SAMPLE WORK

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CPA

FINANCIAL REPORTING

INTERMEDIATE LEVEL

REVISION KIT

INTRODUCTION

Following our continued effort to provide quality study and revision materials at an affordable price for the private students who study on their own, full time and part time students, we partnered with other team of professionals to make this possible.

This Revision kit book (Question and answers) contains kasneb past examination past papers and our suggested answers as provided a team of lecturers who are experts in their area of training. The book is intended to help the learner do enough practice on how to handle exam questions and this makes it easy to pass kasneb exams.

Special appreciation and recognition goes to Johnmark Mwangi (MSc Finance, CPAK, BCom Finance) and FA Kegicha William Momanyi (MBA Accounting, CPA, CISA and CCP)

PAPER NO.9 FINANCIAL REPORTING

GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to prepare financial statements for various entities and account for specialised transactions in both the public and private sectors.

9.0 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
Analyze and interpret financial statements
Apply International Financial Reporting Standards (IFRSs) and International Public Sector Accounting Standards (IPSASs) in preparing non-complex financial statements.

CONTENT

9.1 Assets of financial statements

Assets and liabilities covered in Paper No. 1: Financial Accounting still examinable (in the context of published financial statements)
Inventories
Borrowing costs
Investment property
Financial Instruments (presentation, recognition, classes, measurement, de-recognition and disclosures) (excluding impairment, hedging and embedded derivatives)
Leases (all aspects including dealers and sale and leaseback)

9.2 Liabilities of financial statements

Employee benefits
Provisions, contingent liabilities and contingent assets
Income tax (current and deferred tax but not deferred tax in the case of groups)
events after reporting date

9.3 Further aspects of partnerships

Dissolutions (including piece-meal)
Amalgamation Conversion and sale of partnership firms 9.4 Special transactions
Revenue recognition
Contracts with customers
Hire purchase and installment sales transactions (split of hire purchase profit into interest and gross profit and using actuarial method and sum of digits to account for interest); sale of goods, construction contracts and real estate, provision of services
Government grants

9.5 Financial statements for various types of businesses

Inventory and biological assets in agriculture
Insurance
Banks
Professional firms (lawyers and accountants)
Accounting for branches including foreign branches
Co-operative societies

9.6 Published financial statements

Presentation of financial statements (income statement, statement of comprehensive incomes, statement of changes in equity, statement of financial position and the notes to financial statements)
Accounting policies, changes in accounting estimates and errors (prior period errors)
Fair value measurement

9.7 Consolidated financial statements

Accounting for one subsidiary (consolidated income statement, consolidated statement of financial position and a statement of cash flows – group financial statements); consolidated statement of cash flows also covers associate companies and jointly controlled entities but excludes acquisition and disposal of subsidiaries during the year
Investments in associates and joint ventures

9.8 Financial statements under IPSASs

[Provisions of the following IPSASs (emphasis on distinctions with equivalent IASs/IFRSs)]

Presentation of financial statements
Accounting policies, changes in accounting estimates and errors
Borrowing costs
Consolidated and separate financial statements
Investments in associates
Interests in joint ventures
Events after the reporting date
Construction contracts, leases and inventories
Provisions, contingent liabilities and contingent assets

9.9 Emerging issues and trends

TABLE OF CONTENTS

TOPICS PAGE

PART A: PAST EXAMINATION QUESTIONS

Topic 1: Assets of financial statements………………………………………………………………9

Topic 2: Liabilities of financial statements ……………………………………………………….14

Topic 3: Further aspect of partnerships……………………………………………………………..17

Topic 4: Special transactions………………………………………………………………………..….39

Topic 5: Financial statements for various types of businesses………………………………45

Topic 6: Published financial statements…………………………………………………………….64

Topic 7: Consolidated financial statements…………………………………………………..……92

Topic 8: Financial statements under IPSASs……………………………………….117

Topic 9: Emerging issues and trends………………………………………………………………….123

PART B: SUGGESTED SOLUTIONS

Topic 1: Assets of financial statements……………………………………………………………125

Topic 2: Liabilities of financial statements ……………………………………………………..134

Topic 3: Further aspect of partnerships……………………………………………………………139

Topic 4: Special transactions………………………………………………………………………….164

Topic 5: Financial statements for various types of businesses…………………………….176

Topic 6: Published financial statements…………………………………………………………..202

Topic 7: Consolidated financial statements…………………………………………………..….245

Topic 8: Financial statements under IPSASs…………………………………….……………..281

Topic 9: Emerging issues and trends………………………………………………………………….292

PART A

PAST EXAMINATION QUESTIONS

TOPIC 1

ASSETS OF FINANCIAL STATEMENTS

QUESTION 1

November 2020 Question one B

With reference to International Accounting Standard (IAS) — 16: Property, Plant and Equipment:

