You are employed as an audit manager by Viewstream, a firm of Certified Accountants. You are currently involved in planning the final audit of the financial statements of Henshelwood Co, a listed IT consultancy, for the year ended 31 March 20X7.
The draft financial statements show a profit before tax of $192m (20X6 $167m) and total assets of $553m (20X6 $510m).
The following disclosures have been extracted from the draft financial statements:
(a) Share-based payments
The fair value of all share-based remuneration is determined at the date of grant and recognised as an expense in the statement of profit or loss and other comprehensive income on a straight-line basis over the vesting period, taking account of the estimated number of shares that will vest. The fair value is determined by use of the relevant valuation model. All share-based remuneration is equity-settled.
Notes made by the audit senior during some preliminary analytical review refer to a share-based payment expense of $4.8m and an equity reserve, relating to the share-based payment scheme, of
$8.7m.
(b) Pension costs
Defined benefit schemes
(i) The scheme, the Henshelwood Pension Scheme, is a defined benefit scheme where the benefits are based on employees' length of service and final pensionable pay. It is a funded approved defined benefit scheme and closed to new members on 1 April 20X2. It is funded through a legally separate trustee administered fund.
The actuarial valuation was performed at 31 March 20X7 by the scheme actuary, an employee of Milton Human Resource Consulting.
The financial statements of Henshelwood included the following information. Note to the statement of profit or loss and other comprehensive income Defined benefit expense recognised in profit or loss
$m
Current service cost 3.75
Net interest on the net defined benefit asset (4.50 - 5.20) (0.70)
Past service cost - plan amendment (6.00)
Profit or loss expense/(credit) (2.95)
Defined benefit remeasurements recognised in other comprehensive income
$m
Actuarial loss on defined benefit obligation 4.75
Actuarial gain on plan assets (2.97 1.78
Notes to the statement of financial position
Net defined benefit asset recognised in the statement of financial position $m
Present value of defined benefit obligation 44.00
Fair value of plan assets (64.17)
Net asset (20.17)
Changes in the present value of the benefit obligation
$m
Opening defined benefit obligation 45.00
Interest cost (10% ??45,000) 4.50
Current service cost 3.75
Benefits paid (8.00)
Past service cost (plan amendment) (6.00)
Actuarial loss (balancing figure) 4.75
Closing defined benefit obligation - per actuary 44.00
Changes in the fair value of plan assets
$m
Opening fair value of plan assets 52.00
Interest on plan assets (10% ??52,000) 5.20
Contributions 12.00
Benefits paid (8.00)
Actuarial gain (balancing figure) 2.97
Closing fair value of plan assets - per actuary 64.17
(c) Provisions
Property Other Total
Balance at 1 April 20X6 25.2 478 76.4
Exchange adjustments - 0.1 0.1
Charged to statement of profit or loss and other comprehensive income
- 0.2 0.2
Utilised (8.2) (14.3) (22.5)
Balance at 31 March 20X7 17.0 33.8 50.8
Property provisions are for rents and other related amounts payable on certain leased properties for periods in which they are not anticipated to be in use by the company. The leases expire in periods up to 20Y3.
Other provisions comprise liabilities arising as a result of business disposals and the company transformation including the following items:
- Provisions of $7.1 million (20X6 - $8.9 million) relating to restructuring costs arising from the company transformation and closure of former shared service facilities and the closure of the former head office. These provisions are expected to be utilised over the next 12-36 months.
- Provisions of $6.2 million (20X6 - $160 million) for potential liabilities relating to the disposal of the European business including certain site restitution costs
- Provisions of $19.1 million (20X6 - $19.4 million) relating to possible warranty and environmental claims in relation to businesses disposed. It is not possible to estimate the timing of payments against these provisions.
Required
For each of the three issues identified above:
(i) Explain the matters you should consider to determine whether the amounts have been appropriately valued; and
(ii) Describe the tests you should plan to perform to quantify the amount of any misstatement.