Auditors & Fixed Asset Depreciation

[Chilli]

During the previous years audit, a small company was advised that it is local law that you have to depreciate a real estate fixed asset over 5 years, not the 10 years that the company had already agreed upon. So, the small company changed it’s policy and added an additional charge to the P&L to reflect this and that was that.
Roll forward to this years audit and the company have since found out that this “law” is complete crap! Therefore (given it was a bad year) an adjustment has been made to the P&L to bring the balance sheet back into line. However by posting this adjustment, the current years depreciation charge (for this asset only) is pretty much zero. The auditors are saying that this is not possible and that the outstanding amount needs to be re-worked to show a charge going through for this year.
Is this actually correct? If by adding a further charge, surely the balance sheet will be incorrect. Given it was the same audit firm that incorrectly stated this “law” in the first place, surely they should be happy to sign-off on this adjustment?

Any thoughts?

Many thanks.

[amirzed]

I would suggest if the directors can show a paper trail showing why they have now gone to 10 years and that the original 5 years is incorrect, then along with an explanation in the Dep policy note all should be good.

What they are concerned with is prob that the dep is not consistent with previous years and that the basis for the depreciation has changed, if you give them a cast iron reason for the prior year adjustment they'll prob back down.

[Chilli]

amirzed said:

I would suggest if the directors can show a paper trail showing why they have now gone to 10 years and that the original 5 years is incorrect, then along with an explanation in the Dep policy note all should be good.

What they are concerned with is prob that the dep is not consistent with previous years and that the basis for the depreciation has changed, if you give them a cast iron reason for the prior year adjustment they'll prob back down.

Oh, absolutely. From day 1 the directors agreed on 10 years, and the same firm signed that off for year 1 audit. It was year 2 audit (same firm, different individual) made up this 5 year rule, and the firm unfortunately agreed as they knew no different. Now that they do, they want it back to 10 years and IMO rightly so.

I think the problem here (Dubai) is that you have people who cannot think for themselves and are used to seeing dep'n numbers each year. You explain the scenario to them, and they just look at you, blankly!

Thanks for your input.