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A very basic question applicable to all accounting frameworks

Entity’s financial year = calendar year. On 1 Sep 20X1 Entity contracts an auditor to issue an opinion on its financial statements for year ended on 31 Dec 20X1. Auditor’s fee is $100k. Auditor does interim work, assesses control environment, does some work with figures for 11 months etc. in Nov-Dec 20X1. Then comes back in Jan 20X2, follows up on what happened in Dec 20X1 and issues an audit opinion in Feb 20X2.

Question: should the Entity accrue full $100k in its P&L for year ended on 31 Dec 20X1? Why or why not?

Interesting topic I’ve seen in practice the $100 is allocated to the calendar year but that should be a practical shortcut. Also, I see some gaap matters because in my country, the $100 is deductible for the tax purpose when the opinion is issued.

Under IFRS, the audit fee should be allocated to Jan 20X1 through Feb 20X2 because the opinion covers the subsequent events until the date when the FS are authorized for issue, maybe?

I think that the audit fees should be spread through Feb 20X2. Audit is a service like any other and there's still lots of work left in Jan-Feb 20X2, so there's no reason to charge full amount in 20X1. Of course this is immaterial, especially given that those fees will 'roll-over' in following years, i.e. in 20X2 you won't have any expenses relating to 20X1 audit, but at the same time you will charge to much for 20X2 audit.

I remember that one of my first assignments as an audit intern was to make sure that the whole audit fee is expensed as at 31 Dec 20X1 and I saw this approach several times afterwards. But recently a colleague asked me whether such approach is correct and it got me thinking

PS. As for the tax law, is should make no difference how the fee is treated, but of course many entities do make their life easier and recognise small expenses in their IFRS accounts in the same period as for tax purposes.

Isnt the most useful information to accrue the proposed fee for that period. So it matches to other complex events which give rise to higher fees. in the following year, no complex transactions, it's lower. But in your example this alignment doesn't work.

That’s a good point too. I’m getting interested in the other point of view: how does the auditor identify performance obligations and allocate the transaction price in accordance with IFRS 15?

Almost certainly input method / by reference to expected fees.

I realise we have moved away for the original question but do we think audit revenue meet the IFRS 15 criteria for recognition overtime, and if so which of the criteria?

Performance obligation is satisfied over time if one of the criteria given in IFRS 15.35 is met:

• The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
  The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
  The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

If you've got a good auditor then you should be getting benefit as you go along

don't you love all the twists and turns a topic can take?

I would say that most audit assignments satisfy the third condition, i.e. no alternative use and enforceable right to payment for performance completed to date
do you happen to know how audit firms actually recognise their revenue under IFRS 15?

JRSB wrote: ↑01 Dec 2020, 11:30 If you've got a good auditor then you should be getting benefit as you go along

but anyway, in case of switching the auditor in the middle of the audit assignment, a new auditor would have to reperform all the work

IFRS 15.B4: a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer

Probably, but not necessarily. Just like an auditor doesn't reperform the prior year work when taking over.

well, that's different IMO, because prior year is already audited and the opinion is issued... for current year, an auditor needs to prepare their full documentation and so on

JRSB wrote: ↑01 Dec 2020, 10:27 Isnt the most useful information to accrue the proposed fee for that period. So it matches to other complex events which give rise to higher fees. in the following year, no complex transactions, it's lower. But in your example this alignment doesn't work.

if the work on auditing the complex issues of 20X1 is done before the actual year-end, you still accrue corresponding expenses in 20X1. But in early 20X2 there's still lots of work to be done e.g. with fact checking actual financial statements, assessing the adequacy of disclosures etc

In my opinion that is drilling far too closely into the specific tasks, given the accounts and the engagement relate to a given period, even if that includes the post balance sheet disclosure and so on.

Without drilling into specific tasks, you can tell for sure that the work will be far from completed as at 31 Dec 20X1...

As you note this not really an IFRS question in some ways. I can't find a reference to disclosure of Audit Fees in the current IFRS Standards (please correct me if I am wrong). In the UK and Australia this is a statutory requirement that this information is included in the Financial Reports. The ICAEW sums the requirement up this way (and is similar to the Australian requirement):

The fee disclosed for the audit of the annual accounts is conventionally the fee for the year on which the auditor is reporting. This is confirmed in Regulation 5(1)(a) which requires the fee to be disclosed for ‘the auditing of those accounts’. This is not a time-sensitive phrase, but rather calls for disclosure of the fee for a particular audit regardless of the year in which the work is performed or the fee is expensed. However, this is not intended to suggest that any necessary adjustment for over and under-accruals of previous year audit fees may not be included within the disclosure of audit fees for the current year (see paragraph 19.9 below). It may be helpful to disclose the effect of such adjustments when the amount is material to the fees disclosed or to the trend in disclosed audit fees.

https://www.icaew.com/-/media/corporate ... dated.ashx

I note that it notes the disclosure might be independent of when the fee is expensed, so this is a little unhelpful I am afraid.

that's an interesting view, but as you say such disclosure serves different purpose

I think you know for sure that there's no such disclosure requirement in IFRS

Yes in the UK it's disclosure of the amount payable to the auditor although it's often presented as though it's a P&L note. It would of course be useless if it was based on the costs incurred in the tail end of last year's audit plus the interim testing from this year!

Marek Muc wrote: ↑01 Dec 2020, 16:53 don't you love all the twists and turns a topic can take?

I would say that most audit assignments satisfy the third condition, i.e. no alternative use and enforceable right to payment for performance completed to date
do you happen to know how audit firms actually recognise their revenue under IFRS 15?

It is recognised on a time basis (work in progress). That's why auditors and consultants need to submit their timesheets in time

So KPMG UK produces an annual report that complies with IFRS Standards (who knew right!?!).

So this is their policy:

The majority of the group’s revenue is derived from contracts where the consideration is based on time and materials. For these contracts the group satisfies performance obligations over time and revenue is recognised based on the rate agreed with the client, provided there is an enforceable right to payment for performance completed to date.

Similarly, revenue derived from fixed fee contracts is recognised over time based on the actual service provided to the end of the reporting period relative to total services to be provided, generally assessed by reference to actual inputs of time and expenses as a proportion of the total expected inputs, where there is an enforceable right to payment for performance completed to date.

Interestingly the audit report notes timing of Revenue Recognition as their second key Audit risk "We therefore identified revenue recognition as a significant risk, which was one of the most significant assessed risks of material misstatement."

https://assets.kpmg/content/dam/kpmg/uk ... s-2019.pdf

So GT audited KPMG, and I see that GT was audited by Mazars. So they have access to all the sensitive commercial information of their competitors!

It's auditors all the way down

A few of the larger firms use 'small' auditors presumably for that reason

Although thinking about it, they aren't really businesses based on secret billing or trading methodologies etc, pretty much all based on the people in it.

right, and fees for largest clients are disclosed by them anyway as we've just discussed