................................................................................... 5

Definition ........................................................................................................................... 5




3 Creditors ........................................................................................................................ 13

Changes in 2017/18 ........................................................................................................ 13

Definition ......................................................................................................................... 13



4 Accruals ......................................................................................................................... 15

Changes in 2017/18 ........................................................................................................ 15

Definition ......................................................................................................................... 15


Source of guidance on financial reporting ........................................................................ 15


1 Introduction

Page 4 Audit of 2017/18 annual report and accounts (CG) - module 2 provisions, creditors and accruals



the risks of misstatements in, the following financial statement areas

Provisions and contingencies (section 2).

Creditors (section 3).

Accruals (section 4).



guidance note are





2 Provisions and contingencies


Page 5

2 Provisions and contingencies Changes in 2017/18


Definition

4. Provisions are liabilities incurred of uncertain timing or amount.


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).


8. IPSAS 19 provides guidance on IAS 37 for public sector bodies.


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:


http://www.scotland.gov.uk/Topics/Government/Finance/spfm/contingentliabs



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.



Page 7

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


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


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



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



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.


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.



Provision is not recognised for outstanding legal claims


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



Page 11

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)



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.


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


Page 13

3 Creditors Changes 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.


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.


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.


3 Creditors


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


Page 15

4 Accruals Changes 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.


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.


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


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.


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


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


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



29 January 2018

Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments Page 3

Contents

1 Introduction ..................................................................................................................... 4



Definition ........................................................................................................................... 4

Changes in 2017/18 .......................................................................................................... 4


Sources of guidance on financial reporting requirements .................................................. 5

2 Loans and receivables .................................................................................................... 6


Definition ........................................................................................................................... 6


3 Available-for-sale financial assets ................................................................................. 9


Definition ........................................................................................................................... 9


4 Derivatives and embedded derivatives ........................................................................ 13


Definition ......................................................................................................................... 13


5 Presentation and disclosure ........................................................................................ 17



1 Introduction

Page 4 Audit of 2017/18 annual report and accounts (CG) - module 3 financial instruments



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.



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



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


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


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.


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


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



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.


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



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


3 Available-for-sale financial assets Purpose of section


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.


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



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


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



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



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


4 Derivatives and embedded derivatives Purpose of section


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.


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


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



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.



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:



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


5 Presentation and disclosure Purpose of section


in, the presentation and disclosure of financial instruments.


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


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.


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)


29 January 2018


Page 3

Contents

Group financial statement ............................................................................................................ 4



Changes in 2017/18 .......................................................................................................... 4

Definition ........................................................................................................................... 4


Specific auditor requirements ............................................................................................ 5



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


the risks of misstatements in, group financial statements.



guidance note are


Helen Cobb, Senior Adviser (Professional Support) - [email protected].

Changes 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.


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:






Page 5

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.


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.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/304546/PU1660_IFRS_accounting_guidance.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/304546/PU1660_IFRS_accounting_guidance.pdf




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.



Page 7

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.



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.



Page 9

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.


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



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.


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.



Page 11

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


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.



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).



Page 13

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.



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



29 January 2018


Page 3

Contents

1 Introduction ..................................................................................................................... 6



2 Leases and lease type arrangements ............................................................................ 7


Changes in 2017/18 .......................................................................................................... 7

Definition ........................................................................................................................... 7



Appendix to section 2 ...................................................................................................... 13

3 Service concession arrangements .............................................................................. 14


Changes in 2017/18 ........................................................................................................ 14

Definition ......................................................................................................................... 14



4 Heritage assets .............................................................................................................. 19


Changes in 2017/18 ........................................................................................................ 19

Definition ......................................................................................................................... 19



5 Fair value measurement ............................................................................................... 22


Changes in 2017/18 ........................................................................................................ 22

Definition ......................................................................................................................... 22



6 Investment property ...................................................................................................... 26



Changes in 2017/18 ........................................................................................................ 26

Definition ......................................................................................................................... 26



7 Intangible assets ........................................................................................................... 28


Changes in 2017/18 ........................................................................................................ 28

Definition ......................................................................................................................... 28



8 Assets held for sale ...................................................................................................... 31


Changes in 2017/18 ........................................................................................................ 31

Definition ......................................................................................................................... 31



9 Cash, cash equivalents and bank overdraft ................................................................ 33


Changes in 2017/18 ........................................................................................................ 33

Definition ......................................................................................................................... 33



10 Grant-in-aid (NDPBs) .................................................................................................... 35


Changes in 2017/18 ........................................................................................................ 35

Definition ......................................................................................................................... 35


Sources of guidance on financial reporting ...................................................................... 35


11 Events after the reporting period ................................................................................. 38


Changes in 2017/18 ........................................................................................................ 38

Definition ......................................................................................................................... 38


Page 5



12 Miscellaneous disclosures ........................................................................................... 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



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.



guidance note are





2 Leases and lease type arrangements


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.


