KCE

COLLEGE

INTERMEDIATE LEVEL
FINANCIAL REPORTING AND ANALYSIS

REVISION QUESTIONS
QUESTION 1
LEASES
A company enters into a 4-year lease commencing on 1 January 2019 (and intends to
use the asset for 4 years). The terms are 4 payments of Sh.50,000, commencing on 1
January 2019, and annually thereafter. The interest rate implicit in the lease is 7.5%
and the present value of lease payments not paid at 1 January 2019 (i.e. 3 payments
of Sh.50,000) discounted at that rate is Sh.130,026.
Legal costs to set up the lease incurred by the company were Sh.402.

Required
Show the lease liability from 1 January 2019 to 31 December 2022 and explain the
treatment of the right-of-use asset.

PARTINERSHIP.
Kuni and Moto were partners in business of logging and saw milling sharing profits and losses
equally. The partnership balance sheet as at 31 December 2004 was as follows.

Sh.’000’ sh’000’
Non-current asset:
Land and building at cost 93,250
Furniture (NBV) 2,500
Current asset
Cash in hand 250
Account receivables;
Saw milling 32,000
Logging 54,000 86,000
Inventory;
Saw milling 115,000
Logging 56,250 171,250
Total assets 353,250
Capital and liabilities.
Capital account: Kuni 131,500
Moto 81,000
Non-current liabilities:
Loan 6,000
Current liabilities
Bank overdraft 44,750
Creditors:

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 Saw milling 77,000
Logging. 13,000 90,000
Total capital and liabilities 353,250

Additional information.
1. The partner agreed that effective from 1 January 2005, the business would be taken
over by two separate limited companies, Kuni ltd and Moto ltd. Kuni ltd took over the
saw milling business and Moto ltd took over the logging business.
2. The providers of the loan agreed to accept 10% debentures in the new companies: sh.
3,600,000 being applicable to Kuni ltd and sh. 2,400,000 to Moto ltd.
3. Kuni ltd took over the land and building, furniture’s, cash and bank overdraft. The assets
and liabilities were transferred at book values and the partners were paid sh 25 million
being goodwill for the saw milling business and sh.20 million for logging business.
4. On 1 January 2005, the purchase consideration was satisfied by the allotment of fully
paid equity shares of sh. 10 each in the respective companies as shown below:
 Kuni-11,875,000 shares in Kuni ltd and the balance in Moto ltd.
 Moto-7,960,000 shares in Moto ltd and the balance in Kuni ltd.
5. Kuni ltd also raised a 12% debenture of sh. 50 million on 1 January 2005 and paid off the
bank overdraft. The expenses incurred in raising the debenture amounted to 1,750,000.
6. Kuni ltd and Moto ltd also issued 500,000 and 750,000 fully paid ordinary shares of sh.
10 each.
7. The formation expenses were paid by the respective companies as follows:
 Kuni ltd 3,250,000
 Moto ltd 2,000,000.
Required:
a) Prepare business purchase accounts.
b) Partners’ capital account.
c) Vendors account.
d) Bank account
e) Opening balance sheet of Kuni and Moto ltd.

CONSTRUCTION CONTRACTS
QUESTION ONE
Jenga construction contract ltd was awarded a contract Z on 1 January 2006.the contract price
was fixed at sh 120 million and the estimated total cost of the contract was sh. 105 million. The
following information relates to the contract for the three years from 1 January 2006 to 31
December 2008 when the contract was completed.

2006 2007 2008

Sh “000’’ Sh “000’’ Sh “000’’
Cost incurred 20,000 42,000 32,000
Estimated further costs 70,000 36,000 -
Billing to clients 30,000 50,000 40,000
Collection from client 12,000 38,000 60,000

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Administrative expenses 2,000 2,500 1,000

Required:
For each of the year ended 31 Dec 2006, 2007 and 2008, prepare extract of the income
statement and statement of financial position using the percentage of completion approach in
line with IAS 11, LONG TERM CONSTRUCTION CONTRACTS (14 marks).

QUESTION TWO.
(a). Explain the following terms as used in accounting for construction contracts:
I. Completed contract method.
II. Percentage of completion method.
(b)
On 1 January 2014, ujenzi ltd was awarded a contract for the construction of a road. The
contract was for 3 year period. The contract price was sh.250 million. The following information
has been extracted from the books of the company:

Year ended 31 December (sh millions)

2014 2015 2016
Total cost incurred to date 80 170 220
Estimated additional cost to complete contract 120 90 -
Billing made during the year on contract. 90 100 60
Cash received on the contract in the year 80 90 70
General administration expenses in the year 4 6 5

Required:
Using the percentage of completion method, prepare the following in the books of ujenzi ltd.
a) Income statement extract for the year ended 31 Dec 2014, 2015 & 2016 (10 marks)
b) Statement of financial position extract as at 31 Dec 2014, 2015 & 2016 (5marks)
Your answer should be in conformity with IAS 11 (construction contracts)

QUESTION THREE
(a) Explain the difference between a fixed price contract and cost plus contract.

(b) Jenga ltd is a construction company whose financial year ends on 31 March. The
information below was extracted from the books of the company in connection with
three contracts undertaken by the company during the financial year ended 31 march
2015.
Sh “000”
Contact 468 469 470
Contract price 3,600 4,800 2500
Cost incurred up to 31 March 2014 1800 3000 1500
Cost incurred during the year 600 1000 500
Estimated total cost of the contract. 3000 5200 2300
Total billings to date. 2800 4500 1800

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 Total cash received to date 2600 4200 1700
Total profit/loss reported to date 360 30 (20)
General administrative expenses 60 120 30
Required:
Using the percentage of completion method, prepare
a) Income statement for each of the contract. (10 marks)
b) Statement of financial position for each year as at 31 march 2015. (6 marks)

AGRICULTURAL ACCOUNTING-IAS 41

QUESTION 1
The following trial balance was extracted from the books of Mkulima halisi, a farmer, as at 31
Dec 2016.
Sh “000” Sh “000”
Stock as at 1 Jan 2016:
 Seeds 30
 Growing crops 100
 Poultry feeds 20
 Poultry 190
 Cattle feed 150
 Mature crops 210
 Cattle 480
 Fertilizers 102
Purchases:
 Cattle 1850
 Poultry 620
 Cattle feed 780
 Poultry feed 270
 Fertilizers 410
 Seeds 340
Sales:
 Cattle 3450
 Eggs 680
 Crops 3240
 Poultry 1160
 Milk 1180
Wages:
 Cattle 730
 Poultry 390
 Crops 930
Capital 4000
Creditors 510
Accrued expenses 80

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Land 350
Farm house 2250
Farm machinery 880
Office furniture 240
Depreciation 380
Office salaries and wages 113
Office expenses 230
Crop expenses 320
Cattle expenses 468
Poultry expenses 285
Debtors 462
Bank and cash balance 120
Drawings 360
Insurance 240
14300 14300
Additional information.
1. as at 31 Dec 2016, stocks were valued as follows:
Sh “000”
Seeds 40
Growing crops 110
Poultry feeds 25
Poultry 145
Cattle feed 160
Mature crops 240
Cattle 360
Fertilizers 90
2. Depreciation expense for the year is apportioned as follows:
Sh “000”
Crop activities 180
Livestock activity 90
Poultry activity 50
General office 60
380
3. During the year ended 31 Dec 2016, Mkulima halisi took the following items for his
domestic use:
Sh “000”
Poultry 24
Milk 48
Crops 68
4. During the year ended 31 Dec 2016, the workers were paid in kind as shown below:
Sh “000”
Poultry 40
Milk 85
Crop 120

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 5. During the harvesting of crops, Mkulima halisi provided labour services valued at sh
210,000 which were not accounted for in the books.
6. It was estimated that sh. 12,000 of the debtors balance were bad debt and required
writing off.
Provision for doubtful debts at the rate of 4% of the remaining debtors was required.
7. Insurance premium was paid in January 2016 and was to cover 2 years up to 31 Dec
2017.the insurance contract was to cover the loss of livestock.

Required:
a) Crop account for the year ended 31 December 2016 (4 marks)
b) Livestock account for the year ended 31 December 2016 (4 marks)
c) Poultry account for the year ended 31 December 2016 (4 marks)
d) General income statement for the year ended 31 December 2016 (4 marks)
e) Statement of financial position as at 31 December 2016 (4 marks)

ADVOCATE
QUESTION ONE (JUNE 2011 Q2)
Sabina and Hekima are partners in SH and company Advocate.
The trial balance extracted from the books of account as at 31 Dec 2009 was as follows:
Sh 000 sh 000
Capital 4,140
Office equipment 1,840
Furniture and fixtures. 805
Account payable 378
Client account 575
Work in progress 1,483
Client disbursement 759
Bank: client 575
Office 690
Library books 644
Accruals 253
Loan from bank 1,450
6,796 6,796
The following transactions were carried out during the year ended 31 Dec 2010.
1. Charged client sh 14,700,000 for services rendered during the year.
2. Received sh 1,850,000 on behalf of clients.
3. Received 11,400,000 from client in settlement of the amount due for services rendered
4. Used, 1,500,000 to acquire a house for a client who had a credit balance of 800,000 with
the firm.
5. Received 300,000 from client in settlement of disbursement made on their behalf.
6. Purchased library books worth sh 366,000 paying cash and repaid sh 550,000 of the loan
from bank.
7. Incurred the following expenses which were paid in the year ended 31 Dec 2010.

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 Office (sh 000) client (sh000)
Rent 600 120
Salaries and wages 2,450 150
Office provisions 410 -
8. Incurred the following expenses which had not been paid for as at 31 Dec 2010.
Sh 000
Legal fee 3,400
Salaries and wages 1,650
Rent 1,720
9. Partners withdrew sh 1,750,000 from the bank
10. Withdrew sh 450,000 from client account as professional fees.
11. Acquired office premises for sh 6,500,000 and paid 3,000,000 in cash. The balance was
financed through a mortgage which attracts interest at the rate of 12% per annum.
Assume the office premises were acquired on 1 Jan 2010
12. Donated sh 2,000,000 to charitable trust.
13. Represented a client whose work in progress as at 31 Dec 2010 was valued at 1,170,000.
The work in progress had not been invoiced to client.
14. The firm provides for depreciation on non-current asset on book value at the following
rates:
Non-current asset rate %
Office equipment 10
Furniture and fixtures 15
Library books 12.5
Office premises 2.5
Required:
(a) Prepare in columnar format:
i) Client account ( 4 marks)
ii) Cash book. (5 marks)
(b) Income statement for the year ended 31 Dec 2010. (5 marks)
(c) Statement of financial position as at 31 Dec 2010 ( 6 marks)

Question two

The following trial balance was extracted from the records of Maena and company Advocates, a
small size law firm, as at 30 April 2016:
Maena and Company Advocate
Statement of financial position as at 30 April 2016
Sh “000” sh “000”
Assets
Non-current assets
Equipment 1500
Furniture 500
Library books 300
Current assets
Work in progress 480
Stationery 80

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Disbursement-client 450
Cash at bank: office 350
Client 280
Total assets 3940
Capital and liabilities
Capital 3350
Current liabilities
Creditors 310
Client-for money held on their behalf 280
3940
The following transactions were carried out during the year ended 30 April 2016:
1. Charged clients sh 1,420,000 for services rendered and received payments of sh 850,000
from the clients.
2. Received sh 1,680,000 on behalf of client and spent sh 270,000 to pay rent and
sh.820,000 to purchase land on behalf of clients who had credit balances with the firm.
3. The firm used sh 500,000to purchase ordinary shares from the stock exchange on behalf
of the client who had a credit balance of sh. 180,000 with the firm.
4. The client authorized the firm to transfer sh 600,000 from client account to the office
account.
5. The firm received sh 180,000 from clients in settlement of disbursement made on their
behalf.
6. A client deposited sh 350,000 with the firm on 28 April 2017 for the purchase of land in
May 2017.
7. The firm paid salaries and wages of sh 280,000 and office expenses of sh 70,000 for the
year ended 30 April 2017.
8. The creditors balance is in relation to the purchase of stationery. The form purchased
stationery worth sh 280,000 on credit and paid creditors sh 430,000 during the period
ended 30 April 2017. On 30 April 2017, stationery in hand was valued at sh.110,000.
9. The firm provides for depreciation on non-current assets at the following rates based on
the books values:
 Equipment 10% p.a
 Furniture 12.5% p.a
 Library books 20% p.a
10. The partners made a total drawing of sh. 650,000 from the firm in the year ended 30
April 2017.
11. Work in progress as at 30 April 2017 which had not been invoiced on clients was valued
at sh.280,000.
Required:
a. Income statement for the year ended 30 April 2017 (10 marks)
b. Statement of financial position as at 30 April 2017 (10 marks)

QUESTION THREE
Juma and Company Advocate is a law firm operating upcountry town.
Provided below is the balance sheet of the firm as at 30 June 2018.

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 Statement of financial position as ta 30June 2018
Sh ‘000’ sh ‘000’
Assets
Non-current assets
Equipment 800
Furniture 350
Library books 280
Current assets
Work in progress 210
Stationery 140
Debtors and disbursements 330
Cash at bank-office 300
- Client 250
2660
Capital and liabilities
Capital 1800
Non-current liabilities
Loan 500
Current liabilities
Creditors 110
Client account 250
2660
The following transactions were carried out by the firm during the year.
1. Received sh 850,000 on behalf of the client.
2. Spent the following amount on behalf of client which was all paid in cash.
 Purchase of equipment 260,000
 Payment of rent 130,000
 Repair cost 80,000
3. Purchased new equipment for the office use for 400,000 and paid 100,000 and the
balance remaining is a loan.
4. Spent 350,000 on the purchase of the land on behalf of the client who had a credit
balance with the firm of 120,000.
5. Charged client 1,050,000 for the services rendered during the year.
6. Received 680,000 from client in settlement of the amount due for services rendered.
The firm further received authority from client to transfer 240,000 from client account
in settlement of amount due to the firm.
7. The following expenses were incurred and all were settled in cash.
 Rent 120,000
 Salaries 360,000
 Office expenses 90,000
 Interest on loan 30,000
 Loan repayment 300,000

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 8. During the year, the firm received 480,000 from client in settlement of disbursement
made during the year on their behalf by the firm.
9. Purchased library books worth 160,000 and paid them by cash.
10. Purchased stationery on credit for 210,000 and paid creditors a total of 240,000 during
the year.
11. Drawings for personal use during the amounted to 180,000.
12. On 30 June 2018, stationery in the store was valued at 160,000. On the same date work
in progress was valued at 350,000.
13. The firm provides depreciation on book value using the following rates.
 Equipment 5% per annum.
 Furniture 10% per annum.
 Library books 12.5% per annum.
Required:
(a) Income statement for the year ended 30 June 2018 (10 marks)
(b) Statement of financial position as at 30 June 2018. (10 marks)
QUESTION 4
On January 2018, two doctors, Sharon and wilkister entered into partnership to run a medical
practice. They each contributed initial capital of sh 2 million and were to share profit and losses
equally. The following is a summary of the receipt and payment account of the medical practice
for the year ended 31 Dec 2018.
Receipt 000 payments 000

Fees from services rendered 17460 rent 1200

Loan from bank (10%) 5000 salaries 3000
Capital contribution: Sharon 2000 subscription to medical society400
Wilkister 2000 medical books 1200
Bank interest 20 X ray and other equipment’s 4000
Medicines and consumables 3000
Repair and maintenance 300
Office furniture’s 600
Drawings: Shallon 3200
Wilkister 1600
Cash and bank 7980
Made as follows: cash at bank 4800
Cash in hand 180
Fixed deposit 3000
Additional information:
1. The medical practice expected to receive sh 600,000 from insurance compensation for
medical services rendered to the clients
2. Salaries of medical assistance included sh 700,000 paid in advance while repairs and
maintenance cost sh 60,000 had not been paid.
3. Rent had been paid for the period of 15 months upto 31 march 2019.
4. Depreciation on assets was to be provided for as follows:
a. Medical books 5% per annum on cost.

