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PAPER NO. 14 ADVANCED FINANCIAL REPORTING AND ANALYSIS
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to account for more complex transactions, prepare advanced financial statements and reports in the private and public sectors and demonstrate awareness of trends in accounting practice.
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
- Prepare financial statements for subsidiaries, associates and jointly controlled entities in compliance with International Financial Reporting Standards (IFRSs) and International Public Sector Accounting Standards (IPSASs) as applicable
- Analyse financial statements for public and private sector entities
- Account for complex accounting transactions
- Apply ethical standards in accountancy work and practice
CONTENT
- Accounting for Assets and Liabilities
- (Assets and Liabilities as covered in Financial Accounting and Financial Reporting are also relevant here)
- Leases Including Sale and leaseback and dealers in leased assets
- Deferred Tax (With group aspects)
- Employee Benefits
- Share Based Payments
- Financial Assets and Financial Liabilities (Impairment, Hedging, Embedded Derivatives and Disclosures)
- Fair Value Measurement
- Impairment of Assets
- Preparation of Financial Statements for Interests in Other entities
- Subsidiaries (Including foreign subsidiaries, piecemeal acquisitions, reduction in shareholding and disposals as well as statement of cash flows)
- Accounting for Associates and Joint Ventures (Including foreign entities)
- Disclosures of interests in other entities
- Preparation of Financial Statements for other entities
- Financial Statements for Banks
- Financial Statements for Insurance Companies
- Interim Financial Statements
- Financial Statements in a hyperinflationary economy (including the preparation of financial statements)
- Financial Statements complying with IFRS for SMEs.
- Analysing Financial Statements
- Earnings Per Share
- Related Party Disclosures
- Operating Segments
- Financial Reorganisations and reconstructions
- Public Sector Accounting Standards
- Segment Reporting
- Related Party Disclosures
- Impairment of cash generating assets and non-cash generating assets
- Disclosure of information about the general government sector
- Consolidated Financial Statements
- Investments in Associates and Joint Ventures
- Other Reports and Emerging Issues in Financial Reporting
- 1 The conceptual Framework and the process of developing new accounting standards
- 2 Proposals to revise/update existing standards and recommendations to issue new ones (Discussions Papers and Exposure drafts)
- (The Examinations Board shall provide guidelines on which Discussion Papers and Exposure drafts are examinable for specific years)
- Management Commentary (Management Discussion and Analysis)
- Capital Markets Authority Corporate Governance Reporting Requirements
- Global Reporting Initiatives Guidelines on Sustainability Reporting
- Integrated Reporting
- Materiality Guidelines for Financial Reporting
- Legal and Ethical issues in Financial Reporting.
TOPIC 1
ACCOUNTING FOR ASSETS AND LIABILITIES
ASSETS AND LIABILITIES AS COVERED IN FINANCIAL ACCOUNTING AND FINANCIAL REPORTING
LEASES INCLUDING SALE AND LEASEBACK AND DEALERS IN LEASED ASSETS
LEASES (IAS 17)
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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.
Types of leases
- Operating lease.
- Finance lease.
- Sell and leaseback lease.
- 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
- Lease does not involve strict terms and conditions associated with long term debts.
- Leasing has lower effective cost compared to long term debts.
- It does not require a significant initial capital investment compared with cost of buying new asset.
- It reduces the risk of obsolescence.
- 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 |
| It is a long term lease taking more than 75% of economic life of the asset. | It is a short term lease. |
| The lessee has an option to purchase the asset at the end of the lease period. | The lessee has no such option. |
| The contract cannot be cancelled before maturity. | The lease contract can be canceled any time before maturity.
|
| The lessee incurs all incidental operating expenses and account for the items in its financial statement
|
The lessor incurs the operating expenses and accounts for the asset in his books of account. |
SAMPLE WORK
Complete copy of CPA ADVANCED FINANCIAL REPORTING AND ANALYSIS Study text is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy
Phone: 0728 776 317
Email: info@masomomsingi.com
Sell and leaseback lease.
This is a type of lease or a financial transaction in which one sells the asset and leases it back therefore, one continue to be able to use the asset but no longer owns its. It has the following features/characteristics:
- Long initial terms – when one buys a sale- leaseback asset, one knows that he could end up with a lease option.