(i) Describe two conditions under which property, plant and equipment should be recognised. (4 marks)

(ii) Outline the provisions with regard to derecognition of property, plant and equipment. (4 marks)

QUESTION 2

May 2019 Question five A

In the context of International Accounting Standard (IAS) 16 “Property, Plant and Equipment”, explain four disclosure requirements for items of property, plant and equipment which are stated at revalued amounts. (8 marks)

QUESTION 3

November 2018 Question one A

The objective of International Accounting Standard (IAS) 2 “Inventories” is to prescribe the accounting treatment for inventories. IAS 2 provides useful guidance particularly in economies which arc dependent on agriculture.

Required:

Summarise the key requirements of IAS 2 under the following headings:

(i) Scope of the term “inventories”. (2 marks)

(ii) Measurement of inventories. (3 marks)

(iii) Disclosure requirements. (4 marks)

QUESTION 4

November 2018 Question three A

International Financial Reporting Standard (IFRS) 9 “Financial Instruments- establishes principles of derecognizing financial assets and financial liabilities. Derecognition is the removal of a previously recognised financial instrument from an entity’s statement of financial position.

Required:

With reference to the principles of I FRS 9, describe the criteria for derecognition of financial assets and financial liabilities of an entity. (6 Marks)

QUESTION 5

May 2018 Question four B

Royal Contractors Ltd. owns an item of plant used for construction with a carrying value of Sh.14 million as at 31 December 2015. The firm won a construction contract and decided to sell and lease back the machine on that date under the following conditions.

Selling price Sh.40 million. This was also the fair value of the plant.
Lease rentals payable annually in arrears amounted to Sh.15,521,200.
Lease duration for the machine was to be 3 years. The economic life of the machine was also 3 years.
The implicit interest rate was 8% per annum.

Required:

The journal entries to record the necessary transactions in the books of Roy al Contractors Ltd. for the three years, including the expected entries at the end of year 2018. (8 marks)

QUESTION 6

May 2018 Question five B

Discuss the impact of International Financial Reporting Standard (IFRS) 9 on the tax expenses of commercial banks. (6 marks)

QUESTION 7

November 2017 Question Two A

The new International Financial Reporting Standard (IFRS) 9 – Financial Instruments which was issued on 24 July 2014 and which will take effect from 1 January 2018, has generated significant discussions in your country, particularly within the banking sector.

Required:

Explain how IFRS 9 is likely to impact on the provisions for bad and doubtful debts banks and extension, the ease of accessing bank loans. (6 marks)

QUESTION 8

November 2017 Question Five A

Explain two key features of a sale and leaseback transaction, citing two advantages of such transactions. (6 marks)

QUESTION 9

May 2017 Question One B

In the context of International Accounting Standard (IAS) 40 – Investment property:

Define an “Investment property”, citing two examples (4 marks)
Identify two types of property that are specifically not considered as investment property. (2 marks)

Discuss the fair value model as applied in the valuation of investment property

(6 marks)

QUESTION 10

November 2016 Question Three A

With reference to International Financial Standard (IFRS) 9 – Financial instruments:

Describe the provisions governing the initial measurement and subsequent measurement of financial instruments. (4 marks)
Explain the requirements for de-recognition of financial instruments:

(4 marks)

QUESTION 11

November 2015 Question Four C

Europa Ltd, a manufacturing company, leased a plant from smart equipment Ltd on a finance lease.

The details of the lease agreement are as follows:

Date of commencement of lease	1 January 2015
Fair value of the plant on 1 January 2015	Sh. 120 million
Expected useful life of plant	3 years
Annual lease payment (paid in advance)	Sh. 50 million
Interest implicit in lease	12% per annum
Lease period	3 years
Residential value of plant	Sh. 6 million

Required:

Show way of extracts, how the above transaction would be reflected Europa Ltd in the following:

Income statements for the years ending 31 December 2015 and 31 December 2016. ( 3 marks)
Statements of financial position as at 31 December 2015 and 31 December 2016.