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 b. X-rays and other equipment 20% per annum on cost.
c. Office furniture’s 25% per annum on cost.
5. As at 31 Dec 2018, creditors for medicine s and consumable amounted to sh 1.5 million
while sh 100,000 worth of medicine was still in stock.
6. Interest on bank loan still owed as at 31 Dec 2018.
Required:
a. Income statement for the year ended 31 Dec 2018 (10 marks)
b. Balance sheet as at 31 Dec 2018 (10 marks)

HIRE PURCHASE
QUESTION ONE
Lipa pole ltd commenced business on 1 January 2016 as a supplier of refrigerators. All sales are
made on hire purchase terms, with the company taking credit for the gross profit, including
interest, in proportion to the installments collected.
Throughout the year ended 31 December 2016 and 2017, the total price including interest
charged to every customer was 50% above the cost of goods sold or in the case of repossessed
goods, 50% above the value at which the goods were taken back into the stock. The hire
purchase contract required no deposit and provided for the payment of 12 equally monthly
installments.
The following trial balance was extracted from the books of Lipa pole ltd as at 31 Dec 2017.

Sh “000” sh “000”
Share capital 35,000
Non-current asset at cost 10,000
Provision for depreciation as at 1 Jan 2017 1,000
Hire purchase installment due less provision
For unrealized profit as at 1 Jan 2017. 28,350
Stock as at 1 Jan 2017 at cost 6600
Purchases 59,000
Cash received from customers 80,625
Bank balance 6500
Creditors 4860
General expenses 16,150
Revenue reserve as at 1 Jan 2017 5,115
126,600 126,600
Additional information.
1. The sales, including interest for the year ended 31 December 2017 were sh. 94,650,000.
2. In October 2017, the company repossessed some goods which had cost sh. 4,800,000 and
had been sold earlier in the year. The unpaid installment on these goods amounted to sh.
2,400,000 in respect of which nothing was recovered apart from the goods, which were
taken back into the stock at a valuation of sh. 2,000,000. The repossessed goods were re-
sold before the end of the financial year. The total selling price, both on the original sale
and on resale of repossessed goods were included in the sales for the year ended 31 Dec
2017.

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 3. All installments were paid on time except for those referred to in note 2 above.
4. All goods unsold as at 31 Dec 2017 were in good conditions and were to be valued at cost
5. Provisions for depreciation on the non-current assets were to be provided at the rate of
10% per annum on cost.
Required:
a. Income statement for the year ended 31 December 2017. (10 marks)
b. Statement of financial position as at 31 December 2017. (10 marks)

QUESTION TWO.
Kopesha ltd has been in business for several years dealing in electronic goods. All goods are sold
on hire purchase terms. The following trial balance was extracted from the books of the firm as
at 31 March 2016.
Sh “000” sh “000”
Ordinary share capital 53,200
Cash at bank and in hand 1,800
Accounts payable 5,000
Operating expenses 16,000
PPE (1April 2015) 55,000
Depreciation (1 April 2015) 20,000
Hire purchase installments receivables 34,200
Hire purchase sales 55,200
Purchases 24,600
Inventory (1 April 2015) 1,800
133,400 133,400
Additional information;
1. Inventory as at 31 March 2016 was valued at sh. 2,400,000.
2. PPE should be depreciated at sh. 5 million for the year ended 31 March 2016.
3. Each unit was sold on hire purchase basis on the following terms:
Sh sh
Cash price 40,000
Deposit (10,000) 30,000
Interest 6,000
36,000
4. Assume that all the sales are made at the end of each quarter and the quarter ends on 31
March, June, September and December respectively. The balance due on each hire
purchase sale is payable in four equally installment of sh. 9,000 per quarter payable at the
end of each quarter and commencing in the quarter following that of which the sales was
made.
The numbers of units sold during each quarter were as follows:
Quarter to number of units sold
30 June 2015 100
30 Sep 2015 200
31 Dec 2015 300
31 March 2016 600

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 All installments were received on their due dates.
5. The sum of digits method is to be used to apportion interest, the appropriate amount
being credited to the quarter in which the installment is received.
6. Included in the operating expense is a lease rental payment of sh 2 million paid at the
commencement of the financial year. This relates to equipment whose fair value is sh 8
million. The payment has been treated as an operating lease whereas it is a finance lease.
The duration of the lease is 5 years and interest is at 10% per annum. Lease rentals are
paid in advance.
Required:
a) Income statement for the year ended 31 December 2017. (10 marks)
b) Statement of financial position as at 31 December 2017. (10 marks)
QUESTION THREE (DEC 2011 Q4)
Wonderful bikes ltd is a retail output which sell motorbike both on cash and hire purchase terms.
The following information was extracted from the books of Wonderful bikes ltd as at 31 August
2011.
Sh Sh
Issued share capital 1,500,000
Operating expenses 2,600,000
Cash and bank balances 124,160
Cash received from hire purchase customers 6,309,360
Cash sales 1,420,000
Hire purchase debtors (1 Sep 2010) 45,360
Furniture and fittings at cost 2,000,000
Accumulated depreciation furniture and fittings 900,000
Profit and loss account 160,000
Provision for unrealized profit (1 Sep 2010) 20,160
Purchases 6,840,000
Inventories (1 Sep 2010) 300,000
Trade payables 1,600,000
11,909,520 11,909,520
Additional information:
1. The cash and hire purchase selling prices are fixed at 50% and 80% above the purchase
cost respectively.
2. Hire purchase contract requires a deposit of 20% of the hire purchase selling price. The
balance is payable in four equally quarterly installment, the first installment being due
three months after the hire purchase agreement is signed by the parties.
3. During the year, hire purchase sales (inclusive of interest) amounted to sh. 10,800,000.
4. In Feb 2011, the company repossessed one motorbike which has been sold earlier in the
year. This motorbike cost 60,000 and outstanding installment amounted to sh 64,800. The
motor bikes was valued at 16.667% below the invoice price on repossession and later
sold on cash term for sh 70,000.
5. Depreciation on furniture and fittings is to be charged at the rate of 15% per annum based
on cost.
6. The gross profit (inclusive of interest ) for hire purchase sale is recognized as a
proportion of hire purchase sales to installment collected. A provision is also made for

CPAK JOHNMARK 0705748300 Page 13

 unrealized profit in the balances of hire purchase debtors. With respect to the year ended
31 August 2011, the proportion was 4/9.
Required:
i. Hire purchase debtors account (2 marks)
ii. Repossession account (2 marks)
iii. Income statement for the year ended 31 August 2011. (6 marks)
iv. Statement of financial position as at 31 August 2011. (6 marks)

EMPLOYEE BENEFITS
QUESTION 1
Viwada industries operate a defined post-employment plan for its employees. The company’s
actuaries have provided the following information:
Million
Present value of obligation as at 31 Oct 2017 1500
Fair value of plan asset as at 31 Oct 2017 1500
Current service cost for the year 160
Past service cost 10
Contributions made during the year 85
Benefits paid to employees during the year 125
Present value of obligation as at 31 Oct 2018 1750
Fair value of plan asset as at 31 Oct 2018 1650
Additional information.
1. The expected return on plan asset as at 1 Nov 2017 was 12%
2. The discount rate for the plan liability was 10%.
Required:
Determine the actuarial changes for both asset and liability.

QUESTION 2
The following information was extracted from the books of comfort retirement benefits scheme
for the year ended 31 Oct 2016 and 2017.
2016 2017
Million million
Average remaining service life (years) 10 10
Fair value of plan asset-1 Nov 96 110
Present value of plan obligation-I Nov 100 125
Current service cost 8 10
Contribution to the plan 9 11
Benefits paid 15 12
Past service cost 4 -
Discount rate 10% 8%
Expected rate of return on plan asset 12% 10%

Additional information
1. As at 1 Nov 2015, the present value of both plan asset and liabilities were 100 million
each..

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Required:
The actuarial gain or losses.

QUESTION THREE (JUNE 2011 Q3C)

The following trial balance was extracted from the books of Juhudi Retirement Benefit as at 31
March 2011.
Sh million sh million
Accumulated funds 23,078
Accrued expenses 12
Administrative expenses 142
Demand deposits 1,173
Reduction in market value of investments 1,132
Commutation & lumpsum retirement benefits241
Contribution due within 30 days 247
Employer normal contributions 1,504
Employer additional contribution 320
Individual transfer from other schemes 157.5
Individual transfer to other schemes 93
Investment income 2,370
Investment property 6,616
Fixed income investment 13,180
Members normal contribution 912
Member voluntary contribution 228
Pension paid 382
Equity investment : quoted 4,392
Unquoted 999.5
Unpaid benefits 16
28,597.5 28,597.5
Required:
(a) Statement of changes in net asset for the year ended 31 March 2011 (7 marks)
(b) Statement of net asset as at 31 March 2011 (7 marks)

PUBLISHED (DEC 2009 Q2)

The following balance has been extracted from the books of Zed ltd as at 31 October 2009.
Sh million Sh million
PPE 6,800
Accumulated dep as at 1 Nov 2008 2,400
Intangible assets 2,000
Accumulated amortization as at 1 Nov 2008 400
Investment property (land) 500
Inventory as at 1 Nov 2008 1,200
Purchases 8,000
Sales 15,000
Administrative expenses 2,600
Distribution expenses 2,400
Interest paid on debentures 100

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10% debentures 2,000
Suspense account 2,000
Ordinary share capital (sh 100) 5,000
Share premium 1,000
Retained profits (1 Nov 2008) 1,500
Revaluation reserve (PPE) 200
Cash at bank 2,000
Receivables 6,200
Payables 3,000
Financial assets: at fair value 600
Available for sale 1,000
Deferred tax 500
Obligation under finance lease (1 Nov 2008) 1000
Lease rental paid 200
Installment tax paid 400
Additional information.
1. The cost and net realizable value of the inventory as at 31 October 2009 was sh 1,600
million and sh. 1,500 million respectively.
2. Depreciation on PPE is to be provided at sh. 800 million and classified under cost of
sales.Sh.10 million of this amounts related to excess depreciation on revaluation.
3. Intangible assets are to be revalued to sh.1, 800 million. Amortization of sh 400 million is
to be charged and classified under administrative expenses.
4. Land is held for capital appreciation and it is accounted for at fair value. As 31 October
2009, the market value of the land was sh 550 million.
5. The suspense account related to a new issue of shares by Zed ltd. On 1July 2009, it issued
12 million shares for sh. 150 each .The balance in the suspense account is the investment
income.
6. The financial assets were purchased during the year. The financial assets are to be
recognized as at 31 October 2009 as follows:
At fair value 700 million
Available for sale 1,200 million
Deferred tax of sh 60 million is to be recognized as a result of revaluation of available for
sale.
7. Current year estimated tax is 500 million. The deferred tax liability is to be reduced to sh
300 million.
8. Interest on the finance lease is at the rate of 10% per annum and is payable together with
the rental on 31 October each year.
Required:
a. Published statement of comprehensive income for the year ended 31 October 2009
(10 marks)
b. Summarized statement of changes in equity. (4 marks)
c. Published statement of financial position as at 31 October 2009 (6 marks)

CPAK JOHNMARK 0705748300 Page 16

CASH-FLOW-IAS 7
INDIRECT METHOD
NASA Group
Statement of cash flow for the year ended xx/xx/2070
Operating Activities cash flows
Profit before tax xx
Adjustments (non-cash items)
Depreciation xx
Amortization/Impairment xx
Loss on disposal xx
Finance cost xx
Gain on disposals (xx)
Associate profit/joint venture profit (xx)
Investments income/Dividends income (xx)
Xxx
Changes in working capital
Increase/Decrease in inventory (xx)/ xx
Increase /Decrease in receivables (xx)/ xx
Decrease /Increase in payables xx/ (xx)
Gross operating cash flows xxx
Less interest paid (xx)
Tax paid (xx)
Net operating cash flows. Xxx
Investing Activities cash flows
Cash proceed from disposals xx
Dividends /interest /investment income received xx
Purchase on non-current assets (xx)
Net investing cash flows xxx
Financing Activities cash flows
Cash received from issue of shares xx
Cash received from issue of debentures xx
Loan borrowed xx
Loan paid (xx)
Dividend paid (xx)
Lease rentals paid (xx)
Net financing cash flows xxx
Cash and cash equivalents xxx
Add: cash balance b/d xx
Cash and cash equivalent balance c/d xx

CPAK JOHNMARK 0705748300 Page 17

 CASHFLOWS
MAY 2014 Q4.
The consolidated income statement of Uongozi ltd for the year ended 30 Sep 2013 together with
the comparative consolidated statement of financial position as at 30 September 2013 and 2012
are shown below.
Consolidated income statement for the years ended 30 September 2013.
Sh million
Sales 7,640
Cost of sales (5,240)
Gross profit 2,400
Operating expenses (600)
Finance cost (60)
Profit before tax 1,740
Group share of associate profit after tax 40
1780
Income tax expense (540)
Profit for the period 1240

