Some companies in recent years have placed valuations on the brand names of the goods that they sell. The valuation is shown on the balance sheet. The reason for doing this is that the brand name is valuable to the company in that it helps to sell the company’s goods. For example, may people would rather buy a ‘branded’ tin of soap powder, rather than the ‘own make’ offered by a supermarket. IAS 38 prohibits recognition of internally generated brands.
For purchased brands, the auditor must consider:
Is the brand name valued according to an acceptable method, and not just ‘guessed’ by the directors?
Is the value being amortized over an acceptable time period which relates to the future sales of the brand?
Has the credit entry for the debit been adequately shown as a non-distributable reserve on the balance sheet
Is there adequate disclosure of the accounting policy in the financial statements?
IAS 36 Impairment of assets
It is important for the auditor to check the client’s procedures for determining and accounting for impairments. Under IAS 36, ‘impairment’ has occurred where recoverable amount has fallen below the asset’s carrying value. The recoverable amount is higher of net realizable value and value in use (economic value).
The stages of the audit in this area could be:
Confirm whether the enterprise has carried out any impairment checks and review the validity of the conclusions reached as to whether further investigation of impairment was necessary.
If the client has concluded that no further work is required and the auditor concurs, no more audit work is needed. If, however, the audit disagrees and considers that the value of some assets has been impaired, it is necessary to discuss the matter with management. If no further action is taken by management it may be necessary to issue a modified audit report giving a qualified opinion based on the disagreement with management and detailing the cause of the disagreement. Of course, in majority of cases further action will be taken by management and a modified report will not be required if the auditor is satisfied with that further action.
If the client has concluded that impairment checks are needed, the auditor will review the stages of the impairment investigation, paying particular attention to:
(a) The validity of the enterprise’s work in arriving at net selling price
(b) The validity of the enterprise’s work in calculating value in use, with particular reference to the acceptability of the basis for estimating future cash flows and of discounting rate adopted.
(c) The validity of the client’s procedures in applying the impairment review process to cash- generating units.
(d) Compliance with relevant disclosure requirements.