(3 marks)

SAMPLE WORK

Complete copy of CPA FINANCIAL REPORTING Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy

Phone: 0728 776 317

Email: info@masomomsingi.com

QUESTION 12

November 2015 Question Four D

Outline the main benefit of a sale and leaseback transaction to the vendor.

(2 marks)

QUESTION 13

Pilot Paper September 2015 Question Four B

Madwang Ltd leased out its plant to Kasheshe Hauliers Ltd, under a finance lease on 1 January 2010. The fair value of the plant on 1 January 2010 was sh. 870,000. The lease provided for 6 annual rentals sh. 200,000 each receivable at the end of each year.

The interest implicit in the lease is 10%.

Required:

Using actuarial method, show in the books of Madwang Ltd.

Income statement extracts over the lease term. (6 marks)
Statement of financial position extracts suitably classified. (6 marks)

QUESTION 14

Pilot Paper September 2015 Question Five A

Explain the fair value model of accounting for investment property as per IAS 40 (investment property). (4 marks)

QUESTION 15

May 2015 Question Two B

Differentiate the bases upon which revenue from royalties and revenue from dividends should be recognized in accordance with the international accounting standards (IAS) 18, “Revenue”. (2 marks)

TOPIC 2

LIABILITIES OF FINANCIAL STATEMENTS

QUESTION 1

November 2020 Question one A

Citing two examples, explain the accounting treatment of contingent assets. (4 marks)

QUESTION 2

November 2019 Question one A

International Accounting Standard (IAS) 10 defines events after the reporting date as those events which could be favourable or unfavourable, that occur between the end of the reporting period and the date that the financial statements are authorised for issue.

Required:

With reference to IAS 10:

(i) Distinguish between “adjusting” and “non-adjusting” events. (2 marks)

(ii) Describe the accounting treatment of events after the reporting period. (4 marks)

QUESTION 3

May 2019 Question three A

Describe the two types of post-employment benefit plans in accordance with International Accounting Standard (IAS) 19 “Employee Benefits”. (6 marks)

QUESTION 4

November 2018 Question four A

Miaka Nenda Ltd.’s current year end is 30 June 2018. The company’s financial statements were authorised for issue its directors on 10 July 2018.

The following matters have been brought to your attention:

On 11 July 2018, a fire completely destroyed _ the company’s largest warehouse and the inventory it contained. The carrying amounts of the warehouse and the inventory were Sh.80,000,000 and Sh.50,000,000 respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of Sh.70,000,000 from its insurers. Miaka Nenda Ltd’s trading operations have been severely disrupted since the lire and it expects significant trading losses for some time to come.
A single class of inventory held at another warehouse was valued at its cost of Sh.9,200,000 as at 30 June 2018. In July 2018, 70% of this inventory was sold for Sh.5,600,000 on which the company’s staff earned a commission of 15% of the selling price.
On 10 August 2018, the government announced tax changes which had the effect of increasing the company’s deferred tax liability Sh.7,000,000 as at 30 June 2018.

Required:

With reference to International Accounting Standard (IAS) 10 “Events Alter the Balance Sheet Date”, explain the required treatment of each of the above items in the financial statements of Miaka Nenda Ltd. for the year ended 30 June 2018. (6 marks)

QUESTION 5

May 2018 Question one B

With reference to International Accounting Standard (IAS) 12-Income Taxes:

(i) Differentiate between a “deferred tax liability” and a “deferred tax asset”.