Attributable to: parent company 1,160

Non-controlling interest 80
1240
Consolidated statement of financial position as at 30 September:
Assets 2013 2012
Non-current assets sh million sh million
Property plant and equipment 3,780 3,660
Intangible assets 1,300 600
Investment in associate company 190 160
Current assets.
Inventory 2,840 1,880
Account receivable 1,980 1,360
Cash 140 -----
Total assets 10,230 7,660
Equity and liabilities.
Ordinary share capital (sh 10 each) 1,500 1,000
Share premium 700 200
Revaluation reserve 280 -
Retained profit 3,140 2,760
Non-controlling interest 270 200
Non-current liabilities
10% debentures 600 200
Bank loan 520 600
Deferred tax 620 280
Current liabilities
Bank overdraft - 230
Account payable 1,750 1,460

CPAK JOHNMARK 0705748300 Page 18

Accrued loan interest 30 10
Dividend payable 560 400
Current tax 260 320
Total 10,230 7,660

Additional information.
1. The cost of sales included depreciation of PPE amounting to sh 640 million and a loss on
sale of plant of sh 100 million.
2. Intangible assets are stated at the net book value and comprises:
2013 2012
Sh million sh million
Goodwill 360 400
Others 940 200
1300 600
Other intangible assets acquired during the year ended 30 September 2013 amounted to
sh 1,000 million. The cost of intangible asset is included in the above analysis.
3. During the year ended 30 September 2013, the holding company acquired new plant
which cost sh 500 million. The company also revalued its building by sh 400 million.
4. On 1 October 2012, the holding company made a bonus issue of 1 share for every 10
shares held. The issue was financed from the revaluation reserves.
5. The detailed analysis of retained profits as at 30 September 2013 and 2012 were as
follows:
2013 2012
Sh million sh million
Balance brought forward 2,760 2,400
Profit for the year 1,160 960
Transfer from revaluation reserve 20 -
Dividend declared and paid (800) (600)
Balance carried down 3,140 2,760
Required:
Group statement of cash flows for the year ended 30 September 2013, in conformity with IAS 7
“statement of cashflows” (20 marks)

COOPERATIVE SOCIETY

ILLUSTRATION 1
The following balances were extracted from the books of Evib Sacco society ltd as at 30 June 2020.
sh Sh
Dividend from investments 47,400
Accrued rent 495,000
Sundry provisions 892,500
Appropriation account 604,500
Revaluation reserve 75,000
Statutory reserve fund 1,374,000
Entrance fees 30,000
Members deposits 90,000,000

CPAK JOHNMARK 0705748300 Page 19

Share capital 6,465,000
Sundry creditors 340,815
Bank overdraft 615,000
Interest on loans to members 3,588,930
Travelling expenses: staff 8,030
:Committee members 10,015
Bank charges 20,000
Bank interest 80,500
Salaries and wages 228,600
Committee education 100,000
Committee sitting allowance 111,500
Printing and stationery 205,000
Annual general meeting expenses 50,000
Members education 150,000
Entertainment 5,000
legal fees 40,000
Cash in hand 54,000
KUSCCO deposits 438,000
Cooperative bank ltd account 240,000
Loan to members 97,524,000
Receivable (members) 268,500
Investment in CIC 540,000
Receivables (non-members) 2,250,000
Investment I KNFC ltd 2,115,000
Office furniture and equipment 90,0000
104,528,145 104,528,145

Additional information.
1. Audit fee of sh 613,650 (exclusive of 16% VAT) and supervisory fee are to be provided for.
2. The management committee has proposed the payment of honoraria amounting to sh 100,000.
3. Staff salaries amounting to sh 315,000 had not been paid as at 30 June 2020.
4. Members are to be paid a dividend at the rate of sh 10% per share.
5. Interest on members deposit is to be provided at sh 607,500.

Required:
a) Income statement for the year ended 30June 2020.
b) Appropriation Account as at 30 June 2020.
c) Statement of financial position as at 30 June 2020

CPAK JOHNMARK 0705748300 Page 20

 ACCOUNTING FOR ASSETS AND LIABILITIES

INVESTMENT PROPERTY (IAS 40)

These are assets held to earn rentals or for capital appreciation or both rather than for use in the
production, supply, administration or for sale in the ordinary course of business.eg Land and
building.
Examples of investment property include:
(a) Land held for long term capital appreciation rather than short term sale in the ordinary
course of business.
(b) Land held for predetermined future use.
(c) A building owned by the entity or held under a finance lease by the entity and leased out.
(d) A building which is vacant but is held to be leased out under one or more operating lease.
(e) Property that is being constructed for future use as an investment property.
Property which are not considered as investment property.
a) Land held for ordinary use by the entity.
b) Building held for use rather than capital appreciation or to earn rentals.
c) Asset held for normal use of production of goods or services.

Measurement of investment property.

1. Initial measurement-investment property shall be measured at cost. Cost shall include
the purchase price and any other direct attributable cost incurred on acquisition of
investment property.
2. Subsequent measurement-an entity shall choose either the use of:
 Cost model.-this requires asset to be measured at cost less accumulated
depreciation and any impairment loss in accordance with IAS 16. An entity that
will adopt cost model shall disclose the fair value of its investment property in the
notes to the financial statements
 Fair value model.-under fair value model, investment property is re-measured at
the end of each reporting period. Any fair value gain or loss shall be disclosed and
reported to profit and loss account during the period they arose.

Recognition criteria for investment property.

Investment property should be recognized as an asset when:
1. It’s probable that future economic benefit will flow from that asset to the entity.
2. The cost/fair value of the investment property can be measured reliably.
3. The entity controls the investment property.

PROPERTY, PLANT AND EQUIPMENT (PPE) IAS 16

 IAS 16 PPE outlines the accounting treatment of most types of ppe items. It further
stipulated the principles for recognizing property, plant and equipment as assets,
measuring their carrying amount and the depreciation and impairment losses to be
recognized in relation to them.
 PPE are initially measured at its cost, subsequently measured either at cost or
revaluation model.

CPAK JOHNMARK 0705748300 Page 21

Disclosure requirements for PPE.
The following information should be presented in respect of item of PPE:
1. Basis of measuring carrying amount.
2. Depreciation method used and its rates.
3. Useful life of the asset.
4. The gross carrying amount, accumulated depreciation and impairment losses at the
beginning and end of period.
5. A reconciliation of the carrying amount at the beginning and end(PPE movement
schedule) of the period showing:
 Additions
 Disposal
 Asset classified as held for sale.
 Impairment losses and reserves of impairment.
NB: De-recognition of an item of PPE is done on disposal or when no further benefits are
expected from the use or disposal(OBSOLETE).

Disclosure requirement for PPE stated at revalued amount.

 The carrying amount of the PPE.
 Changes in revaluation surplus/ loss for Ppe recognizes under other comprehensive
income.
 Disclosure of specific accounting policies and effective date of revaluation and whether
an independent valuer was involved.
 A reconciliation between the carrying amount of revaluation surplus at the beginning and
at the end of the period ie indicating the movement balances.

FINANCIAL INSTRUMENTS-IFRS 9

Definition of terms
1) Financial instrument
A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity eg Loan, debentures, bonds, cash etc.
2) Financial assets
It is any asset that is:
 Cash
 Contractual right to receive cash or another financial asset from another entity conditions that
are potentially favorable.
 A contract that will or may be settled in the entity’s own equity instrument.
 An equity instrument of another entity.

3) Financial liability
This is a contractual obligation:
 To deliver cash or another financial asset to another entity, or
 To exchange financial instruments with another entity under conditions that is potentially
unfavorable.

CPAK JOHNMARK 0705748300 Page 22

4) Equity instrument
This is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities.

5) Derivative
A derivative has three characteristics:
a) Its value changes in response to an underlying variable (eg share price, commodity price,
foreign exchange rate or interest rate);
b) It requires no initial net investment or an initial net investment that is smaller than would
be required for other types of contracts that would be expected to have a similar response
to changes in market factors; and
c) It is settled at a future date.

Examples include foreign currency forward contracts, interest rate swaps and options

6) Fair value
This is price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Measurement and Recognition of financial instruments

A financial asset or financial liability should be recognized in the statement of financial position
when the reporting entity becomes a party to the contractual provisions of the instrument.

Initial recognition
All financial instruments are initially measured at fair value plus or minus changes in fair value
either through profit and loss account or through other comprehensive income (OCI) with
exemption to receivables that do not contain significance financing component (Receivables will
be measured at transaction cost.)

Subsequent measurement and recognition

Subsequently, all financial instruments are measured at either amortized cost or fair value
through profit or loss or at fair value through other comprehensive income.

De-recognition of financial instruments.

De-recognition is the removal of a previously recognized financial instrument from an entity
balance sheet.

 A financial instrument should be derecognized if either the entity’s contractual rights or

the asset’s cash flows have expired, or:
 The asset has been transferred to a third party along with the risks of ownership.

If the risks and reward of ownership have not passed to the buyer, then the selling entity must
still recognize the entire financial instrument and treat any consideration received as a liability.

CPAK JOHNMARK 0705748300 Page 23

CLASSIFICATION OF FINANCIAL INSTRUMENT
1. Financial assets
2. Financial liabilities
3. Equity instrument
4. Derivatives

CLASSIFICATION OF FINANCIAL ASSETS

IFRS 9 classifies financial assets under three headings as follows:

1) Financial assets at fair value through profit or loss (FVTPL)

This classification includes any financial assets held for trading purposes and also derivatives,
unless they are part of a properly designated hedging arrangement.

Initial recognition
Initial recognition at fair value is normally cost incurred and this will exclude transactions costs,
which are charged to profit or loss as incurred.

Subsequent measurement
Re-measurement to fair value takes place at each reporting date, with any movement in fair value
taken to profit or loss for the year, which effectively incorporates an annual impairment review.

2) Financial assets at fair value through other comprehensive income (FVTOCI)

It will typically be applicable for equity instruments that an entity intends to retain ownership of
on a continuing basis.

Initial recognition
They are initially recognized at fair value which normally includes the associated transaction
costs of purchase.

Subsequent measurement
Re-measurement to fair value takes place at each reporting date, with any movement in fair value
taken to other comprehensive income for the year, which effectively incorporates an annual
impairment review.

3) Financial assets measured at amortized cost

This classification can apply only to debt instruments and must be designated upon initial
recognition. For the designation to be effective, the financial asset must pass two tests as follows:
 The business model test – to pass this test, the entity must be holding the financial asset to
collect in the contractual cash flows associated with that financial asset. If this is not the case,
such as the financial asset being held and then traded to take advantage of changes in fair
value, then the test is failed and the financial asset reverts to the default classification to be
measured at FVTPL.

CPAK JOHNMARK 0705748300 Page 24

 The cash flow characteristics test – to pass this test, the contractual cash flows collected
must consist solely of payment of interest and capital. If this is not the case, the test is failed
and the financial asset reverts to the default classification to be measured at FVTPL.

One example of a financial asset that would fail this test is a convertible bond. While there is
receipt of the nominal rate of interest payable by the bond issuer, and the bond will be converted
into shares or cash at a later date, the cash flows are affected by the fact that the bond holder has
a choice to make at some later date – either to receive shares or cash at the time the bond is
redeemed. The nominal rate of interest received will be lower than for an equivalent financial
asset without conversion rights to reflect the right of choice the bondholder will make at some
later date.

Impairment of financial assets

IFRS 9 effectively incorporates an impairment review for financial assets that are measured at
fair value, as any fall in fair value is taken to profit or loss or other comprehensive income for the
year, depending upon the classification of the financial asset (see earlier).

For financial assets designated to be measured at amortized cost, an entity must make an
assessment at each reporting date whether there is evidence of possible impairment; if there is,
then an impairment review should be performed. If impairment is identified, it is charged to
profit or loss immediately. Quantification of the recoverable amount would normally be based
upon the present value of the expected future cash flows estimated at the date of the impairment
review and discounted to their present value based on the original effective rate of return at the
date the financial asset was issued.

Indicators of impairment loss of financial instruments

1) Significant financial difficulty of the issuer or obligor;
2) A breach of contract, such as a default in interest or principal payments;
3) It is becoming probable that the borrower will enter bankruptcy.
4) The disappearance of an active market for that financial asset because of financial difficulties
5) Observable data indicating that there is a measurable decrease in the estimated future cash
flow from the financial

Classification of financial liabilities

On recognition, IFRS 9 requires that financial liabilities are classified as measured either:
1) At fair value through profit or loss(FVTPL)
2) At amortized cost(AC)
A financial liability is classified at fair value through profit or loss if:
 It is held for trading, or
 Upon initial recognition it is designated at fair value through profit or loss.

Measurement of financial instruments

Under IFRS 9 all financial assets should be initially measured at cost = fair value plus transaction
costs. Financial liabilities should be measured at transaction price i.e. fair value of the
consideration received.

CPAK JOHNMARK 0705748300 Page 25

Initial measurement
Financial instruments are initially measured at the fair value of the consideration given or
received (ie, cost) plus (or minus in the case of financial liabilities) transaction costs that are
directly attributable to the acquisition or issue of the financial instrument.

The exception to this rule is where a financial instrument is designated as at fair value through
profit or loss (this term is explained below). In this case, transaction costs are not added to fair
value at initial recognition.
FAIR VALUE HIERARCHY OF IMPUT MEASUREMENT.
Fair value hierarchy categorizes the input used in valuation techniques into 3 levels.
1. Level 1 input (Quoted prices)
Level 1 input are quoted prices in the active market for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.
2. Level 2 input.
Level 2 input are inputs other than quoted market prices included within level 1 that are
observable for an asset or liability either directly or indirectly. They include quoted prices
for similar assets or liabilities (but not identical0 in an active market and quoted prices
for assets or liabilities in markets that are not active.
3. Level 3 input.
Level 3 input are unobservable inputs for the asset or liability. Unobservable inputs
should be used to measure fair value to the extent that observable inputs are not available
and where there is very little market activity for the assets or liability at the measurement
date.

Impact of IFRS 9 on the tax expenses of commercial banks.(may 2018 Q5b)

 IFRS 9 encompasses the accounting for financial instruments and their impairment.
 The objective of IFRS 9 is to recognize a whole year and lifetime expected credit losses
for all financial instruments for which there has been a significant increase in credit risk.
 There is a high likelihood that the only incurred credit losses recognized on non-
performing loans and advances under IFRS 9 will be allowed as tax- deductible.
 The major issue with the adoption of IFRS 9 for banks is the effect of bigger and more
volatile impairment losses on capital ratios. From tax perspective, it may also mean
significantly lower profits but higher scrutiny of specific impairment loses, a apart of
which may be disallowed for tax purposes. Furthermore, there will be an increase in the
number of fair vale movement through the income statement which will need to be
properly tracked and adjusted for tax purposes.