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.


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


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




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.


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.]



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



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:



Page 11

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:



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


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




Page 13

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?

3 Service concession arrangements


3 Service concession arrangements Purpose of section


in, service concession arrangements.

Changes 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.


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.


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


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




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



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


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.



Page 17

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



based on a relevant index, is a multiplier of a relevant index (e.g. RPI plus a

percentage).


4 Heritage assets


Page 19

4 Heritage assets Purpose of section


in, heritage assets.

Changes in 2017/18


Definition

49. Heritage assets are those that are held and maintained principally for their contribution to

knowledge and culture.


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.


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


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


4 Heritage assets


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.


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:

4 Heritage assets


Page 21

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




5 Fair value measurement Purpose of section


in, items measured at fair value.

Changes 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.


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.


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


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.




Page 23

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.


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.



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.



Page 25

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


6 Investment property


6 Investment property Purpose of section


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.


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.


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


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.


6 Investment property


Page 27

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


7 Intangible assets Purpose of section


in, intangible assets.

Changes in 2017/18


Definition

90. An intangible asset is defined in the accounting code as an identifiable non-monetary asset

without physical substance.


91. The FReM requires bodies to account for intangible assets in accordance with IAS 38

Intangible assets (as adapted by section 6.2).


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


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.


7 Intangible assets


Page 29

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)

7 Intangible assets


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


Page 31

8 Assets held for sale Purpose of section


in, assets held for sale.

Changes 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.


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.


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


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.


8 Assets held for sale


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


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


Page 33

9 Cash, cash equivalents and bank overdraft Purpose of section


in, cash, cash equivalents and bank overdrafts.

Changes 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.


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.


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


Cash equivalents are not properly identified


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


9 Cash, cash equivalents and bank overdraft


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)


Page 35

10 Grant-in-aid (NDPBs) Purpose of section


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.


125. The FReM requires bodies to account for grants in accordance with IAS 20 Accounting for

government grants and disclosure of government assistance.


126. Guidance on grant-in-aid is provided by

the FReM at chapter 8

the grant and grant-in-aid section of the SPFM.


127. The following paragraphs highlight potential risks of misstatement in respect of grant-in-aid,


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:


http://www.gov.scot/Topics/Government/Finance/spfm/grants

10 Grant-in-aid (NDPBs)


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)



Page 37

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


11 Events after the reporting period Purpose of section


in, events after the reporting period.

Changes 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.


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.


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


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




Page 39

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



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)


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.



Page 41

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.

12 Miscellaneous disclosures


12 Miscellaneous disclosures Purpose of section


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.


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


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).



Page 43

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.


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.



key assumptions and judgements, and set out actions for auditors to undertake to assess


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



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.



Page 45

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.


167. The FReM requires bodies to comply with IFRS 8 Operating segments in respect of operating

segments.



operating segments, and set out actions for auditors to undertake to assess whether the body


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.


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


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.




Related parties disclosure

Changes 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.


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.



related parties, and set out actions for auditors to undertake to assess whether the body has


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.



Page 47

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



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.


189. The accounting treatment of transactions should reflect whether a body is acting as an agent

or principal.



agency arrangements, and set out actions for auditors to undertake to assess whether the


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.



Page 49

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


Audit of 2017/18 annual report and accounts (CG) - module 6 regularity of expenditure and income



29 January 2018


Page 3

Contents

Regularity of expenditure and income ........................................................................................ 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.



guidance note are



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.






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.

http://www.public-audit-forum.org.uk/wp-content/uploads/2016/12/Statement_of_recommended_practice_PN10.pdf



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


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).

http://www.gov.scot/Topics/Government/Finance/spfm/Intro

http://www.gov.scot/Topics/Government/Finance/spfm/lossesetc



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


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.

http://www.parliament.scot/S4_FinanceCommittee/General%20Documents/Written_Agreement_with_Scottish_Government.pdf



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



29 January 2018


Page 3

Contents

1 Introduction ..................................................................................................................... 5



Summary of auditors' responsibilities for non-financial statements .................................... 5

2 Remuneration and staff report ....................................................................................... 7


Changes in 2017/18 .......................................................................................................... 7

Definition ........................................................................................................................... 7


Sources of guidance on financial reporting requirements .................................................. 7

Summary of auditors' responsibilities ................................................................................ 8


3 Performance report ....................................................................................................... 17


Changes in 2017/18 ........................................................................................................ 17

Definition ......................................................................................................................... 17


Sources of guidance on financial reporting requirements ................................................ 17

Summary of auditors' responsibilities .............................................................................. 17


4 Governance statement .................................................................................................. 25


Changes in 2017/18 ........................................................................................................ 25

Definition ......................................................................................................................... 25




5 Other non-financial statements .................................................................................... 31


Changes in 2017/18 ........................................................................................................ 31


Summary of corporate reporting requirements ................................................................ 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


Page 5


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).



guidance note are

Paul O'Brien, Senior 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


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.


