FINANCIAL REPORTING AND ANALYSIS KASNEB NOTES

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PAPER NO. 9 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 financial transactions and to prepare as well as analyse financial statements in the private and public sectors.

 

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

  • Account for various assets and liabilities
  • Prepare financial statements including published financial statements for various types of organisations
  • Account for specialised transactions
  • Prepare group financial statements
  • Analyse and interpret financial statements
  • Apply International Financial Reporting Standards (IFRSs) and International Public Sector Accounting Standards (IPSASs) in preparing non-complex financial statements.

 

CONTENT

  1. Accounting for Assets and Liabilities [Assets and liabilities as covered in Financial Accounting (Foundation Level) are also relevant here]
    • Investment Property
    • Assets used in exploring for and evaluation of mineral resources
    • Non-current assets held for sale
    • Financial Assets and Financial Liabilities (Recognition, Classification, Initial measurement, subsequent measurement, reclassifications and de-recognition)
    • Leases (Exclude Sale and Leaseback and dealers in leasing assets)
    • Current and Deferred tax
    • Government grants
    • Provisions, contingent liabilities and assets

 

  1. Accounting for Specialized Transactions
    • Revenue recognition (Basic application of revenue recognition principles to Hire Purchase, Consignment sales, construction contracts and joint arrangements)
    • Effects of changes in exchange rates (Only foreign currency denominated transactions)
    • Borrowing Costs

 

  1. Preparation of Financial Statements for different entities/Transactions
    • Conversion of a partnership into a company
    • Professional firms (Accountants, Lawyers, doctors, engineers)
    • Agricultural activities and farming
    • Pension plans
    • Cooperative Societies

 

  1. Preparation of Published Financial Statements
    • Presentation of Financial Statements (Statement of Profit or Loss, other comprehensive incomes, Statement of Financial Position and Statement of cash flows)
    • Accounting Policies, Changes in Accounting Estimates and Errors
    • Events after the Reporting Period
    • Discontinued Operations

 

  1. Accounting and Financial Statements for Interests in Other Entities
    • Subsidiaries (Basic Consolidated Financial Statements with one subsidiary – excluding disposals and statement of cash flows)
    • Associates and Joint ventures
    • Accounting treatment of investments in subsidiaries, associates and jointly controlled entities in the financial statement of the investor (Separate financial statements)
    • Branches (Only autonomous and local branches)

 

  1. Public Sector Accounting Standards
    • Presentation of Financial Statements
    • Accounting Policies, Changes in Accounting Estimates and Errors
    • Effects of Changes in Foreign Exchange Rates
    • Revenue from    exchange       transactions   and      revenue          from    non-exchange transactions
    • Property, plant and equipment, investment property and intangible assets
    • Provisions, contingent liabilities and contingent assets
    • Presentation of budget information in Financial Statements

 

  1. Analysing Financial Statements
    • Analysing financial statements using ratios covered in Financial Accounting
    • Analysing Financial Statements using common size approach for the statement of profit or loss and statement of financial position

 

TOPIC 1

 ACCOUNTING FOR ASSETS AND LIABILITIES

  

INVESTMENT PROPERTY

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 ad 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. 
  1. Subsequent measurement – an entity shall choose either the use of:
  • Cost model.- this requires asset to be measured at cost less accumulated depreciation in accordance with IAS 1 6.
  • 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.

SAMPLE WORK

Complete copy of CPA FINANCIAL REPORTING AND ANALYSIS NOTES is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP)

Phone: 0728 776 317

Email: info@masomomsingi.com

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.

 

They are measured at cost or fair value.

 

PROPERTY, PLANT AND EQUIPMENT (PPE) IAS 1 6

  • IAS 1 6 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.

 

 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 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.

 

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 i.e. indicating the movement balances.

 

INVENTORIES [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.

 

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

 

 

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 e.g. legal expense.

 

Examples of borrowing costs

a) Interest on loan/borrowing.

b) Floatation cost e.g. 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.

 

 ASSETS USED IN EXPLORING 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

 

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.

The following are examples of expenditures that might be included in the initial measurement of exploration and evaluation assets.

  1. Acquisition of right to
  2. Topographical, geological, geochemical and geophysical
  3. Exploratory
  4. Trenching
  5. Sampling
  6. Technical

 

Measurement at recognition

Exploration and evaluation assets shall be measured at cost.

Measurement after recognition

After recognition, an entity shall apply either the cost model or the revaluation model.

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.

 

SAMPLE WORK

Complete copy of CPA FINANCIAL REPORTING AND ANALYSIS NOTES is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP)

Phone: 0728 776 317

Email: info@masomomsingi.com

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