Impact of IFRS 9 on the „provinsion of bad and doutiful debts by banks

 The highest effect of IFRS is the increases in loss provisions from new expected loss
impairment model, as compared to IAS 39 incurred loss model. The increase in the
provision is large and quite variable.
 Reported credit losses are expected to increase and become more volatile under te new
credit loss model. The number and complexity of judgment is also expected to increase.
 It is based on internal credit risk management practices and/or policies and is usually
considered to be consistent with the definition of default used for measuring probability

CPAK JOHNMARK 0705748300 Page 26

 of default. Forward looking factor macro-economic variables and their forecasts used in
the calculation of impairment under IFRS

EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES (IFRS 6)

Accounting for exploration of mineral resources

The scope of IFRS 6,stated as follows:
 An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs.
 An entity shall not apply the IFRS to expenditure incurred before the exploration for and
evaluation of mineral resource, such as expenditures incurred before the entity has
obtained the legal rights to explore a specific area; after technical feasibility and
commercial viability of extracting a mineral resource are demonstrable.

Key provisions on impairment of exploration assets as per IFRS 6

IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and
evaluation assets recognized by an entity under its accounting policies.
 Entities recognizing exploration and evaluation assets are required to perform an
impairment test on those assets when specific facts and circumstances outlined in the
standards indicate an impairment test is required.
 The facts and circumstances outlined in IFRS 6 are non-exhaustive and are applied
instead of indicators of impairment in IAS 36.
 Impairment loss shall be treated as an expense in the profit and loss account.
 The company shall evaluate (carry out impairment test) the indicators of impairment loss
of its exploration asset.
Disclosure requirement.
An entity shall disclose:
1. Its accounting policies for exploration and evaluation expenditure including the
recognition of exploration and evaluation asset.
2. The amount of asset, liabilities, income and expenses arising from the exploration for and
evaluation of mineral resources.
3. An entity shall treat exploration and evaluation asset as a separate class of asset and make
disclosure required by either IAS 6 or IAS 38 consistent with how the asset are classified.
4. Impairment loss
5. Carrying amount.

Recognition of exploration and evaluation assets.

In the absence of an IFRS that specifically applies to a transaction, other event or condition,
management shall use its judgment in developing and applying an accounting policy that results
in information that is:
 Reliable to the economic decision making need for user.
 Reliable.

Elements of cost of exploration and evaluation assets.

An entity shall determine an accounting policy specifying which expenditure are recognized as
exploration and evaluation asset and applying the policy consistently.

CPAK JOHNMARK 0705748300 Page 27

The following are examples of expenditures that might be included in the initial measurement of
exploration and evaluation assets.
1. Acquisition of right to explore.
2. Topographical, geological, geochemical and geophysical cost.
3. Exploratory drilling.
4. Trenching cost
5. Samplingcost
6. Technical feasibility cost.

Measurement at recognition.
Exploration and evaluation assets shall be measured at cost.

Departing from application of IFRS, IAS or IPSAS

Disclosure requirement.
When an entity departs from the requirement of a standard in accordance with paragraph 3, it
shall disclose;
 That the management has concluded that the financial statement present fairly the entity’s
financial position, financial performance and cashflows.
 That it has complied with applicable IFRS/IPSAS/IAS, except that it has departed from a
particular requirement to achieve a fair presentation.
 The nature of the departure, including the treatment that the standard would require.
 The impact of the departure on each item affected in the financial statement.
Accounting policy choices that are disallowed under the SMEs standards.
IFRS for small and medium-sized companies (the SME standards) has been issued for use by
entities that have no public accountability. One of the notable differences between the SMEs
Standards and the full IFRS and IAS Standards that is not available to companies that apply the
SMEs Standards.

Accounting policy choices that are disallowed under the SMEs standard includes:
 Goodwill arising on acquisition of subsidiary is always determined using the
proportionate net asset method (partial goodwill method). The fair value model of
measuring the NCI is not available.
 Intangible assets must be accounted for at cost less accumulated amortization and
impairment. The revaluation model is not permitted for intangible assets.
 After initial recognition, investment property is re-measured to fair value at the end of the
year with the fair value gain or losses recorded in profit or loss.
 The cost model can only be used if fair value cannot be measured reliably or without
undue cost or effort.

BORROWING COST (IAS 23/IPSAS 5)

These are cost associated with borrowing e.g. interests and floatation cost that an entity incurs in
connection with borrowing. Borrowing cost is directly attributable to the acquisition,
construction or production of a qualifying asset. They should be capitalized. Other borrowing
costs are recognized as an expense eg legal expense.

CPAK JOHNMARK 0705748300 Page 28

Examples of borrowing costs.
a) Interest on loan/borrowing.
b) Floatation cost eg legal costs.
c) Principle amount.
d) Amortization of discount or premium relating to borrowing.
e) Exchange difference in-case of foreign currency transaction.

A QUALIFYING ASSET-is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
Example of qualifying asset.
 Inventory that are manufactured or produced over a long period of time.
 Manufacturing plant.
 Power generation facilities.
 Intangible assets.
 Investment properties
Accounting treatment and recognition of borrowing costs.
 An entity shall capitalize borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asst.
 An entity shall recognize other borrowing cost as an expense in the period in which it
incurs them.

How accounting treatment under IPSAS 5 differs from IAS 23.

IPAS 5 requires borrowing costs to be expensed immediately in the period in which they are
incurred regardless of how the borrowing is applied. This is the benchmark treatment.
Under IAS 23 the revised version requires that all borrowing costs that are eligible for
capitalization should be capitalized and included as part of qualifying asset.

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37)

PROVISION-a provision is a liability of uncertain timing or amount or event.

Recognition of a provision.
A provision should be provided and be recognized as a liability in the financial statement when;
1. An entity has a present obligation as a result of the past event.
2. It is probable that an outflow of resources will be required to settle the obligation.
3. A reliable estimate can be made of the amount of obligation.
4. When the probability of occurrence is more than 50%.

CONTINGENT LIABILITIES-It is a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future
event not wholly within the control of the entity. If an obligation is probable it is not a contingent
liability instead a provision is needed.eg warrant , pending legal case as the defedant.

Contingent liability shall not be recognized but shall be disclosed.

CPAK JOHNMARK 0705748300 Page 29

CONTIGENT ASSET-A contingent asset is a possible asset that arises from past events and
whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain
future events.eg pending legal case as the plaintiff.

A contingent asset shall not be recognized rather shall be disclosed.

ACCOUNTING POLICIES CHANGES AND ESTIMATES.
These are specific principles, rules and practices applied by the entity in preparing and
presenting financial statements.
A change in accounting policies is only recommended when:
 It is required by the IFRS.
 When the changes results into a more reliable information.

A change in accounting policy shall be applied retrospectively.

Retrospectively application requires an entity to adjust the opening balance of the affected
components of equity and assets.
Circumstances in which an entity is permitted to change accounting policies.
1. When it is required to do so by the IFRS.
2. When the changes results into a more reliable information.
3. To comply with the changes in accounting standards.
4. To comply with the changes in legislation.

EVENTS AFTER THE REPORTING PERIOD IAS 10

These are events that take place between the balance sheet date but before the AGM.
There are two types of events.

1. ADJUSTING EVENTS.
These are those events that take place after the balance sheet date providing additional evidence
of conditions that existed at the end of the reporting period. This events needs to be adjusted in
the financial statement.
Examples of adjusting events.
a) Bankruptcy of the debtor after the reporting period needs debtor’s amount to be adjusted
by reducing.
b) Recovery of debt that had been previously written off.
c) Sales of inventories after the reporting period may give evidence about the net realizable
value of inventories.
d) Discovery of fraud or errors that shows that the financial statements are incorrect.
e) Settlement after the reporting period of the court case that confirms that the entity had an
obligation at the end of the period.

2. NON-ADJUSTING EVENTS.
This is an event after the reporting period that is indicative of a condition that arose after the end
of the reporting period which need not to be adjusted to the financial statement in that they do
not provide more evidence. They include
a) Decline in market value of investments after the reporting period.
b) Changes in tax rate after the reporting period.
c) Announcing a plan to discontinue an operation.

CPAK JOHNMARK 0705748300 Page 30

 d) Declaration of dividend after the reporting period.
e) Destruction of a major asset

Accounting treatment of subsequent events/event s after the reporting period.

1. Adjusting events requires amendments of the financial statement to incorporate them and
a disclosure of the nature of the subsequent events and material impact.
2. Non-adjusting events do not require amendment of the accounts, and only disclosure
notes is required in the notes to the account.

PRIOR PERIOD ERRORS ACCOUNTING AND DISCLOSURE REQUIREMENT.

A prior error is an omission from, or a misstatement of prior period financial statement. Such
errors must have been caused by the failure to use, or the misuse of information that was
available when financial statement were authorized for issuance and that could be expected to
have obtained eg mathematical mistakes, wrongful application of accounting policies,
misinterpretation of facts and figures.

Accounting treatment for material “prior period errors”.

 Prior period errors must be corrected retrospectively in the financial statement.
Retrospectively application means that the correction affects only prior comparative
figures.
 Therefore, comparative amount of each prior period presented which contains errors are
restated and Current period amount are unaffected.

GOVERNMENT GRANTS (IAS 20)-

 This are assistance inform of transfer of resources to an entity in return for past or future
compliance with certain condition relating to operating activities of the entity.
 Government assistance is an action by government designated to provide an economic
benefit specific to an entity.
 Government grants may be in-form of asset or income.
 Forgivable loans-This is any form of a loan in from government or organization which
its entirety or a portion of it, the lender is committed to forgive if certain conditions are
met by borrower.

Accounting treatment for the grants.

There are 2 broad approaches to the accounting for government grants.
(a) Capital approach. -This requires the grant to be provided out of P&L account. They
should be recognized as part of Equity/Capital in the statement of financial position
because no repayment is expected
This method is not recommended because the grant are receipt from other sources other
than shareholders therefore they should not be recognized as capital.
(b) Income approach. -Grant should be provided in the P&L as an income over one or more
period. This is the recommended method because government grant are earned through
compliance with their conditions. They should be recognized as income over the period
the entity benefits from such grants.

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Circumstances under which government grants should be recognized in the financial
statement.
a. When the entity is certain that they will comply with the conditions attached to them.
b. When certain about receiving the grant.
c. When grants can be measure reliably.

NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

.(IFRS 5)
These are asset whose carrying amount should be recovered from the sale transaction rather than
through continuous use. It should be presented as a separate item under current assets. It is
valued at the lower of the carrying amount and the recoverable amount.

Conditions to be meet for an asset to be classified as held for sale asset.

1. The management is committed to plan to sell the asset.
2. The asset is available for immediate sale.
3. The active programme to locate a potential buyer has been initiated.
4. The sale is highly probable within 12 months from the date of the classification as held
for sale

IMPAREMENT OF ASSETS
Objective.
The objective of this standard is to prescribe the procedures that an entity applies to be
determined whether a non-cash generating asset is impaired and to ensure that impairment losses
are recognized.
An asset is said to be impaired if the carrying amount exceeds the recoverable amount.
 Recoverable amount is the higher of the an asset fair value less cost to sell and the value
in use
 Value in use -is the present value of the future cash-flow expected to be delivered from
an asset.

 Carrying amount is the amount which an asset is recognized in the statement of

financial position after deducting any accumulated depreciation and accumulated
impairment losses thereon.
 Impairment is a loss in the future economic benefit or service potential of an asset, over
and above the systematic recognition of the losses of the asset future economic benefit.

INDICATORS OF IMPAIRMENT LOSS.

EXTERNAL INDICATORS.
1. Significant decrease in asset market value.
2. Significant changes with an adverse effect to the entity asset such as technological
changes, market, and legal environment.
3. Increase in market interest rate and those increase are likely to affect the discount rate
used in calculating an asset value in use.
INTERNAL INDICATORS.
1. Physical damage of the asset.

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 2. Evidence is available from internal reporting of inefficient performance.

IMPAREMENT REVERSAL
An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognized in prior period for an asset other than goodwill may no longer
estimate the recoverable amount of that asset.

Indicators of an impairment reversal.

EXTERNAL INDICATORS.
1. Significant increase in market value of an asset.
2. Significant change with favorable effect on the entity.
3. Decease in market interest rate during the period.
INTERNAL INDICATORS.
1. Evidence is available for superior effectiveness.

Recognition of an impairment reversal.

A reversal of an impairment shall be recognized immediately in the income statement as an
income.

REVENUE (IAS 18)(IFRS 15)

 Revenue is the gross inflow of economic benefit during the period arising in the course of
ordinary activities of an entity. Revenue includes only the gross economic inflow
received or receivable by the entity on its own account.
 Amount collected on behalf of the 3rd party such as sale taxes, VAT are not economic
benefit and therefore are excluded from revenue.
 Similarly in an agency relationship, revenue is an amount of commission and the amount
collected on behalf of the principal is not revenue.
Measurement of revenue.
Revenue is measured at fair value of the consideration received or receivable after taking into
account the amount of any trade discount.
IAS 18 shall be applied for accounting for revenue arising from the following transactions.
1. Sale of goods
2. Rendering of services.
Revenue should be recognized if the following conditions are meet.
 The amount of the revenue can be measured reliably.
 It’s probable that the economic benefit associated with the service will flow to the entity.
 The stage of completion of the service at the end of the reporting period can be measured
reliably.
 The cost incurred for the transaction and the cost to complete the transaction can be
measured reliably.

INTEREST, DIVIDENDS AND ROYALTIES.

Revenue from the above sources should be recognizes on the following basis.
1. Interest shall be recognized using the effective interest method (current market rate).
2. Royalties shall be recognized on an accrual basis.

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 3. Dividends shall be recognized when the shareholders have the right to receive.

REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)

IFRS 15 describes the following principle steps to be applied to all contracts with customers.
1. Identify the contract with the customer-a contract with customer will be within the
scope of IFRS 15 if the following conditions are met:
 The contract has been approved by the parties to the contract.
 Each party has a right in relation to goods or services to be transferred.
 The payment terms for the goods/services to be transferred can be identified.
 The contract has a commercial substance.
2. Identify the performance obligation to the contract-at the inception of the contract, the
entity should assess the goods or services that have been promised to the customer and
identify as performance objection.
3. Determine the transaction price-the transaction price is the amount which an entity
expects to be entitled in exchange of the transfer of goods or services.
Allocate the transaction price to the performance obligation in the contract.
4. Recognize revenue when or as the entity satisfied a performance obligation.
5. Revenue is recognized as the contract is performed either over time or at a point of
time.
Creteria to be met for revenue to be recognized by reference to stage of completion.
1. The amount of revenue can be measured reliably.
2. Its probable that the economic benefits will flow to the seller.
3. The stage of completion at the reporting date can be measured reliably
4. The cost incurred or to be incurred can be measured reliably.

INVENTORY [IAS 2]
Inventories are assets held for sale in the normal course of the business. They include raw
materials, work in progress or finished good.
The objective of IAS 2 is to prescribe the accounting treatment for inventories ie the amount of
cost to be recognized as an asset and carried forward unit the related revenues are recognized.

MEASUREMENT OF INVENTORIES.
Inventory should be valued at the lower of cost and net realizable value. The cost shall comprise:
1. Cost of purchase-this comprises purchase price, import duties and others non-refundable
taxes, transport and handling and other costs.
2. Cost of conversion-this comprises the direct labour cost, variable production overheads
and fixed production overhead.
3. Administrative cost, selling cost, abnormal loses and shortage cost unless they relate
to the goods in production process.
NET REALIZABLE VALUE-is the estimated selling price less estimated cost to sell.

Disclosure requirements.
1. Method adopted in determining the cost Ie FIFO or weighted average method.
2. The carrying amount of inventories suitably classified into raw material, WIP and
finished goods.
3. Inventories that was valued at net realizable value.

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 4. Circumstances leading write down of inventories to net realizable value
5. Inventories pledged as securities.

INCOME TAXES (IAS 12).

 Income tax –This include all domestic and foreign taxes which are based on taxable
profit.
 Deferred Tax-This is the tax payable in the future which arises as a result of taxable
temporary differences.
 Temporary Difference-Is the difference between the carrying amount and the tax base
of an asset or liability.
 Tax Base-Is the amount attributable to an asset or liability for the tax purposes.
 Taxable temporary Differences-This are temporary differences that will result in
deferred tax liability.
 Deductible temporary Differences-This are temporary differences that will result in
deferred tax asset.
 Deferred tax liability-these are amount of income taxes payable in future period in
respect of taxable temporary difference.
 Deferred tax asset-these are amount of income taxes recoverable in future period in
respect of deductible temporary difference.

Basis of measuring for current tax and deferred tax.

 Tax expense for the period is made up of two elements:
 Current tax
 Deferred tax.
 Current tax is the tax for the period based on the taxable profit for the year ie (gross
income-allowable expenses).
 Deferred tax on the other hand arises as a result of temporary differences. Increase in
deferred tax is an expense which increases the tax liability for the year while a decrease
in deferred tax is an income hence reducing the tax liability for the period.
Exemptions to the requirement to recognize a deferred tax liability.
 Liability arising from initial recognition of goodwill.
 Liabilities arising from initial recognition of an asset/liability other than than in business
combination.
 Liability arising from temporary differences associated with investment in subsidiary,
branches and associate.

IFRS 16- LEASES

DEFINITION OF TERM
Lease. A contract or part of a contract that conveys the right to use an asset for a
period of time in exchange for consideration. This is a contract between two parties where one
party known as lessor (owner) gives another party known as lessee the right to use the asset and enjoy the
benefits and risk associated with the utilization of the asset.

In order for such a contract to exist the user of the asset needs to have the right to:
 Obtain substantially all of the economic benefits from the use of the asset.
 The right to direct the use of the asset.

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 IFRS 16 states that a customer has the right to direct the use of an identified asset
if either:
a) The customer has the right to direct how and for what purpose the asset is
used throughout its period of use; or
b) The relevant decisions about use are pre-determined and the customer has the
right to operate the asset throughout the period of use without the supplier
having the right to change these operating instructions.
1) Finance lease. A lease that transfers substantially all the risks and rewards
incident to ownership of an asset. Title may or may not eventually be transferred.
2) Operating lease. A lease other than a finance lease.
3) Lease term.
4) Unguaranteed residual value. That portion of the residual value of the underlying
asset, the realization of which by the lessor is not assured.
Types of leases.
(a) Operating lease.
(b) Finance lease.
(c) Sell and leaseback lease.
(d) Leverage lease

Operating lease/off balance sheet lease.

This is a short term lease.it has the following characteristics:
 The lease period is very short relative to the economic life of the asset.
 The lease contract can be cancelled by either party any time before end of lease period.
 The owner (lessor) incurs maintenance, operating and insurance expenses of the asset.
 The lessee is not given an option to buy the asset at the end of lease period.

Finance lease/capital lease.

This is long-term in nature and the lease period is almost equal to the economic life of the asset.
Characteristics.
 The lease period should be at least equal to 75% of the asset economic life.
 The lease contract cannot be cancelled by either party before lease period matures.
 The lessee incurs all maintenance cost.
 The lessee is given an option to buy the asset at the end of lease period.
Advantages of a lease.
1. Lease does not involve strict terms and conditions associated with long term debts.
2. Leasing has lower effective cost compared to long term debts.
3. It does not require a significant initial capital investment compared with cost of buying
new asset.
4. It reduces the risk of obsolescence.
5. It provides off-balance sheet financing i.e. operating lease are shown as foot notes to the
financial statements.
Differences between finance and operating lease.
Finance lease Operating lease
1. It is a long term lease taking more It is a short term lease.
than 75% of economic life of the

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 asset.
2. The lessee has an option to purchase The lessee has no such option.
the asset at the end of the lease period.
3. The contract cannot be cancelled The lease contract can be canceled any time
before maturity. before maturity.
4. The lessee incurs all incidental The lessor incurs the operating expenses and
operating expenses and account for the accounts for the asset in his books of account.
items in its financial statement

ACCOUNTING FOR LEASES BY LESSEE

Accounting treatment
Initial recognition
At the commencement date (the date the lessor makes the underlying asset available
for use by the lessee), the lessee recognizes:
1) A lease liability
2) A right-of-use asset

Lease liability
The lease liability is initially measured at the present value of lease payments not
paid at the commencement date, discounted at the interest rate implicit in the
lease (or the lessee's incremental borrowing rate if the interest rate implicit in the
lease if not readily determinable).

The lease liability cash flows to be discounted include the following

1) Fixed payments
2) Variable payments that depend on an index (e.g. CPI) or rate (e.g. market rent)
3) Amounts expected to be payable under residual value guarantees (e.g. where a
lessee guarantees to the lessor that an asset will be worth a specified amount at
the end of the lease)
4) Purchase options (if reasonably certain to be exercised).

Right-of-use asset
The right-of-use asset is initially measured at it’s, which includes:
1) The amount of the initial measurement of the lease liability (the present value of
lease payments not paid at the commencement date)
2) Payments made at/before the lease commencement date (less any lease incentives
received)
3) Initial direct costs (e.g. legal costs) incurred by the lessee
4) An estimate of dismantling and restoration costs (where an obligation exists).

The right-of-use asset is normally measured subsequently at cost less accumulated

depreciation and impairment losses in accordance with the cost model of IAS 16
PPE.

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The right-of-use asset is depreciated from the commencement date to the earlier of the
end of its useful life or end of the lease term (end of its useful life if ownership is
expected to be transferred).

Alternatively the right-of-use asset is accounted for in accordance with:

a) The revaluation model of IAS 16 (optional where the right-of-use asset relates to
a class of property, plant and equipment measured under the revaluation model,
and where elected, must apply to all right-of-use assets relating to that class).
b) The fair value model of IAS 40 Investment Property (compulsory if the right-of-
use asset meets the definition of investment property and the lessee uses the fair
value model for its investment property).

Right-of-use assets are presented either as a separate line item in the statement of
financial position or by disclosing which line items include right-of-use assets.

Lessor accounting
Classification of leases for lessor accounting
The approach to lessor accounting classifies leases into two types:
1) Finance leases (where a lease receivable is recognized in the statement of financial
position); and
2) Operating leases (which are accounted for as rental income).

Finance lease: A lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset.

Operating lease: A lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset.

Finance leases
Recognition and measurement
At the commencement date (the date the lessor makes the underlying asset available
for use by the lessee), the lessor derecognizes the underlying asset and recognizes a
receivable at an amount equal to the net investment in the lease.

The net investment in the lease is the sum of:

Present value of lease payments receivable by the xx
lessor
Present value of any unguaranteed residual value xx
accruing to the lessor
xx

The unguaranteed residual value is that portion of the residual value of the
underlying asset, the realization of which by a lessor is not assured or is guaranteed
solely by a party related to the lessor.

Essentially, an unguaranteed residual value arises where a lessor expects to be able to

sell an asset at the end of the lease term for more than any minimum amount

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guaranteed by the lessee in the lease contract. Amounts guaranteed by the lessee are
included in the 'present value of lease payments receivable by the lessor' as they will
always be received, so only the unguaranteed amount needs to be added on, which
accrues to the lessor because it owns the underlying asset.

Finance income is recognized over the lease term based on a pattern reflecting a
constant periodic rate of return on the lessor's net investment in the lease.

The de-recognition and impairment requirements of IFRS 9 Financial Instruments

are applied to the net investment in the lease.

Illustration 5
A lessor enters into a 3 year leasing arrangement commencing on 1 January 2013.
Under the terms of the lease, the lessee commits to pay Sh.80,000 per annum
commencing on 31 December 2013.

A residual guarantee clause requires the lessee to pay Sh.40,000 (or Sh.40,000 less
the asset's residual value, if lower) at the end of the lease term if the lessor is unable
to sell the asset for more than Sh.40,000.

The lessor expects to sell the asset based on current expectations for Sh.50,000 at the
end of the lease. The interest rate implicit in the lease is 9.2%. The present value of
lease payments receivable by the lessor discounted at this rate is Sh.232,502.

Required
Show the net investment in the lease from 1 January 2013 to 31 December 2015 and
explain what happens to the residual value guarantee on 31 December 2015.

Solution
The net investment in the lease (lease receivable) on 1 January 2013 is:
Sh.
Present value of lease payments receivable by the 232,502
lessor
Present value of unguaranteed residual value 7,679
(50,000 – 40,000 = 10,000 × 1/1.0923)
240,181

The net investment in the lease (lease receivable) is as follows:

2013 2014 2015
Sh. Sh. Sh.
1 January b/d 240,181 182,278 119,048
Interest at 9.2% (interest income 22,097 16,770 10,952
in P/L)
Lease installments (80,000) (80,000) (80,000)
31 December c/d 182,278 119,048 50,000

On 31 December 2015, the remaining Sh.50,000 will be realized by selling the asset

CPAK JOHNMARK 0705748300 Page 39

for Sh.50,000 or above, or selling it for less than Sh.50,000 and claiming up to
Sh.40,000 from the lessee under the residual value guarantee.

An allowance for impairment losses is recognized in accordance with the IFRS 9

principles, either applying the three stage approach or by recognizing an allowance for
lifetime expected credit losses from initial recognition (as an accounting policy choice
for lease receivables).

Criteria for identifying a lease contract for the purposes of accounting in the financial
statement.
 IFRS 16 requires lessees to recognize an asset and a liability for all leases unless they are
short term or of minimal value.
 As such, it is important to assess whether a contract contains a lease or whether it is
simply a contract or service.
 A contract contains a lease if it conveys the right to control the use of an identified asset
for a period of time in exchange for consideration
 A customer(Lessee) controls the asset if it has:
 A right to substantially obtain all of the identical assets economic benefits, and
 The right to direct the identified asset use.
 The right to direct the use of the asset can still exist even if the lessor puts restriction on
its use within a contract.

TRIPLE BOTTTOM LINE ACCOUNTING

Triple bottom line is an accounting framework that incorporates three dimensions of
performance; Social, environment and financial.
 The concept behind the triple bottom line is that companies should focus as much on
social and environmental issues as they do on profits.
 The TBL consists of three elements; profit, people and the planet.
 TBL theory holds that if a firm looks at profit only, ignoring people and the planet, it
cannot account for the full cost of doing business.

 Profit-this is the traditional measure of corporate profit.

 People/Social-This measures how socially responsible an organization has been
throughout its history.
 Planet/environment- this measures how environmentally responsible affirm has been.

THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES

(IAS 21 & IPSAS 4 and 23)
An entity may carry on foreign activities as follows;
 Transaction in foreign currencies.
 Foreign operations.
 In addition, an entity may present its FS in foreign currency.
Definitions
1. Closing rate-is the spot exchange rate at the reporting date

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 2. Exchange difference-is the difference resulting from translating a given number of units
of one currency into another currency at different exchange rate.
3. Exchange rate-is the ratio of exchange for two currencies.
4. Foreign currency-is a currency other than the functional currency of the entity.
5. Foreign operation-is an entity that is a controlled entity, associate, joint venture or
branch of a reporting entity, the activities of which are based or conducted in a country or
currency other than those of the reporting entity.
6. Functional currency-is the currency of the primary economic environment in which the
entity operates.
7. Monetary items-refers to assets or liabilities to be received or paid in a fixed or
predetermined amount of money e.g. cash, receivable, payable and all liabilities.
8. Non-monetary liabilities-are other items in the financial statement other than monetary
items.
9. Net investment in a foreign operation is the amount of the reporting entity’s interest in
the net asset/equity of that operation.
10. Presentation currency is the currency in which the financial statement are presented.
11. Spot exchange is the exchange rate for immediate delivery.

Factors to consider in determining the functional currency of an entity.

(a) The currency that revenue is raised from, such as taxes, grants and fines.
(b) The currency that mainly influence sales price for goods and services.
(c) The currency that mainly influence labour, material and other costs.
(d) The currency in which receipt from operating activities are usually retained.
The functional currency of a foreign operation is different from the reporting entity‟s
functional currency when:
 The foreign operation carries its activities with a significant degree of autonomy.
 The foreign operations transactions with the reporting entity is low.
 The foreign operation’s cash flows do not directly affect the cash flows of the reporting
entity.
 The cash-flows of the foreign operation are not readily available for remittance to
reporting entity.
 The cash-flows of the foreign operation are sufficient to service existing and normal debt
obligations.
Recognition of exchange differences
Exchange difference arising on the settlement of monetary items or on translating monetary
items shall be recognized in surplus or deficit in the statement of performance/P&L during the
period in which they arise.