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.


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.

http://www.civilservicepensionscheme.org.uk/employers/employer-pension-guide/

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/328603/frem_hutton_review_fairpay_additional_guidance_update_2012-13.pdf





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.


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.



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



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.


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:



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


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:



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


the fact that such a payment has been made

a description of the compensation payment



Page 13

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.


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


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






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




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



Page 15


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




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


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



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


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.

3 Performance report


Page 17

3 Performance report Purpose of section


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.


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.


57. Guidance on the strategic report issued by the Financial Reporting Council.


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

http://www.frc.org.uk/getattachment/697745ed-d991-4360-a32c-857dc28fb949/Guidance-on-the-strategic-report-2014.pdf



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.


guidance note and will include further guidance on reporting material misstatements and the

wording for the performance report opinions.


63. The following paragraphs highlight potential risks of misstatement in the performance report,


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



Page 19

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.



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



Audit Scotland


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.


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



Page 21


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.


Scottish

bodies

Explanation of application

Long term expenditure trend analysis No No requirement in Companies Act, and no

equivalent requirement in Scottish


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.




Scottish

bodies


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.






qualify their opinion on the performance report in respect of non-compliance with the

statutory guidance.

Performance report is inconsistent with auditor's knowledge


between information in the performance report and their knowledge obtained in the audit.



Page 23

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



Audit Scotland


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


consider whether their understanding of the body and its environment needs to be

updated

request the local authority to correct any misstatement identified.





describe the material misstatement in the independent auditors report.



Information in the performance report is misleading

Test procedure 4 - misleading information

Auditors should

consider whether any information in the performance report is misleading



Audit Scotland


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


request the body to correct any misstatement identified.






4 Governance statement


Page 25

4 Governance statement Purpose of section


material misstatement in, the governance statement. It also sets out test procedures for

auditors to carry out.

Changes 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.


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.


93. Auditors are required to read the governance statement to identify







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.

http://www.scotland.gov.uk/Topics/Government/Finance/spfm/govstate




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.


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


Governance statement is inconsistent with the financial statements


between information in the governance statement and the 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


discuss any uncorrected material misstatement in the governance statement with

Audit Scotland


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.






Page 27

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





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


request the authority to correct any misstatement identified.

104. Further guidance on cases where a material misstatement in the governance statement is not





qualify their opinion on the governance statement in respect of inconsistency with the


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


SPFM has been omitted from the governance statement



Audit Scotland


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.

http://www.scotland.gov.uk/Topics/Government/Finance/spfm/govstate



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.


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.

http://www.gov.scot/Publications/2006/07/11153800/9

http://www.gov.scot/Publications/2006/07/11153800/9



Page 29

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.






qualify their opinion on the governance statement in respect of non-compliance with the

governance statement.

Governance statement is inconsistent with auditor's knowledge


between information in the governance statement and the auditor's knowledge obtained in the

audit.


Auditors should

consider whether there is a material inconsistency between the governance

statement and the knowledge they have obtained in performing the audit



Audit Scotland


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.



118. If auditors identify an inconsistency between information in the governance statement and

their knowledge, auditors should



updated







Information in the annual governance statement is misleading


Auditors should

consider whether any information in the governance statement is misleading



Audit Scotland


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


122. If auditors identify any information in the annual governance statement that is misleading,

auditors should








5 Other non-financial statements


Page 31

5 Other non-financial statements Purpose of section


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.


127. Auditors are required to read each of the other non-financial statements to identify





128. Auditors are required to reporting material misstatements, but there is no requirement to

express an opinion.


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


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).



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:


Scottish

bodies


(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.

http://www.gov.scot/Topics/Government/Finance/spfm/lossesetc#Notification




Page 33


Scottish

bodies


Parliamentary accountability

disclosures as detailed in 3.2.12,

i.e.

No

No requirement in Companies Act, and no


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


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.

http://www.gov.scot/Topics/Government/Finance/spfm/contingentliabs

http://www.gov.scot/Topics/Government/Finance/spfm/contingentliabs



http://www.gov.scot/Topics/Government/Finance/spfm/gifts




Scottish

bodies


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


http://www.gov.scot/Topics/Government/Finance/spfm/feescharges

http://www.gov.scot/Topics/Government/Finance/spfm/feescharges



Page 35


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


updated


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


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?


4 Have you

considered whether any information in the

performance report is misleading?


5 Have you discussed any uncorrected material

misstatement in the performance report with Audit

Scotland's Professional Support?

