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Hello Mike sir,
What does off-balance sheet transactions mean and how do auditors tackle this in their audit of the client’s company?
Off balance-sheet items are matters where substance over form addresses the issue
In days gone by, an item held under a lease (before IAS 17) didn’t belong to the lessee so was not included as an asset even though the lessee had the significant risks and rewards of ownership
By the clever wording designed by lessors’ draughts persons it was possible to design the wording of a lease so that it was difficult to classify a lease as a finance lease or as an operating lease and if it didn’t quite satisfy the definition of a finance lease then it must by default be an operating lease. Even though, in effect, it was a finance lease
Same with subsidiaries – if we didn’t hold >=50% then the investment was not a subsidiary
But holding 49% is surely effectively a subsidiary. So recent IFRSs address these issues and attempt to restrict the opportunities for entities to keep matters off their balance sheets simply by finding loop-holes in the wording of standards
Auditors? Skill and judgement and not allowing the client to outwit them
OK?
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