(2 marks)

(ii) Explain the two types of temporary differences. (4 marks)

(iii) Describe the basis of measurement for current tax liabilities and deferred tax liabilities. (4 marks)

QUESTION 6

May 2016 Question Five A

With reference to International Accounting Standard (IAS) 10 “Events After the Reporting Period”, explain the following terms:

(i) Events after the reporting period. (2 marks)

(ii) Adjusting events. (2 marks)

(iii) Non-adjusting events. (2 marks)

PART B

SUGGESTED ANSWERS AND SOLUTIONS

TOPIC 1

ASSETS OF FINANCIAL STATEMENTS

QUESTION 1

November 2020 Question one B

i) Conditions under which PPE should be recognized

PPE should be recognized when:
The entity owns and controls the asset
It probable economic benefit will flow to the entity
The cost of the asset can measured reliably

(ii) Derecognition of PPE

An asset should be removed from the statement of financial position on disposal
When the asset have been scapped or abandonment.
When the asset have been considered absolete
when the asset have depreciated fully and there is no expected future economic benefits

QUESTION 2

May 2019 Question five A

Disclosure requirement for PPE stated at revealed amount

The following information should be presented in respect of a revaluation of PPE

Statement of financial position – the carrying amount of PPE
Statement of comprehensive income – changes in the revolution surplus for PPE recognized in other comprehensive income.
Statement of changes in equity – a reconciliation between the carrying amount of the revaluation surplus at the beginning and at the end of the period. I.e indicating the movement in the balances
Notes for accounting policies – disclosure of the specific amounting policy and effective date of revaluation and whether an independent valuer was involved.

General disclosure for each class PPE

Basis of measuring carrying amounts
Depreciation method used and rates
Usual life of the asset
The gross carrying amount, accumulated depreciation and implement losses of the beginning and end of period.
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: Derecognition of an item of PPE is done on disposal or when no future benefits are expected from its use or disposal.

QUESTION 3

November 2018 Question one A

i) Scope of the term inventories

Inventories are assets held for sale on the normal course of the business .they include raw materials work in progress or finished goods.

ii) Measurement of inventories

Inventory should be measured or valued based on the lower of cost and net reliable value

The cost of inventory shall include:

Purchase cost
Cost of conversion
Administrative cost, selling cost, shortages etc

iii) Disclosure requirement

Methods adopted in determining the cost i.e FIFO or weighed average
The carrying amount of inventories suitably classified into raw materials, WIP and finished goods.
Inventories that was valued of net realized value
Inventories pledged as securities

QUESTION 4

November 2018 Question three A

Criteria for derecognition of financial asset and liabilities of an entity

De recognition is the removal of a previously recognized financial instrument from entities statement of financial position.
A financial instrument should be de recognized if either the entity contractual rights or obligation cash flows have expired or the asset has been transferred to a third party along with the risks of ownership.
If the risks and record of ownership have not passed to the buyer the selling entity must still recognize the entire financial instrument and treat any consideration received as a liability.

QUESTION 5

May 2018 Question four B

The Journal entries to record the necessary transactions in the books of Royal Contractors Ltd. For the three years including the expected entries at the end of year 2018.

Gain on disposal = 40-14=26m

Amortization schedule
Period	Balance b/d	Interest (8%)	Payment	Principle	Balance c/d
2016	40,000,000	3200,000	15,521,200	12,321,200	27,678,800
2017	27,678,800	2,214,304	15,521,200	13,306,896	14,371,904
2018	14,371,904	1,149,752	15,521,200	14,371,448	–

Income statement
	2016	2017	2018
Interest expense (Debit)	3,200,000	2,214,304	1,149,752
Deprecation=40m÷3(Debit)	13,333,333	13,333,333	13,333,333

Statement of financial position
	2016	2017	2018
Non-current asset
Plant (NBV)	26,666,667	13,333,334	0

Non – current liabilities
Lease obligation	14,371,904	–	–
Current liabilities
Lease obligations	13,306,896	14,371,448	–

QUESTION 6

May 2018 Question five B

Discuss the impact of IFRS9 on tax expenses of Commercial banks

IFRS9 encompasses the accounting for financial instrument and their impairment
The objective of IFRS 9 is to recognize a whole year and life time expected credit losses for all financial instrument for which there has been a significant increase in credit risk.
There is a high likelihood that only incurred credit losses recognized on non-performing loans and advances under IFRS 9 will be allowed as tax- deductible

QUESTION 7

November 2017 Question Two A

How 1FRS91 likely to impact on the provision of bad and deceitful debt bank

The biggest effect of IFRS is the increase in loss provision from the new expected loss impairment model, as compared to IAS39 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 the new expected credit loss model, the number and completely 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 of default forward-looking factor – macro-economic variables and their forecast used in the calculation of impairment under IFRS