Changes have been made in International Standards on Auditing which will impact significantly the content and structure of the auditor’s report. Following is a summary of the key amendments and the rationale behind them as well as a brief update about the new Leases standard.
Changes in International Standards on Auditing
Changes in the International Standards on Auditing include the new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report and a number of revised standards. The new and revised ISAs will be effective for audits of financial statements for periods ending on or after 15 December 2016. The amendments are in line with investors’ expectation for the auditor’s report to provide more information compared to the standard opinion and more transparency regarding auditor’s responsibilities.
The most significant change is the requirement for the auditor to include descriptions of key audit matters and the audit procedures performed in these areas. The auditor should highlight the matters they focused on during the audit, the approach and procedures performed. Key audit matter descriptions should be concise, based on facts, specific for the client, free from technical jargon and in sufficient details to understand how the matter was addressed by theauditor.
Changes also impact the structure of the auditor’s report and move the opinion paragraph as the first paragraph. In addition, there are revised descriptions of management responsibilities and auditor’s responsibilities, including a description of responsibilities for going concern.
New Leases standard
IFRS 16 Leases was issued in January 2016 and will be effective as of 1 January 2019. Early adoption is permitted for companies that also adopt IFRS 15. It will bring most leases on-balance sheet, for lessees.
The new definition of a lease increases focus on who controls the asset and may change which contracts are leases. Among others, IFRS 16 also introduces a new classification test for leases which will result in a ‘dual model’ for both lessors and lessees.
The new requirements of the standard will result in a significant effort to identify all lease agreements and extract all relevant lease data necessary to apply the standard. This will affect a wide variety of sectors and, the larger the lease portfolio is, the greater the impact will be.
All companies that lease assets for use in their business will see an increase in recognized assets and will recognize a right-of-use (ROU) asset and, at the same time, will recognize lease obligation. The total lease expense will be front-loaded even when cash rentals are constant.
There are two optional exemptions in IFRS 16. Lease with a maximum contractual term, including renewal options, of 12 months or less and leases of low value items would be exempt.
The topic was discussed at the 2016 KPMG Business Seminar for clients.
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