METHODS OF TRANSILATION
1. THE FUNCTIONAL CURRENCY METHOD (TEMPORAL METHOD)
This method is used where the foreign operation are the extension of the activities of the
reporting enterprise.
Under this approach:
Mode of transilation
 All monetary assets and liabilities are translated at the closing rate.

CPAK JOHNMARK 0705748300 Page 41

  Non-monetary items that are carried in terms of historical costs are translated using spot
rate.
 Income statement item are translated using the average rate.

 Depreciation is translated at the rate applied to translate the PPE in the balance sheet.
 Any exchange difference is dealt with in the P&L.
 Non-monetary items that are carried at fair value should be translated using the exchange
rate that existed when the values is determined.

2. THE PRESENTATION CURRENCY METHOD/CLOSING RATE METHOD.

This method is used where the functional currency of a foreign operation is different from the
reporting entity functional currency.
Under this approach:
 The assets and liabilities both monetary and non-monetary of the foreign entity should be
translated at the closing rate.
 Income and expenses items of the foreign entity should be translated using average rate.
 Equity items are translated using the spot rate

 All resulting exchange difference should be classified as equity until the disposal of
the net investment.
Accounting treatment of exchange differences arising on monetary items.
 Exchange difference arising when monetary items are settled or when monetary items are
translated, the difference is reported to profit or loss in the period of occurrence.
 There is however an exemption that exchange differences arising on monetary items that
forms part of reporting entity’s net investment in foreign operations (subsidiary) are
recognized in the consolidated financial statement.
Disclosure requirement with reference to „Effects of Changes in Foreign Exchange Rates”
1. The amount of exchange difference recognized in profit or loss.
2. Net exchange difference recognized in other comprehensive income and recognized as a
separate equity component.
3. When the presentation currency is different from the functional currency, disclose the
fact.
4. Method used in translation.
Measurement and recognition of revenue from non-exchange transaction (IPSAS 23)
1. Revenue from non-exchange transactions shall be measured at amount of the increase in
net asset recognized by the entity.
2. When as a result of non-exchange transaction, an entity recognizes an asset, it also
recognizes revenue equivalent to the amount of the asset measured.
3. Reduction of a liability shall be recognized as revenue.
4. An inflow of resources from a non-exchange transaction recognized as an asset shall be
recognized as revenue.

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 THE CONCEPTUAL FRAMEWORK
A conceptual framework has been defined as a coherent system of interrelated objectives and
fundamentals that can lead to consistent and that prescribes the nature, function and limits of
financial accounting and financial accounting systems.

The usefulness of a conceptual framework for financial accounting is evident in that:

(a) It enables the development and issuance of a coherent set of accounting standards and
practices built upon the same foundation.
(b) It increases financial statement user’s understandability and confidence in FR.
(c) It enhances comparability among the financial statement of different companies.
(d) It assists in the resolution of new and emerging practical problems by providing a frame
of reference for resolving accounting issues.
(e) It defines the bound of judgment in the preparation of financial statement.

Framework for preparation and presentation and presentation of financial statement

(IASB Framework)

The framework deals with/scope

 Users and their information needed.
 The objective of the financial statement.
 Underlying assumptions-such as accrual and going concern assumption.
 The qualitative characteristics.
 The definition, recognition and measurement of the elements of financial statement.
 Concepts of capital and capital maintenance.

Qualitative characteristic of the financial statement.

 Understandability.
 Relevance.
 Reliability
 Comparability.
Limitation f IASB conceptual framework for financial reporting.
1. Conceptual framework is complex to set up and time consuming.
2. Conceptual framework comes with a lot of rigidity.
3. Opportunities offered by the framework are not acceptable to all parties.
4. The principles underlying the framework are by necessity general and subject to
interpretation.
5. It’s difficult to develop a set of principles that are applicable fairly to every situation.
6. Different parts of the world with different economic and cultural norms may need
different principles. This may limit the global adoption of IFRS.
Procedures in developing IFRS standards
1. The board identifies a subject and appoints an advisory committee to advice on the issue.
2. The board then issues a Discussion paper and avails its for discussion and comment from
key stakeholders.
3. After a review of comment on Discussion paper, the board publishes an exposure draft,
which is a draft version of the intended standard.

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4. Following the consideration of comment received on the exposure draft, the Board publishes
the next final text of the IFRS, standard.
5. The published IFRS standard is issued for interpretation through the guidance of
International Financial Interpretation committee (IFRIC).
6. At each stage of standard setting setting process, an approval by the way of vote by atleast a
simple majority of Board member is required.

Elements of financial statement.

The elements directly related to the measurement of financial position include assets, Liabilities
and equity.

ASSET-is a resource controlled by the entity as a result of past event and from which future
economic benefits are expected to flow to the entity.

LIABILITY-is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity.

EQUITY-is the residual interest in the assets of the entity after deducting all the liabilities.

LONG TERM CONSTRUCTION CONTRACTS-IAS 11

These are contracts which take a period more than one year. The contractor is engaged by the
contractee to undertake such projects for consideration known as contract price.
The objective of IAS 11 is to help determine:
 The contract profit for each accounting period.
 The valuation of the work in progress.

Types of contracts.

1. FIXED PRICE CONTRACT/LUMPSUM CONTACT

It is a contract whose price is determined before the commencement/inception. The price can be
adjusted if there is escalation clause .this is a provision that allows for the adjustment of the price
depending on the changes in the economic environment of the contract eg increase in labour and
cost of material.

2. COST PLUS CONTRACT/PERCENTAGE RATE CONTRACTS

 This is a contract where the price is only determined after the contract has been fully
completed.
 The owner assumes most of the risk. The contract price equal to cost incurred plus agreed
profit margin.
o Cost incurred profit + margin
 The method is mostly applied where it is difficult to determine the estimated total cost of
the contract. Also applied where the contract period is very short.

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METHODS OF ACCOUNTING FOR CONSTRUCTION CONTRACTS.
1. Completed contract method.
This is where the revenue is only recognized after the contract has been completed. Also the
profit is recognized upon completion of the contract.
Contract gross profit=contract price- contract cost.
The method is applied where it is difficult to determine the estimated total cost of the contract.
2. Percentage of completion method.
This is applied where the cost of the contract can be reliably estimated as the contract progresses.
The revenue and the gross profit is recognized as the contract progresses.
Contract revenue and expenses are recognized by reference to the stage of completion

% of completion= cost to date× 100%

Estimated total cost
Revenue recognized=% of completion × contract price.

Disclosure requirement for contracts in progress in accordance to IAS 11

1. Aggregate cost incurred and recognized profit.
2. Amount of advance received.
3. Amount of retentions
4. Amount of revenue recognized.
5. Method used to determine the revenue.
6. Method used to determine the stage of completion
Creteria to be met for revenue to be recognized by reference to stage of completion.
1. The amount of revenue can be measured reliably.
2. Its probable that the economic benefits will flow to the seller.
3. The stage of completion at the reporting date can be measured reliably
4. The cost incurred or to be incurred can be measured reliably.

Methods used to determine the stage of completion of a construction contract (may 2019
q4b)

1. VALUE BASED METHOD

Value of work completed in proportion to total contract price. The value of work may be
determined by conducting a survey of work performed. Also the physical unit of work
completed in comparison with total number of units to be completed under the contract.
When this vale based method is used in accounting for profit making contracts, revenue
is recognized on the basis of work certified as complete whereas the contract cost is
measured as the balancing figure
2. COST BASED METHOD.
Cost incurred to date in comparison with total expected contract cost. When estimating
the stage of completion under this method, only those cost incurred must be considered
that reflect the present status of work performed.
When the cost based method is used in accounting for profit making contracts, cost is
recognized on the basis of stage of completion whereas contract revenue is measured as
the balancing figure.

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Terminologies.
ENEROUS CONTRACTS-is a contract entered into with another party under which the
unavoidable cost of fulfilling the terms of contract exceeds any revenue expected to be received
from the contract.
EXECUTRY CONTRACTS-it’s a contract under which neither party has performed any of its
obligations not both have partially performed their obligation to an equal extent.

FARMING ACTIVITIES ACCOUNTING/AGRICULTURE-IAS 41

IAS 41 provides for accounting for farming activities which is animal husbandry and crop
growing for profit generation. The animal and the crop are known as biological assets.
 Biological asset-are living animal and plant as a result of agricultural activities
 Agricultural activity-this is the management by an entity of the biological
transformation.
 Agricultural produce-this is the harvested product of entities biological asset.

Features of an agricultural activity.

 Capabilities of change-biological assets are capable of biological transformation.
 Management of change-management facilitates biological transformation.
 Measurement of change.

Circumstances under which an entity should recognize a biological asset. (Disclosure

requirements)
1. The entity controls the asset as a result of past events.
2. It is probable that the future economic benefit associated with the asset will flow to the
entity.
3. The asset value can be measured reliably.
Accounting treatment for a biological asset.
1. Agricultural produce is measured at fair value less estimated cost to sell at point of
harvest.
2. The gain on initial recognition of biological asset at fair value less cost to sell and
changes in fair value less cost to sell is included in profit and loss.
3. A gain on initial recognition of agricultural produce at fair value less cost to sell is
included in profit or loss for the period.
4. All costs related to biological asset that are measured at fair value are recognized as
expense when incurred other than cost to produce biological asset
Key provisions on measurement of agricultural produce.(IAS 41)
1. Biological asset within the scope of IAS 41 are initially and subsequently
measured and recognized at fair value less estimated cost to sell , unless to fair
value cannot be estimated.
2. Agricultural produce is measured at fair value less estimated cost to sell at the
point of harvest.

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 3. The gain on initial recognition of the biological asset and changes in fair value are
included to profit or loss.
4. All costs related to biological assets are recognized as expense when incurred
rather than the cost to purchase biological asset.
Disclosure requirement when fair value of the farm produce cannot be measured
reliably.
1. Description of the asset.
2. Deprecation method.
3. Useful lives or depreciation rates.
4. An explanation of why fair value cannot be reliably measured.
5. If possible a range within which fair value is likely to lie.
6. Gross carrying amount and the accumulated depreciation, at beginning or end.
7. Impairment loss if any.

ACCOUNTING FOR HIRE PURCHASE.

This is a transaction which allows for acquisition of an asset by paying for the deposit and taking
possession of the asset immediately the deposit is paid. The balance is payable in installment and
it is subject to interest.
Accounting for hire purchase requires application of “substantive over the form principle” where
the economic aspect of a transaction overrides the legal aspect of the transaction.

Hire purchase price = deposit + all installments

Or
Hire purchase = cash price + interest

Interest can be allocated using the following methods:

1. Straight line method-this is where the total interest is allocated equally over the hire
purchase period.
2. Sum of digits method-the interest is allocated on the basis of the sum of hire purchase
period.
3. Actuarial method-this involves discounting the cashflows

Methods of accounting for hire purchase.

There are two major methods of accounting:
1. Interest method
Under this method, sales are recognized at cash price. Interest is computed separately and
considered as an income. The method usually applies where the company has few units
of sale which are of high value.
2. Sales method.
Under this method, sales are recognized at hire purchase price.
The gross profit = hire purchase price – cost of sales.
The interest is not recognized as a separate income.
Accounts prepared under this method include:
 Debtors account

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  Repossession account
 Provision for URP account
Difference between interests and sale method.

Sales method Interest method

Sales are recognized at hire purchase price Sales are recognized at cash price
Interest is not computed separately Interest is computed separately

PARTNERSHIP

CONVERSION OF PARTNERSHIP
This is where a limited company purchases the partnership business. Two sets of books of
account shall be prepared:
 In partners’ books
 In the company’s books

The purchase shall be determined as follows:

Assets taken over xxx
Add: goodwill xxx
Less: liabilities taken over (xxx)
Purchase consideration (Equity) xxx
Goodwill= purchase consideration – net asset acquired

Accounts prepared.
 Business purchases account.
 Partners’ capital account
 Bank account
 Vendors account
NB any expenses incurred prior to the formation of the company are called preliminary expenses
which should be capitalized and amortized over a given period of time.

PUBLIC SECTOR ACCOUNTING.(IPSAS)

Public institutions are formed to provide services to the members of public. They are formed
with no objective of making profit.

Differences between public and private entities.

PUBLIC SECTOR PRIVATE SECTOR

1. Objective-the main objective is to provide 1. The main objective is to make profits.
services.
2. Funding-they are funded by the general 2. Are funded by entrepreneurs.

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public mainly through taxation.
3.Ownership-mainly owned by general 3. Owned by individuals in form of sole
public(government) proprietorship, partnership or companies.
4. Accountability-they are accountable to the 4. Accountable to the owners.
public through institutions like auditor’s
general office and parliament.

Methods of accounting for public sectors.

1. Cash accounting.
2. Fund accounting.
3. Budgeting accounting.
4. Accruals basis accounting.
Benefits of adopting IPSAS
 They improve accountability and transparency.
 It improves the reliability of accounts and boosts the confidence of external agencies.
 It enhances comparability among government entities.
 It emphasis on performance as well as reducing misuse of public funds.
 Improvement in consistency in preparing and reporting of financial information.
 It improves audit of public institutions.
Challenges in promoting adoption of IPSAS.
 Sovereignty of difference countries-each government operates independently as
compared to private sector.
 Different countries have different reporting requirements.
 Countries have different laws that apply to different government entities.
 Challenges in resources, system and personnel to implement IPSAS.
 Language barriers.
 Lack of political goodwill.
 Staff resistance.
Benefits of adopting IFRS.
1. Increase foreign direct investments
2. Enhanced quality reporting
3. Increased Transparency and comparability.
4. IFRS contributes to economic efficiency by helping investors to identify opportunities
and risks across the world.
5. Better access to capital including from foreign sources.
6. Facilitates mergers and acquisitions.
7. Enhances competitiveness.
8. Ease of using one consistent reporting standards in subsidiary from different countries.
9. Improves ability to attract and monitor listing by foreign companies
10. Enhances standardization of financial disclosures.
11. Improves regulatory oversight and enforcement.
Key success factors for IFRS adoption/factors promoting adoption of IFRS.
1. Self-enforcement by companies.
2. Professional system of corporate governance.
3. Professional support with IFRS experience.

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 4. Sufficient funding.
5. Trained workforce.
6. Technological enhancement to support adoption.
7. Executive and board support
Challenges in adopting IFRS
 Insufficient training and funding.
 Complexity of conversion.
 Compliance and lack of enforcement.
 Ethical environment.
 Challenges in resources, system and personnel to implement IPSAS.
 Language barriers.
 Lack of political goodwill.
 Staff resistance.

