Utilising Discounted Cash Flow and Sensitivity Analysis to Ensure Compliance with IFRS 37 on Vacant Space Provisions

During the balance sheet attestation process, we identified discrepancies in the provisions for vacant space, which were not properly reconciled. The figures could not be verified due to missing, outdated, or incomplete documentation. Given the materiality of the provision, inaccuracies could have significantly impacted the P&L.

To resolve this, we obtained updated backup computations, which served as the foundation for the provision. We also compared these computations to the outdated Group Vacant Space Policy, which had not been updated to reflect the latest International Financial Reporting Standard (IFRS) 37. Drawing on our expertise in IFRS, we identified critical areas requiring adjustment.

Our next step involved conducting a thorough financial statement analysis, comparing provisions on a month-to-month basis to understand movements. We then recomputed the provision in line with the latest IFRS guidance. This was done through the following process:

1. Lease and Decommissioning Terms Verification: We retrieved lease details and decommissioning requirements from the access database, cross-referencing these with the actual lease documents.
2. Discounting Future Lease Payments: In accordance with IFRS 37, we discounted the future contractual lease payments using a discount rate based on the cost of capital (2% above the bank lending rate), which was in line with the Group Policy.
3. Selective Provisioning: We ensured that only dilapidations and decommissioning costs with a “specific” and “reliable” estimate were included in the provision. The company had previously discounted all expenditure back to day one, which was incorrect. The provision was accurately apportioned and discounted over the lease term.
4. Exclusion of Fixtures and Fittings Write-offs: We excluded book value write-offs for fixtures and fittings, as these should be accounted for through the Fixed Assets register.
5. Discount Unwinding: In compliance with IFRS 37, we unwound the discount each year, ensuring that at the end of the lease term, the liability equalled the original provision.

We also performed sensitivity analysis, testing the impact of various economic conditions and vacant space projections based on insights from commercial property analysts. This allowed us to assess the potential risks associated with fluctuating market conditions.

Upon comparison with the current provision, we identified several inconsistencies. We prepared a detailed analysis for each property, noting discrepancies and providing actionable comments. Our review revealed that the company had over-provisioned by approximately 5.2 million. Furthermore, we identified that the vacant space provision had incorrectly included freeholds, which are excluded under IFRS. We advised the Fixed Asset team to address this through an accelerated depreciation charge following an impairment review, in line with IFRS 36.

We presented our findings to the Board, who agreed to engage with Group Policy to revise the provision (approximately 9.5 million) accordingly. Subsequently, the policies were updated, and our recommendations were adopted.

During a separate exercise, we discovered duplicate payments of 2.5 million after an offshoring process, which had been reviewed and approved by a top ten global auditor. Fortunately, we identified the error in time, preventing significant losses and successfully recovering the funds.

A testimonial from a senior director of the above globally listed company is available for inspection, which states, “made a materially favourable impact on our financials.”

Key Takeaways:

No matter how large your organisation is or how prestigious your auditors may be, there will always be risks and opportunities to uncover. A thorough review of policies and processes can identify and rectify errors, ensuring that your assets are safeguarded and future-proofed. Reach out to us to leverage our expertise in protecting and guiding your organisation.

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