The Audit Exemption That Was Not Available

Conclusion: No. Kola is not a small company for CAMA 2020 purposes, so the audit exemption is not available.

Reasoning: The small-company test is cumulative, not a pick-and-choose list. A private company must satisfy the turnover threshold, the net-assets threshold and the disqualifying conditions. The key tests are turnover of not more than N120 million, net assets of not more than N60 million, and no foreign member (among other conditions).

Applying the facts:

• Revenue is N480 million, four times the N120 million turnover ceiling. This alone fails the test.
• The Dutch shareholder holds 15%, so the company has a foreign member. That is a separate disqualifier.
• Net assets of N45 million are below N60 million, but that single factor cannot cure the other failures.

Consequence: Kola must appoint an auditor and have its 2024 financial statements audited. The board should correct its assumption before filing. The finance director should also check whether any filing or annual return has already been made on the wrong basis, because an incorrect claim of exemption can trigger regulatory queries and penalties.

Step 1: Identify performance obligations. The contract has three promised items: equipment, installation and maintenance. Installation is not distinct because the equipment cannot be used without the specialised installation; the two are highly integrated and should be combined into one performance obligation. Maintenance is distinct because the customer can benefit from it separately over three years.

Step 2: Allocate the transaction price. Allocate N120 million between (a) equipment plus installation and (b) maintenance, on the basis of relative standalone selling prices. If standalone prices are not directly observable, estimate them using an adjusted market assessment or expected cost plus a margin. Do not simply use the invoice split if it does not reflect standalone selling prices.

Step 3: Recognise revenue. Recognise the equipment-plus-installation portion when control transfers to the distributor, which is likely on delivery and acceptance, not merely on dispatch. Recognise the maintenance portion over the three-year service period as the service is provided.

Conclusion: The finance director's recognition of the full N120 million on delivery is wrong. At least the N20 million maintenance element must be deferred and recognised over time, and the allocation must be supportable.

Rebate treatment: The rebate is variable consideration. Kola should estimate it using either the expected value or the most likely amount, whichever better predicts the outcome, and include it in the transaction price only to the extent that it is highly probable that a significant reversal will not occur. At year end the distributor has bought 800 tonnes, below the 1,000-tonne threshold, but management expects 1,100 tonnes. That expectation makes the rebate probable. Kola should accrue the expected rebate and reduce revenue, allocating the reduction between the equipment-plus-installation obligation and the maintenance obligation. The estimate must be updated at each reporting date.

Audit risks:

• Revenue may be overstated because the full N120 million was recognised on delivery.
• The maintenance obligation may be unrecognised, creating a liability and a deferred revenue balance.
• The rebate may be unaccrued, overstating both revenue and profit.
• The allocation between performance obligations may not be supportable.
• Cut-off around the 1 October contract and year-end deliveries needs testing.

The auditor should test the contract, standalone selling prices, delivery and acceptance evidence, the rebate calculation and management's expectation of 1,100 tonnes. The board should correct the accounting before the audit is completed.