- Triple net lease – most sale leasebacks are structured with a triple net lease. This means the tenant takes full responsibility for the property e.g. building.
Advantages of sale- leaseback lease.
- Sale and lease back can provide businesses with a significant cash- flow boost.
- It enables the business to release cash from existing items of value such as equipment. The cash gained can be used to provide working capital.
DEFERRED TAX (WITH GROUP ASPECTS)
Deferred tax is the corporation tax that is likely to be incurred on the activities of a company during a particular period but, because of differences between the way activities are included in the accounting profit and taxable income, will be paid in another period.
The principle issue in accounting for income tax is how to account for current as well as
IAS 12 requires that current tax for current and prior periods be recognized as a liability to the extent unpaid and as an asset if the amount paid exceeds the amount due for this period.
Definitions
- 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/amount allowable for tax purposes in the future.
- 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.
Deferred tax is the estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods. The need for deferred tax arises because the profit for tax purposes may differ from the profit shown in the financial statements.
The difference between accounting profit and taxable profit is caused by:
- Temporary differences
- Permanent differences
Deferred tax is a means of “ironing out” the tax inequalities arising from temporary differences.
Temporary Differences
These are differences between the carrying amount of an asset or liability in the statement of financial position and the tax base of the asset or liability. The tax base is the amount attributed to that asset or liability for tax purposes (often known as the Tax Written Down Value).
A temporary difference arises when an item is allowable for both accounting and tax purposes, but there is a difference in the timing of when the item is dealt with in the accounts and when it is dealt with in the tax computations.
A common example of such a difference is capital expenditure. In the financial statements, the expenditure will be depreciated over the life of the asset and this depreciation will be deducted in arriving at accounting profit. However, in the tax computation, depreciation is not deductible. It is added back and capital allowances (or tax depreciation) are granted instead. If the accounting depreciation and capital allowances are calculated at a different rate, there will be a difference between the accounting profit and the taxable profit.
This is a temporary difference because eventually, the cause of the difference will disappear entirely.
That is, the asset will eventually be fully depreciated and no further depreciation expense in respect of that asset will appear in future income statements and all capital allowances will also have been claimed, leaving no further deductions in future tax computations in respect of the asset.
Permanent Differences
Some income and expenses may not be chargeable / deductible for tax and therefore there will be a permanent difference between accounting and taxable profits. That is, the difference will not reverse in the future
Therefore, permanent differences are:
One-off differences between accounting and taxable profits caused by certain items not being taxable / allowable
Differences which only impact on the tax computation of one period
An example of a permanent difference would be fines or penalties, such as interest imposed on the late payment of tax. Such an expense would appear in the financial statements but would not be allowable for tax purposes.
Deferred tax arises in respect of temporary differences only. Deferred tax is not concerned with permanent differences.
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.
Methods of determining income taxes
There are various methods of determining income tax for the period. The method may be grouped into 2 categories as follows:
- Tax payable method/flow through method/nil provision method.
- This approach considers income tax as an appropriation of income and not as an operating expense.it only recognizes current tax hence ignoring the deferred tax.
- IAS 12 does not require the use of this method.
- Deferred tax accounting method / Liability Method
Under this method, the tax expenses comprise both current and deferred tax. The deferred tax element in tax expense can be calculated using:
- Full provision basis.
- Partial provision basis.
Full provision method – this method requires that all temporary differences be recognized in full for all transactions accruing for a given period.
This method minimizes the subjection/biasness’ in provision of deferred tax because deferred tax is provided on all temporary differences.
Partial provision method – under this, the temporary difference be recognized for those that are reasonable of reversing in the future.
Argument for recognizing deferred tax/advantages of deferred tax recognition.
- If deferred tax liability is ignored, profits will be inflated.
- The accrual concept requires tax to be matched with profit as they are earned.
- Deferred tax will eventually become an actual tax liability.
- Ignoring deferred tax overstates profits which may result in:
- Overpayment of dividend based on inflated profits.
- Distortion of EPS and the P/E ratio hence distorting entities performance.
- Shareholders are misled.
SAMPLE WORK
Complete copy of CPA ADVANCED FINANCIAL REPORTING AND ANALYSIS Study text is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy
Phone: 0728 776 317
Email: info@masomomsingi.com
