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The following is a substantive test as to classfication assertion for bank at page 328 BPP AA workbook: “Identify whether any accounts are secured on the assets of the company by discussion with management.”
I want to ask the meaning of this substantive test: is the bank account taken as guarantee against the assets of company or vice versa ? and is it compulsory to disclose the guarantee of assets in fs? Why is it a substantive test as to classification assertion?It is assumed knowledge of law that loans to a company may be secured by a “charge” on company assets e.g. a property.
That said I don’t think this is classification assertion for bank loans because the only matter for the SoFP is current/non-current liability split.
That is a classification assertion for bank/cash at bank, not bank loan, as in BPP AA Workbook
I don’t have Kaplan or BPP materials – I have OpenTuition’s and access to the Study Hub.
If talking about bank/cash at bank rather than a loan, any form of security of guarantee would relate only to a balance “in the red” – i.e. an overdraft. This should always be classified as a current liability (since it is technically repayable “on demand”). Any security/guarantee should be disclosed in the notes to the financial statements if it is a requirement (e.g. in the UK under UK gaap/Companies Act 2006 … you do not need any knowledge of this for AA) – however, I still don’t see that it has anything to do with classification.
One possibility does occur to me – if there are different bank accounts – Dr/Cr balances can only be offset in the SoFP if they are with the same bank AND there is a legal right of set-off. In this case the auditor would need to check that any offset was valid.
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