Disposing capital-intensive business

What's happening in the corporate world now?

Capital-intensive require heavy investment of resources, including, but not limimted to: cash, human resource,management's effort, etc. As part of the restructuring exercise to scale down, there are evidence that a lot of corporate are disposing off capital-intensive business.

How would disposing capital-intensive business benefit the corporate?

- immediate liquidity ( i.e. proceeds from disposal)
- better working capital management
- allow management to evaluate other business opportunities
- lesser resources are required, which allow the business to scale down
- higher return on asset ("ROA") ratio

However, it's always not easy to dispose off a capital-intensive business unit/ busines during this business environment, unless a substantial discount is given to the potential buyers.

Accounting treatment for tax penalty

One of our Accounting & Audiitng blog reader inquired us the following:

" How should penalty on late repayment for tax been accounted for?"

Should it be a tax expense? Should it be other expenses?

To clarify: penalty imposed by inland revenue authority on late repayment for tax should not be accounted for as tax expense; it should be accounted for as administrative expense/ other expense.

No depreciation charge on asset held for sale

This is to confirm that if a property is classified as asset held for sale, no depreciation is to be recorded.

To illustrate, Company ABC entered into Sales & Purchase agreement with 3rd party to dispose one of its property. The Sales & Purchase agreement may take months to complete. In this instance, Company ABC re-classified the property from Property, Plant & Equipment to Asset held for Sale upon entering the Sales & Purchase agreement.

Asset held for sale is de-recognised from the balance sheet upon the completion of the Sales & Purchase agreement.

Auditing Creditors

One of the procedures required to audit trade creditors account is to audit the creditors' statement received from the audit client's suppliers (i.e. external audit evidence).

In normal business circumstances, suppliers will send their monthly Statement of Account to their customers to inform the customers in relation to the outstanding balances. Hence, our audit client will , most likely, receive statement of account from the suppliers.

As part of audit procedure, we can check the suppliers' statement (received by our audit customers) against the creditors' balance recorded in their book. Discrepancies need to be investigated. Statement of account served as an external confirmation to check if our audit client's book has been prepared properly.

However, there are suppliers who do not have practices of sending out Statement of Account to their customers. In this instance, we can send external audit confirmation to the suppliers to confirm outstanding balances.

Cash audit- internal controls in cash process- cash payment

In our earlies entries in relation to cash audit, we discussed about the audit procedures of auditing unpresented cheques. We will discuss more extensively for audit procedures in auditing cash and bank balances of our audit clients.

Auditors may consider test the internal controls of the client's cash process. For this entry, we will provide an overview of the possible audit procedures to test the internal controls in cash payment process:

(a) select certain number of random samples, and test that payment voucher are properly prepared and authorised

(b) select certain number of random samples, and test that bank reconciliations are properly prepared and reviewed

(c) select certain number of random samples, and test that journal entries are properly posted into General Ledger

(d) select certain number of random samples, and test that payment voucher details match with the corresponding payment details