1.

Sale and Leaseback

Lifeson Co has sold a property to a leasing company, Clive Co. According to IFRS 15, revenue is
recognized when the performance obligation has been satisfied. From the case, Lifeson Co has passed
the control to Clive Co and correctly derecognized the property and recorded a sale.
However, as per relevant standard the sale and leaseback transaction needs to recognize the right of use
asset and lease liability. There is a risk that Lifeson Co has incorrectly calculated the amount for right of
use asset which could lead to material misstatement in the financial statement.
AE:
- A copy of agreement on sale and leaseback to confirm the authorization of transaction and the
rights of use asset for both parties
- A copy of bank statement to agree the amount recorded as sale in the cash book

Investment property
The carrying amount of the property are 2.56% of total asset ($353,000/$13.8million) thus making it a
material transaction.
As per IAS 40 investment property are used to earn rental income or capital appreciation or both.
From the case, Lifeson keep the building in order to rent it out thus meeting the definition of investment
property. The treatment of recognizing the building as investment thus is correct.
However, there is an issue regarding the fair value gain on the building during the transfer from owner
occupied property to investment property.
Lifeson had recognized fair value gain of $30,000. This is incorrect as Lifeson should have recognized the
initial gain of $25,000 ($348,000-$323,000) in other comprehensive income as revaluation surplus
because it is still part of IAS 16. The further gain of $5,000 ($353,000-$348,000) which arise when the
building has been classified as per IAS 40, can then be included as fair value gain in the profit or loss
statement.

Audit evidence

 Copy of title deeds to confirm the ownership belongs to Lifeson co.

 Copy of market valuation review by the external expert to confirm the fair value of the building.
Shopping Mall
The shopping mall of $8.85 million represents 6.4% of total assets, hence it is material to the financial
statements.
On 31March 20X5, Lifeson Co recorded the property of $8.85 million based on its recoverable amount
via value-in-use and recognised impairment reversal of $1.034 million. Under IAS 36, reversal of
impairment will be limited to the carrying amount if no impairment ever occurred less current carrying
amount.
In this case, the current carrying amount is $7.816 million and it carrying amount if no impairment ever
occurred is $8.55 million (9.5x18/20), thus the impairment reversal will be $734,000 (8.55-7.816).
However, the management has wrongly recognised impairment reversal as $1.034 million. The impact is
the asset will be overstated and expenses understated.
Audit evidence
1. A copy of purchase agreement of shopping mall to confirm its purchased price of $9.5 million.
2. A recalculation on the depreciation charged to confirm its mathematical accuracy.
3. A copy of working papers on recoverable amount to confirm the higher of value-in-use as fair
value less cost to sell.

Impact on audit report

Investment property
Misstatement of $25,000 in profit or loss statement is 1.16% of profit before tax which is not material to
the financial statement.
Auditor’s report would not need to be modified because it is immaterial. However, financial statement
will contain misstatement if management refuse to adjust.

Shopping mall
Misstatement of $300,000 is 13.95% of profit before tax thus making it a material transaction to
financial statement individually.
If management refuse to adjust, audit opinion will be modified on ground of financial statement contain
material misstatement.
The issue is material but not pervasive as it only affects single item in financial statement.
Hence, qualified except for opinion will be issued.
A basis for qualified opinion paragraph will be inserted after opinion paragraph to explain the issue that
give rise to the modification of audit opinion.