There is a capex threshold policy where audit firms in Dubai capitalize assets with a higher cost than the threshold. Suppose the threshold is AED 10000, and a company in Dubai purchases assets at AED 7000 each.
It may not sound right to account for them in profit/loss since their total value is higher than AED 10,000. What happens if a Dubai entity reassesses its capitalization threshold from AED 10,000 to AED 15,000? The answer lies in aggregation and materiality. It is crucial to set up materiality level first.
Understanding Material
IAS 1 Presentation of Financial Statements defines material as anything that could collectively or individually influence the economic decisions that companies in Dubai & UAE make based on the financial statements. There is some degree of importance. At asset can be crucial because of two fundamental factors:
Size
The purchase of an entire building is material for a medium-sized Dubai company, but not a paper bin.
Sensitivity
Some assets can be material not because of their size but because of their sensitivity. They have a significant impact on how people view the company. A good example is a bonus to management.
Evaluating The Materiality
Each company in Dubai, through its audit specialists, must assess materiality. This is because it depends entirely on the size of the company, the extend of individual information, the nature of operations, and its importance for financial statements.
Materiality is highly judgmental, and audit services should assess it. There is no right approach to setting the applicability. But, in September 2017, IFRS released the IFRS Practice Statement called Making Materiality Judgments.
These guidelines explain the procedures of setting up materiality for audit experts. There are four crucial steps:
- Identify.
- Evaluate.
- Organize.
- Review.
Aggregate or Individual
Please keep in mind capex threshold isn’t materiality but linked to it and extracted from it. Therefore, if the capex threshold must be set in a manner that the total amount of items expensed it profit/loss isn’t material.
The average of small items is not capitalized because being lower than the threshold is less than the materiality, then the threshold is handled correctly. Assuming the threshold is AED 1000. So, everything expense above AED 1000 is capitalized because it is considerable. Everything under 1000 dirhams is accounted as profit/loss.
Let us assume five items, each of them costing 700 dirhams. This means you have spent 3500 dirhams. Each individual item is not material since its below the capex threshold. However, it is material in aggregate. This is clearly outlined in IAS 16 Property, Plant, and Equipment standard.
Revising The Capex Threshold
When the threshold is adjusted from 1000 dirhams to 1500 dirhams? How can Dubai audit specialists change that? Audit services can revise thresholds during the reporting period, usually once every year. Auditors also need to check whether the current amount is immaterial and not affecting users.
Also, auditing professionals should determine whether they reflect the change in materiality or capex threshold. Notably, however, it depends on whether the capex threshold decreases or increases.
When it Decreases
Assuming certain assets achieve the definition and recognition criteria for plant, property, and equipment according to IAS 15. Still, an auditor doesn’t recognize it as an asset since its cost is less than the threshold.
Again, let us assume a capex threshold of 1000 dirhams and a company purchased a bookshelf for 800 dirhams. The bookshelf is a plant, property, equipment since the company plans to store office files for more than 12 months. Therefore, the auditors must capitalize it and depreciate it as an asset if they are looking to achieve accuracy.
You may also expense it since it’s not material. Let us assume an auditor has made an immaterial error. The following year his company experiences a reduction in profit, items will become material.
The company revises the capex threshold from 1000 dirhams to 700 dirhams. What was the immaterial error the previous 12 months becomes a material error. However, at times this isn’t the case. Regardless, it is essential for auditors to counter-check this. The correct material error should be made in IAS Accounting Policies, Changes in Accounting Estimates and Errors.
When Capex Threshold Increases
When the capex threshold increases, the material items change to immaterial. Therefore we have no cumulative error from previous periods. Hence, not. Suppose the threshold is revised upwards, no need to correct it.
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Kasun Liyanage is an Audit Manager with over 7 years of experience dealing with diversified corporate clients. He not only manages the team’s work schedule but also is an expert in handling audit areas such as external audits and fraud investigation, Internal control benchmarking and best practices and well as preparation of financial statements and IFRS compliance.
