Non current assets have the fundamental characteristic that they are held for use in the business and not for resale. IAS 1 Presentation of financial statements defines current assets as those assets which are expected to be sold or consumed in the course of the operating cycle or assets which are held primarily for short term trading purposes and are expected to be realised with in 12 months of the reporting date or cash and cash equivalents. All other assets are classified as non current assets which are also described as long term assets or fixed assets.
Non Current Assets (Fixed Assets)
In most countries, non current assets are generally classified as:
a) Intangible assets
- Development Costs
b) Tangible Assets
- Land and buildings
- Plant and Equipment
- Furniture, fixtures and fittings
Tangible Non Current Assets
The verification approach is essentially similar in all these. Extensive disclosure is required in most countries and IAS 16 Property Plant and Equipment, IAS 36 Impairment of Assets and IFRS 5 Non Current Assets held for Sale and Discontinued Operations are the authoritative accounting documentations. (Also IAS 8)
Land and buildings - Freehold
Cost and authorization
The cost of land and building acquired during the year should be vouched to appropriate documentation.
These are contract of sale, surveyor's certificates, solicitors correspondence, cash book and in the case where a loan was obtained correspondence with the bank. The auditor must determine what the client considers to be cost. Where the buildings have been constructed by the client, then the auditor must review completion certificates and costing sheets with regard to internal labour and materials expended on the building as these are often overlooked. For authorization, the auditor should look to the directors minutes and to confirm that the company's seal was used to seal the agreement of purchase.
IAS 16 requires that all assets for use by the business should be valued on the basis of depreciated historic costs with one exception. IAS 16 states that freehold land should not be depreciated except in the event that the reduction in value is due to depletion through for example mining or due to changed economic circumstances. The reason for not depreciating freehold land is quite apparent when one looks at the definition of depreciation. Depreciation is the allocation of historic costs over the useful life of the asset. As freehold land has no finite useful life, there is no basis for calculating depreciation. Freehold buildings should be depreciated and the auditor must check that the estimated useful life is reasonable and that the calculations have been correctly made. The split therefore between freehold land and the buildings on that land must be established to be reasonable.
Existence of Land and buildings is not difficult to prove. You may even be sitting in the building. However, the auditor needs to be sure that the land and buildings that he is seeing are the actual land and buildings referred to in the accounts. He may therefore need evidence from a map of the area concerned.
Title deeds would usually be available for freehold land and they must be examined to ensure that they are validly in the name of the company. Land is often subject to mortgage so the auditor must be careful to ensure that such charges are correctly disclosed in the accounts. Such charges should also be recorded in the company's register of charges. Title deeds should be examined automatically on every audit. There is no title deed to a building therefore beneficial ownership is implied, that is the building is on our land we paid for it, the title deed of the land is in our name, we occupy that building, it follows that the building is also ours.
Presentation will be covered when all other fixed assets have also been considered.