Accounts prepared by government entities.

1.GAV-records the amount allocated to various government units.
2.Exchequer account-it’s an account into which tax funds and other funds are deposited.
3.PMG-is the cash account operated by the individual government units.it records
4.AIA-this records amounts to be generated by each government unit from its operations.
5.Appropriation account-shows estimated expenditure, the amount over or under spent
for a particular year.
Terminology.
1. General fund-this is the primary government fund. It is established to account for
resources devoted to financing the general service which the government unit performs
for its citizens.
2. Excess vote-this is the expenditure of a given ministry over the approved limit for the
year. The exchequer and audit act does not permit the government ministry to spend
beyond its allocation.
3. Encumbrance-this is the restriction placed on funds under commitment accounting to
ensure that expenditure by way of commitment does not exceed available funds.
4. Vote of account-this is the authority granted by the national assembly for withdrawal
from the consolidated fund not exceeding half the total allocation.
5. Exchequer over issue-this is any amount remaining unspent by the ministry at the
financial year end. This amount should be surrendered as an over issued to the
consolidated fund.
6. Consolidated fund-this is the main fund operated by the government

ACCOUNTING FOR CO-OPERATIVE SOCIETIES

Cooperatives are voluntary association of persons who work together to promote their economic interest.
It is a form of business where individual belonging to the same class join their hands form the promotion
of their common goals.
The philosophy of the cooperative formation is “ all for each and each for all”. Cooperation work with the
feeling of helping others.
Characteristics of cooperative society.
 Voluntary association.
 Open membership

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  Democratic management
 Service motive.
 Utilization of surplus.
 Self-help through mutual cooperation.
 Fixed rate of return.

Main objectives of cooperative society.

1. Enhancing cooperation
Cooperative society aim to encourage complete cooperation between everybody involved with an
organization. They are generally against the idea of any sort of hierarchy, and consider everyone
to be equal.
This can improve relationship between staff members and senior management, as well as between
service providers and customers.
2. High level of service.
Better working relationships naturally lead to higher productivity levels, so a better service is
given to customers. This raises customer satisfaction levels, which is primary aim of many
cooperative societies.
3. Higher profits
Many cooperative societies are essentially out to make a profit and believe that enhancing
relationships will lead to high profit levels. Some charities also have benefited from operating as
cooperatives, as charity members become more focused on their work, raising more money for
the cause in question.
Role of cooperative society.
1. Creation of unit.
Unity is strength and the guiding principle of a cooperative society. In this purpose cooperative
united the stronger and guide them to go ahead with mutual cooperation which helps to endure
social relationship
2. Awaking working zeal.
Cooperative society helps to awake a new working spirit in the mind of those people who are
defeated and spiritless in the struggle of life. Cooperative encourages people to dream new dream
and work with new inspiration.
3. Bringing welfare for the members.
A cooperative society is established just for bringing the economic and social welfare for its
members. In this purpose, cooperative society develops thinking working attitude as well as
mental condition of the constituents.
4. Reducing inequality of wealth.
Capitalism creates inequality of wealth, and cooperative society helps to reduce this as well as
helps the equal distribution of wealth. It creates self-employment opportunities and encourages
the members to compete with others.
5. Establishing equal rights.
To establish equal rights, cooperative society fixed the limitation of purchasing shares. Besides
this, democracy and equal voting rights are also followed. Equal right contributes to establishing
social order and justice.
6. Improving skills.
Cooperative society leads a great role by providing a training program for improving the skills of
uneducated poor and unskilled members.
7. Removal of middle man-

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 The cooperative society helps to protect the lower and middle class people of the society which
have fixed income, from the greedy clutch of profiteering, capitalist, and the middle man.
8. Loan facilities-
Poor producers suffer from capital problems. Cooperative society lends money to those people at
a very lower interest rate
9. Economic development.
By developing small scale traders and giving loans and financial counseling for small industries
and cottage. It helps to remove poverty and ensure economic development of the country.
Merits/advantages of cooperative society
 Easy formation
 Open membership
 Democratic management
 Limited liability
 Stability and continuity
 Mutual help
 Mobilization of savings
 Government support
 Elimination of middle man profit.

Limitation of cooperative society

 Limitation of capital.
 State control
 Inefficient management
 Absence of business secrecy
 Lack of motivation
 Political interference
 Internal quarrel and rivalries
 Lack of public management

Types of cooperative society.

1. Consumers’ cooperative
2. Credit cooperatives
3. Farming cooperative society
4. Producers cooperative society

Difference between Cooperatives and Companies

Difference company cooperative
Formation The formation of a company is It’s easy to form co-operative
more formal and complex. society, although I is a low
created organization.
Purpose The main purpose o the company Its main purpose is improving the
to ensure the profit of the financial condition of members,
shareholder. not to earn a profit.
Number of members The number of members in In a cooperative society, the
private company minimum 2 and minimum is 20 and the max is

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 max of 50 in public company limited.
minimum seven and maximum
seven.
Transfer of shares The shares of a public limited The shares of a cooperative
company is openly negotiable, society can be negotiable to take
but not in case of company. permission from the authority.
Allotment of dividend A dividend is given from reserve In the case of a society, a small
fund or earned profit. This portion of the earned surplus is to
decision is taken in a director’s be given as dividends.
meeting.
Management The directors who are elected by Elected directors operate the
shareholders and appointed society, but they do not get any
managers operate the company. salary.
Relationship between owners In a joint company, there is a Cooperative enterprise makes for
and directors great divorce between owners oneness of interest
and control and often a clash of
interest
Factors responsible for the survival of cooperative organization.
 Moral, social and educational benefits
 Open membership
 Democratic management
 Limited liability
 Stability and continuity
 Mutual help
 Mobilization of savings
 Government support
 Elimination of middle man profit.

Problem facing cooperative societies.

1. Management inefficiency
2. Illiteracy
3. Lack of unit and co-operation
4. Lack of planning.
5. Lack of sacrifice and sincerity
6. Deficiency of capital
7. Ignorance of principles
8. Corruption and nepotism

Solutions for problem of cooperative society.

1. Adoption of realistic plan.
2. Spreading of education.
3. Reduction of unequal competition.
4. Accuracy in accounting.
5. Widespread publicity.
6. Giving incentive to executives
7. Restrain corruption and nepotism.
8. Effective coordination

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 EMPLOYEE BENEFITS-IAS 19
These are all forms of consideration given by an entity in exchange for services rendered by
employees.

The objective of IAS 19 is to specify the accounting treatment and the associated disclosure
requirement when accounting for employee benefits.

Types of employee benefits.

1. Termination benefits.
This becomes payable upon employment/work being terminated either by employee or
employer.
2. Short term employee benefit.
This is employee benefit that are to be settled within 12 months after the employee has
offered the services e.g. salaries, bonuses, medical cover, housing benefits, car benefits,
free gifts.
They are expensed in the period of service to which they relate.
3. Long term benefits.
They include benefits not settled within 12 months such as sabbatical leaves and long
term services benefit. Actuarial gain and loses arising are recognized immediately .All
past service cost are recognized immediately.
4. Post-employment/retirement benefits/pension
This is an arrangement by which the entity provides pension to the employee after
they retire.an entity should recognize contributions to defined plan scheme as an
expense when the employee has rendered the services for which contributions relates.
Hence it’s a benefit payable upon retirement.
.
There are 2 types of pension plans:
i. Defined contribution plan.
ii. Defined benefit plan.

Defined contribution plan.

The pension payable on retirement usually depends on the contributions paid into the plan by the
employee and employer. Under this scheme the employee bears the uncertainties of the amount
that will be paid upon retirement. The amount will depend on the performance of the investment.

Defined benefit plans.

The pension payable on retirement under this plan will depend on either the final salary or the
average salary of the employee during his career. The calculation is based on actuarial
assumptions.eg
2× average salary× service years
3
Actuarial assumptions comprise:

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 1. Demographic assumptions-this assumption are about the future characteristic of current
and formal employee and their dependent. demographic assumption deals with matters
such as:
 Mortality both during and after employment.
 Rate of employment turnover.
 Claim rate under medical plans
2. Financial assumptions-this deals with items such as:
 Discount rate.
 Future salary and benefit level.
 Expected rate of return on plan asset.
Within the statement of total comprehensive income for the year, the movement is separated into
3 components as follows.
1. Service cost component-this includes current service cost and past service cost together
with gains/losses on curtailment and settlement.
CULTAILMENT-this is a significant reduction in the number of employees covered by
the plan.
2. Interest cost component.
3. Re-measurement component-this includes actuarial gains and losses.

Measuring defined pension asset and liabilities.

Both defined assets and liabilities at the beginning of the reporting period are reconciled with
present values at the end of reporting period.

Defined benefit asset.

Fair value of plan asset balance b/d xxx
Add: contribution to the plan xxx
Return on asset xxx
Less benefit paid (xxx)
Xxx
Actuarial gains/losses xxx
Fair value of plan asset balance C/D xxx

Defined benefit liability.

Present value balance b/d xxx
Add: current service cost xxx
Past service cost xxx
Interest cost xxx
Less: benefits paid (xxx)
Carrying amount Xxx
Actuarial gain/loss xxx
Present value balance C/D xxx

Multi-employer plan

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Small entities do not have resources to run a pension plan in-house. It pays pension contribution
over to an insurance company which it runs a multi-employer i.e. pension plan for several
employers.

FUNDING –is the process of making cash payment to a pension scheme so as to meet future
obligation of paying retirement benefit. Typically the funding monies will be placed in a trust
fund independent from the employer’s other assets.

FUNDED SCHEME
Is a plan which the employer transfers contributions to an external entity which is separate and
distinct from the employer.

UN-FUNDED SCHEME.
Is where contribution are not transferred to an external entity rather they are retained in the
company and re-invested in the business.

Over-funded and under-funded scheme

Overfunding scheme
This occurs when the fund asset are more than expected to meet benefits payment. Overfunding
is corrected by adjusting the current and future contribution and spread the surplus over the
remaining service life of the employees covered having made suitable allowances for
contribution holiday. The annual charge to the income statement will therefore be computed as
follows:
Charge to P&L=regular pension costs – (surplus ÷ remaining service year)

Underfunded scheme
This arises where fund asset are insufficient to meet payment of benefits. Underfunding is
corrected by adjusting the current and future cost and spreading the deficient over the expected
remaining service life of the employees covered. The annual charge to P&l of the employer is
computed as follows:

Charge to p&l=regular pension cost + (deficiency ÷ remaining service life)

Accounting and reporting by retirement benefit plan-IAS 26

The pension entities usually prepares the following statement”

1. Statement of changes in net asset (fund account)
2. Statement of net asset.

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 Formats are as follows:

Statement of changes in net asset statement of net asset

For the year ended xxx as at xxx
Incomes assets
Contributions-employer xx non-current assets
-employee xx investment xx
Transfer from other schemes xx PPE xx
Investment incomes xx current assets
Expenses contribution receivables xx
Pension and other benefits (xx) cash and bank xx
Administration expenses (xx) contribution due in day’s xx
Transfer to other schemes (xx) current liabilities
Other expenses (xx) pension payable (xx)
Surplus/deficit xx/ (xx) accruals (xx)
Net asset xxx
Financed by:
Fund balance/accumulated fund xx
Surplus xx
Xxx

BUSINESS COMBINATION/CONSOLIDATION (GROUP) )(IFRS 10)

 Consolidation or business combination refers bringing together of separate entities into

one reporting entity. The result of all business combination is that one entity (acquirer)
obtains control over one or more other entities. Business combination brings about parent
subsidiary relationship.
 Subsidiary-a subsidiary is an entity that is controlled by another entity for more than
50% of its equity capital.
 Consolidated financial statement (IFRS 10)-these are financial statement of
different/group of companies presented by those of a single entity.
 Group this comprises the parent and all its subsidiary.
 Non-controlling interest (NCI)-This is the proportion of net asset in the subsidiary that
is not owned by the parent company.
 Control-this is the power to govern the financial and operating policy decision of the
investee.
Factors that determines “control” over another entity.
To determine whether an entity controls another entity. An entity shall assess whether it
has the following:
1. Power over the other entity.
2. Exposure or right to variable benefits from its involvement with the other entity;
and
3. The ability to use its power over the other entity to affect the nature or amount of
the benefit from its involvement with the other entity.

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IFRS 3 allows two alternatives method of determining NCI:
1. NCI at their proportionate share of the fair value of the subsidiaries net asset.
2. NCI at fair value.

Group structures
There are 3 types of structures.
1. Horizontal structure-this is where the parent acquire controlling interest in one or more
subsidiary.
2. Vertical structure-this occurs where the parent acquires controlling interest in a
subsidiary and the subsidiary acquires a controlling interest in another subsidiary.
3. Mixed structure/D structure-this occurs where the parent acquires a controlling in a
subsidiary and the subsidiary with the parent acquires a controlling interest in another
subsidiary.
Preparation of consolidated financial statement.
The parent company prepares a consolidated financial statement using uniform accounting
policies. However the parent need not prepare consolidated F/S due to the following:
Exemptions from preparing consolidated financial statements.

 The parent is itself a wholly owned subsidiary or partially owned subsidiary of another
entity of which the other entity prepares the group accounts.
 Its debt or Equity instrument is not traded in the local/foreign public market.
 It is an investment entity eg Britam, cytoon, centum
 It did not file nor is in the process for filling its financial statement with the security
commission for the purpose of issuing any class of instrument.
 Its ultimate or intermediate parent prepares consolidated financial statement that complies
with IFRS.
GOODWILL ON ACQUISITION
IFRS 3 defines goodwill as future economic benefit arising from assets that are not capable of
being individually identified and separately recognized.
It’s also the difference between the purchase consideration and the net asset acquired.
It is computed as follows:
Cost of investment xxx
Less fair value of net asset acquired (xxx)
Goodwill xxx

Methods of computing goodwill

There are 2 methods
1. Full goodwill method
This is where the goodwill of the subsidiary is determined as a whole. The goodwill comprises
the parent and NCI goodwill. Under this method, the NCI is measured at fair value. its
determined as follows:

Purchase consideration xx
Fair value of NCI nets asset xx
Xx

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Less: net asset acquired
Ordinary share capital xx
Share premium xx
Pre-acquisition retained earnings xx
Pre- acquisition reserves xx (xx)
Full goodwill xxx

2. Partial goodwill method

This is where only parent goodwill is recognized and the NCI is measured at their proportionate
share of fair value of subsidiary net asset. its determined as follows.

