Audit of Accounting Estimates and Judgements – Impairment of Non-financial Assets – Ind AS 36, SA 540

NFRA AUDITOR - AC INTERACTION SERIES 4

The preparation and presentation of financial statements involve judgments and estimates, especially in complex areas such as impairment of non-financial assets.

The need:

Section 134 (5)
of CA 2013
SEBI LODR Regulations

The directive:

Ind AS 36

Auditors and AC - Illustrative discussion points on this topic:

  • Internal controls over:

    • Identification of cash-generating units and allocation of assets, in particular, goodwill
    • Identification of indicators of impairment
    • Models and data used, and management assumptions
    • Sensitivity testing and scenario analysis
    • Management information system over Budget versus Actual performance
    • Use of Management Experts

    • Disclosures

  • Auditor’s evaluation of the need for professional(s) with specialized skills or knowledge.
  • Manner in which the Auditor has evaluated the competence, capability and independence of management experts and auditor’s experts employed, if any.

Fundamental areas:

Impairment indicators:

  • Verification of management’s process of identification of impairment indicators of non-financial assets.
  • Annual impairment test for Goodwill and Intangible assets with indefinite useful life.

Value in use:

  • Estimation of future cash flows
  • Discount rates
  • Fair value
  • Whether the Auditor identified impairment of non-financial assets as a key audit matter. If not, the reason for the same.
  • Manner of addressing the matter by the Auditor during audit, types of audit tests performed, adequately documenting the audit tests performed in the audit report.

Key Audit Matters:

  • Cash-generating units and goodwill.

  • Impairment loss recognition and reversal.
  • Disclosures and transparency - Do the financial statements include adequate disclosures about the assumptions, judgements, and uncertainties related to impairment testing consistent with the requirements of Ind AS 36, the CA 2013, and SEBI (LODR) Regulations.

Recognizing and measuring impairment:

Recoverable Amount:

  • Manner in which the Auditor has evaluated that the models/ methods, used by Management for fair value and value in use, are appropriate.
SA 540
Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
SA 315
SA 330
The Auditors’ Responses to Assessed Risks
Communicating Key Audit Matters in the Independent Auditor’s Report
SA 701
Communication with Those Charged with Governance
SA 260

Key SAs that are relevant to accounting estimates and judgments:

 Identifying and Assessing Risk of Material Misstatement Through Understanding the Entity and its Environment
Series 4
Ind AS
SAs
SEBI (LODR) Regulations
CA 2013