Appendix 2


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


Appendix 3 Auditor action checklist - governance statement


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?


financial statements means there is a misstatement

in the governance statement?


2 Have you

used the checklist at Appendix 4 to assess whether

information required by the SPFM has been omitted

from the governance statement?


3 Have you


inconsistency between the governance statement

and the knowledge you have obtained in performing

the audit?


4 Have you

considered whether any information in the

governance statement is misleading?



misstatement in the governance statement with Audit


Appendix 4


Page 39

Appendix 4 Checklist - required content of annual governance statement


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



13 March 2018

Audit of 2017/18 annual report and accounts (CG) - module 8 charitable NDPBs Page 3

Contents

1 Introduction ..................................................................................................................... 5



2 Application of other modules to charitable NDPBs ...................................................... 6


Summary of other modules' application ............................................................................. 6

3 Fund accounting ............................................................................................................. 8




4 Presentation of financial statements ........................................................................... 11




5 Donations and legacies ................................................................................................ 14


Definition ......................................................................................................................... 14



6 Disclosure of trustees' and staff remuneration ........................................................... 17




7 Trustees' annual report ................................................................................................. 19


Definition ......................................................................................................................... 19




Appendix 1 .................................................................................................................................. 24

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



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.


3. The contact points in Professional Support for this module of the technical guidance note are





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.

http://www.legislation.gov.uk/asp/2005/10/pdfs/asp_20050010_en.pdf

http://www.legislation.gov.uk/asp/2005/10/pdfs/asp_20050010_en.pdf

http://www.legislation.gov.uk/ssi/2006/218/pdfs/ssi_20060218_en.pdf

http://www.charitiessorp.org/media/619101/frs102_complete.pdf

http://www.charitiessorp.org/media/619101/frs102_complete.pdf


3 Fund accounting


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.

https://www.frc.org.uk/getattachment/b2911d4f-fdca-44a4-957d-c4361e891661/PN-11-The-audit-of-charities-in-the-United-Kingdom-(November-2017).pdf

3 Fund accounting


3 Fund accounting Purpose of section

10. This section provides information on, and guidance on the risks of misstatement in, accounting

for charitable funds.


11. Module 2 of the SORP sets out the requirements for the analysis and presentation of a

charity's funds.


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


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



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

http://www.charitysorp.org/media/619101/frs102_complete.pdf

3 Fund accounting


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





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.


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.


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


https://frc.org.uk/getattachment/e1d6b167-6cdb-4550-bde3-f94484226fbd/FRS-102-WEB-Ready-2015.pdf




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.


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.





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


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).


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.


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


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:




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.



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


6 Disclosure of trustees' and staff remuneration


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


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.


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


6 Disclosure of trustees' and staff remuneration


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.

7 Trustees' annual report


7 Trustees' annual report Purpose of section


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.


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.


63. Auditors' responsibilities for a trustees' annual report are the same as for a other central

government bodies' performance report (explained in module 7).



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.


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


Trustees' annual report is not consistent with the financial statements


between information in the trustees' annual report and the 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


discuss any uncorrected material misstatement in the trustees' annual report with

Audit Scotland's Professional Support


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.




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







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


request that the body corrects any misstatement identified.

72. Further guidance on cases where a material misstatement in the trustees' annual report is not





qualify their opinion on the trustees' annual report in respect of consistency with the


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


SORP has been omitted from the trustees' annual report



Audit Scotland


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.


whether the trustees' annual report includes the items summarised at appendix 2 to this

module.




Trustees' annual report is inconsistent with auditor's knowledge


between information in the trustees' annual report and their knowledge obtained in the audit.


Auditors should

consider whether there is a material inconsistency between the trustees' annual

report and the knowledge they have obtained in performing the audit



Audit Scotland


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


consider whether their understanding of the charity and its environment needs to be

updated

request the charity to correct any misstatement identified.


corrected is provided in technical guidance note 2018/4(CG) on independent auditor's reports,

but in summary auditors should





Information in the trustees' annual report is misleading


Auditors should

consider whether any information in the trustees' annual report is misleading



Audit Scotland


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


84. If auditors identify any information in the trustees' annual report that is misleading, auditors

should




corrected is provided in technical guidance note 2018/4(CG) on independent auditor's reports,

but in summary auditors should



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


Appendix 1 Auditor action checklist - trustees' annual report


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?


financial statements means there is a

misstatement in the trustees' annual report?


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?


3 Have you


inconsistency between the trustees' annual report

and the knowledge you have obtained in

performing the audit?


4 Have you

considered whether any information in the trustees'

annual report is misleading?



misstatement in the trustees' annual report with Audit


Appendix 2


Appendix 2 Checklist - required content of trustees' annual report


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.