Purchase consideration xx
Less: net asset acquired
Ordinary share capital xx
Share premium xx
Pre-acquisition retained earnings xx
Pre- acquisition reserves xx
xx *% (xx)
Goodwill xx

INVESTMENT IN ASSOCIATE (IAS 28) AND JOINT VENTURE

 An associate is an entity over which the investor has a significance influence.
 Significance influence is the power to participate in the financial and operating policy
decision of the investee.
 Where an entity holds 20%-50% of the voting power (equity) directly or indirectly it will
be presumed to have a significance influence.
 If the voting power is less than 20% it will be presumed to have no significance influence
and hence it will be recognized as an investment.
The existence of significance influence by an entity is usually evidenced in one or more of the
following ways:
a. Representation on the board of directors of the investee.
b. Participation in the policy making process including dividend policy.
c. Material transaction between the entity and the investee.
d. Interchange of management personnel.
e. Provisions of essential technical information.

Accounting for associates.

IAS 28 revised, requires associated companies to be accounted for using Equity method.

EQUITY METHOD is a method of accounting whereby the investment is initially recognized

at cost and adjusted thereafter for the post acquisition changes in net asset.it is determined as
follows:

Joint venture
A joint venture recognizes its interest in a joint venture as an investment and shall account for
this investment using equity method in accordance to IAS 28.

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 JOINT ARRANGEMENT IFRS 11.
This is an arrangement of which two or more parties have joint control. Joint control is a
contractual agreement of sharing control.

Types of joint arrangement.

1. JOINT OPERATION.
This is an arrangement whereby the parties that have a joint control have rights to the asset and
obligation for the liabilities. Joint operations may or may not be separate entities. Each venture
will record its share of the operations asset, liabilities, expenses and gains as determined by the
substance of the contract setting up the joint operation. There are no adjustments needed on
consolidation
2. JOINT VENTURE.
This is a joint arrangement whereby the parties that have joint control have right to net assets and
liabilities. The parties are called JOINT VENTURER.it will be a separate legal entity. In this
situation, the investment is accounted for either at cost or in accordance with IFRS 9 in the
individual financial statement of each venture on consolidation

FORMS OF JOINT VENTURE.

1. PROJECT BASED JOINT VENTURE.
Under this joint venture, companies enter into a joint venture in order to achieve a
specific task which can be an execution of any specific project or a particular service to
be offered together. In other word, these types of joint ventures are bound by time or a
particular project.
2. FUNCTIONAL BASED JOINT VENTURE.
Under this type of joint venture agreements, companies come together to achieve a
mutual benefit on account of synergy in terms of functional expertise in certain areas
which together enables them to perform more efficiently and effectively. The rationale
companies focus on before entering such joint venture is whether the likelihood of
performing better is more together tan doing it separately and more effectively.
3. VERTICAL JOINT VENTURE.
Under this type of joint venture, transactions take place between the buyer and supplier. It
is usually preferred when bilateral trading is not beneficial or economically viable.
Normally in such joint ventures, maximum gain is captured by supplier while limited
gains are achieved by buyers. Under these types of venture, different stages of an industry
chain are integrated within to create more economies of scale.
4. HORIZONATL JOINT VENTURE
Under this type of joint venture, the transaction happens between companies that are in
the same general line of business and that may use the products from joint venture to sell
to their own customers or to create an output that can be sold to the same group of
customers.

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FORMS OF JOINT VENTURE UNDER PUBLIC SECTOR (IPSAS 8)
1. JOINT CONTROLLED OPERATIONS.
The operations of some joint ventures involve use of the asset and other resources of the
ventures rather than the establishment of a corporation, partnership or other entity. Each
venture uses its own PPE and its own inventory.
2. JOINTLY CONTROLLED ASSET
These joint ventures do not involve the establishment of a corporation, partnership or
other entity or financial structure that is separate from ventures themselves. Some joint
venture involves the joint control and often the joint ownership by, the venture of one or
more assets contributed to, or acquired for the purpose of joint venture and dedicated to
the purpose of joint venture.
3. JOINT CONTROLLED ENTITIES.
A joint controlled entity is a joint venture that involves the establishment of a
corporation, partnership or other entity in which venture has an interest. The entity
operates in the same way as other entities except that a binding arrangement between the
ventures establishes joint over the activity of the entity.
A jointly controlled entity controls the asset of the joint venture, incurs liability and
expenses and earns revenue. It may enter into contract in its name and raise finances for
the purpose of joint venture activity.
NB. Only subsidiary is consolidated and for the ordinary share capital and share premium
only for the parent is recognized.

SPECIALIZED TRANSACTION
1. Intergroup balance
This refers to inter-company indebtness. It’s a case where the group company’s owes each
other. Intergroup balances are eliminated in full on consolidation from both account
receivables and account payables. Any cash in transit need to be adjusted before eliminating
the inter group balances.
DR: Payables
CR: Receivables
2. Intergroup sale and unrealized profit on closing inventory.
Intergroup sale occurs where group companies sells goods to each other at a profit.
Intergroup sale are eliminated in full from both sale and cost of sales:
DR: Sales
CR: cost of sales
Unrealized profit occurs where intergroup sale of inventory remains in the stock at the end
of the year. The URP is eliminated in full by:
DR: cost of sales
CR: closing stock
When determining the URP, it’s important to differentiate between margin and mark-up:
MARGIN-is determined in relation to sales.
MARK UP –this is determined on cost

Illustration.

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A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a profit margin of 20%. Determine the URP and show the
relevant journal entries.
Solution:
URP =20%× 120=24
Dr: cost of sale 24
Cr: closing inventory 24

Illustration 2.
A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a mark-up profit of 20%. Determine the URP and show the
relevant journal entries.
Solution:
URP =20/120× 120=20
Dr: cost of sale 20
Cr: closing inventory 20
Illustration 2.
A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a mark-up profit of 1/3. Determine the URP and show the
relevant journal entries.
Solution:
URP =1/4× 120=30
Dr: cost of sale 30
Cr: closing inventory 30

3. Intergroup sale of fixed asset.

This is the sale of a fixed asset by one Group Company to another. In case of this transaction,
two adjustments need to be made:
(a) Eliminating any profit recognized.
Dr: cost of sale (p&l)
Cr: PPE account
(b) Adjusting for overcharged depreciation.
Dr: PPE account
Cr: cost of sale (p&l)
4. Dividend from subsidiary.
Dividends are distribution of profit to the shareholders. Dividends may be paid out of pre-
acquisition profit (pre-acquisition dividend) or paid out of post-acquisition profit (post
acquisition dividend).
The parent share of pre-acquisition dividend is credited to the cost of investment:
DR: cash/bank/dividend receivable a/c
Cr: cost of investment a/c
Parent share of post-acquisition dividend is a return on investment (investment income)
Dr: cashbook
Cr:investment income (p&l)

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 NB: dividend receivable or received from subsidiary are intra group balances and should
be eliminated in full)

5. Fair value adjustments.

IFRS 3 requires the identifiable assets and liabilities of the acquiree to be measured initially
by the acquirer at their fair value at the acquisition date.

When the subsidiary company’s assets are revalued on acquisition:

The subsidiary may have not incorporated the revaluation in its own book. In this case the
revaluation needs to be adjusted before consolidating subsidiary. A depreciation adjustment
may also be required for depreciable asset.
6. Piece meal (step) acquisition of subsidiary.
Step acquisition occurs when the parent acquires control over the subsidiary in stages. This is
achieved by buying blocks of shares at different times. IFRS 3 requires that the acquisition
method to be applied only when control is achieved (above 50%)

Any pre-existing equity interest is accounted for in accordance with relevant IFRS. On the
date when the entity acquires a controlling interest:
1. Re-measure the previously held equity interest at fair value.
2. Recognize any gain/loss to p&l for the year.
3. Calculate goodwill and the NCI in accordance with IFRS 3.
The cost of acquiring control will be the fair value of the previously held equity interest plus
the cost of the most recent purchase of shares at acquisition date.

ILLUSTRATION
H ltd holds 10% in S ltd at sh. 24,000 in accordance with IFRS 9.On 1 st June 2018 it acquired
a further 50% of S ltd equity shares at a cost of sh.160,000. On this dare the fair value were
as follows:
 S ltd net asset sh 200,000
 NCI sh 100,000
 The 10% investment sh.26,000
NCI is measured using fair value method.
Required: calculate the goodwill using both methods
Solution.
(i) Partial goodwill method.

Purchase consideration (160+26)-fair value 186,000

Less net assets acquired;
(10%+50%)*200,000 (120,000)
Goodwill 66,000

(ii) full goodwill method

Purchase consideration 186,000
Fair value of NCI 100,000
Net asset (200,000)
Full goodwill 86,000

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 BRANCH ACCOUNTING.
A branch is a segment or part of a business situated at another part away from the entities
head office. A branch belongs to a business that has already been established and therefore
branches have no share capital.

PURPOSE FOR BRANCH ACCOUNTING

1. To ensure proper control of branches.
2. To safeguard the cash and inventory of goods in the hands of branches.
3. To ascertain the profit and loss from the branches operations.
4. To compare the profitability of different branches.
5. To maintain adequate records regarding the transactions between head office and
branches.
6. To calculate commission to managers in based on the profits of the branch.
Types of branches.
1. Dependent branches-this is a small branch whose main activity is to sell the goods
supplied by the head office. They do not maintain accounting records. The accounting
records are usually maintained by the head office.
2. Independent branches-they are branches which operates as separate business from the
business that has established them (head office). They maintain their own set of
accounting record. In additional to the goods supplied to them by the head office, they
may have authority to purchase goods locally.
3. Foreign branches-these are branches located in a foreign country. They can either
maintain their own accounting record or they can be maintained by the head office.
Ledger accounts maintained where goods are sent to branches at selling price/cost plus
markup.
i. Branch stock account.
ii. Goods sent to branch account.
iii. Branch debtors account
iv. Markup /stock adjustment/provision for URP account.
v. Branch expenses account.
vi. Branch income statement.

Journal entries
 Goods sent to the branch Dr: Branch stock account (invoice price)
Cr: Goods sent to branch (at cost)
Cr: Branch mark-up account (profit)
 Goods returned to head office by branch
Dr: goods sent to branch-cost
Dr: branch mark-up account-profit
Cr: branch stock account-invoice price

 Sales made by branch Dr: cash/bank/debtor

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 Cr: branch stock account
 Returns of good by branch customer Dr: branch stock account
Cr: debtors account
 Returns of good by branch customer to head office
Dr: goods sent to branch account-cost
Dr: branch mark-up account-profit
Cr: branch debtors account
 Goods stolen in the branch Dr: goods stolen/loss account-at cost
Dr: branch mark-up account
Cr: branch stock account-invoice price
 Cash sales stolen Dr: cash stolen account
Cr: branch stock account
 Increase in price in the branch Dr: branch stock account
Cr: branch mark-up account
 Transfer of goods from one branch to another
o Books of receiving branch Dr: branch stock account-invoice price
Cr: branch mark-up account.
o Books of selling branch Dr: branch mark-up account
Cr: branch stock account-invoice
Balancing goods sent to branch account-this account is balanced and its balancing figure is
closed to purchases account.
Financial statements of independent branches.
Independent branches will be required to prepare and present the income statement and
statement of financial position at the end of each economic period. The financial statement of
independent branches will then be combined with those of head office so as to present the FS
of the combined business.
Income statement format.
XYZ Ltd
Statement of comprehensive income for the year ended 31 Dec 2020
HO branch combined
Sales (external only) xx xx xx
Good sent to branch xx - -
Total sales xx xx xx
Cost of sales
Opening stock xx xx xx
Add purchases xx xx xx
Goods received - xx -
Goods available for sale xx xx xx
Less goods stolen/lost (xx) (xx) (xx)
Less closing stock (xx) (xx) (xx)
Cost of sales xx xx xx
Gross profit xx xx xx
Provision for URP xx - -
Adjusted gross profit xx xx xx

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Less expenses (xx) (xx) (xx)
Profit xx xx xx
Transfer of branch profit xx (xx)
Xx - xx

ILLUSTARTION 1.
X ltd deals in electronics goods. The head office is In Nairobi and has a branch all over the
country. All purchases are made by the head office and goods are charged to branches at cost
plus (mark up) 25%.the following information relates to Nakuru branch for the year ended
31/12/2017.

Opening balances 1/1/2017.

Branch inventory (invoice price) 300,000
Branch debtors 450,000
Closing balances 31/12/2017.
Branch inventory (invoice price) 250,000

Transactions for the year

Goods sent by the head office to branch (invoice price) 2,500,000
Goods returned by branch to head office (invoice price). 200,000
Cash sales 800,000
Credit sales 2,700,000
Returns from customers to branch 100,000
Discount allowed. 30,000
Bad debts written off 20,000
Branch expenses 500,000
Goods stolen at branch 30,000
Cash sales stolen at branch (not included in other sales) 15,000
Cash received from branch debtors 2,450,000
Required:
a) Branch inventory account
b) Branch adjusted /mark up account
c) Goods sent to branch account
d) Branch debtors account
e) Branch income statement.

EXAMPLE 2
Kassmatt ltd operates a supermarket chain with the head office in Nairobi and branches in
Meru and Eldoret.

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Goods are transferred from the head office to Meru branch at a mark-up of 25% and to Eldoret
branch at a gross profit margin of 25%. The branches do not maintain separate books of
accounts.

The following transactions took place during the year ended 31 March 2016.

MERU BRANCH ELDORET BRANCH

Sh “000” Sh “000”
Opening stock at invoice price 10,000 10,000
Goods transferred to branch at invoice price 50,000 40,000
Cash remittance by branches 28,385 43,715
Returns by branches at invoice price 3,000 -
Cash at branch (1 April 2015) 2,000 1,000
Cash at branch (31 March 2016) 1,000 500
Debtor balance (1 April 2015) 840 600
Debtor balance (31 March 2016) 1,200 860
Returns by branch customers directly to head office 180 150
Cash received from branch debtors 16,800 14,200
Discount allowed 360 270
Bad debt written off 90 105
Expenses paid by branch 9,000 3,000

Additional information:
1. Meru branch transferred to Eldoret goods which had cost the head office sh. 4,500,000.
2. Eldoret branch had remitted sh.2,000,000 in cash to Meru branch

Required:
a. Branch inventory accounts.
b. Branch mark-up account.
c. Branch debtors account.
d. Branches cash account.

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