Internal Controls

Internal control is a process, effected by the entity’s board of directors, management, and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the categories of (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

Five Components:

1. The Control Environment – sets the tone organization by influencing the control consciousness of people. Control environment factors include integrity and ethical values; commitment to competence; board of directors or audit committee; management’s philosophy and operating style; organizational structure; assignment of authority and responsibility; and human resource policies and practices.

2. Risk Assessment – is management’s process for identifying, analyzing, and responding to risks.  Risks in a company can arise from internal risk factors, such as changes in personnel, new information systems, new products, etc. and external risk factors, such as economic conditions, competition, etc.

3. Control Activities – are policies and procedures that help ensure that management directives are carried out. Typical controls performance reviews (reviews of actual current performance versus budgets, forecasts, and prior period performance). It involve the use of both operating and financial data.

4. Information and Communication – To be effective, the information and communications system must accomplish the goals for transactions such as identify and record all valid transactions, describe the transactions on a timely basis, measure the value of the transactions properly, record transactions in the proper time period, properly present and disclose transactions and communicate responsibilities to employees.

5. Monitoring – Monitoring of controls is a process used to asses the quality of internal control performance over time. Monitoring may be achieved by performing ongoing activities or by separate evaluations.

The control environment – is considered the foundation of internal controls established by an organization.

Application controls consists of three types of controls: input controls, processing controls, and output controls.

Definition and Examples of Investment Property

IAS 40 define Investment Property as:

1. Property (Land or Building or Both) held to earn rentals; or for capital appreciation.

2. Not held for (a) use in production, supply of goods / services or for administration (b) sale in ordinary course or business

3. Property held by a lessee under an operating lease that otherwise meets definition of investment property – (a) lessee must use fair market value model (b) property-by-property basis

The following are not classified as Investment Property

1. For sale in the ordinary course of business (inventories)

2. Owner-occupied (Property, Plant and Equipment)

3. Constructed for third party – Construction in Progress (Inventories)

4. Employee-occupied (Property, Plant and Equipment)

5. Capital appreciation (Property, Plant and Equipment, but once completed) Investment Property.

Examples of Investment Property

1. Land held for long-term capital appreciation

2. Property under development or construction to be held to earn rentals or for Investment property being redeveloped for continued use as investment property.

3. Building owned (or held under finance lease) and lease out under operating leases. Including vacant building that will be leased out under operating leases.

What if the Property is with Dual Purpose?

a. If enterprise is able to split, the portion held as owner-occupied is classified under Property, Plant and Equipment; and the portion held for rental to others is classified under Investment Property.

b. If enterprise is not able to split but the significant portion is held for rental to others, the asset is classified as Investment Property; otherwise, it is classified as Property, Plant and Equipment.