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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 (Questions and Answers) contains kasneb past examination past papers and their suggested answers as provided by 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.

SAMPLE WORK

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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

CONTENT

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

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

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

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

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)

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

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

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

PART A

PAST EXAMINATION QUESTIONS

TOPIC 1

ACCOUNTING FOR ASSETS AND LIABILITIES

QUESTION 1

August 2022 Question One A

A number of developing countries are engaged in exploration of minerals to boost their economic empowerment.

Your company, an international mineral exploration firm has been contracted by one of the developing countries on a mineral exploration and evaluation engagement.

Required:

Advise the Board of Management of the company on the following:

(i) The relevant International Financial Reporting Standard (IFRS) for accounting for exploration of mineral resources and the scope of the standard. (4 marks)

(ii) The key provisions of the IFRS in (a) (i) above on impairments of assets used in exploration activities. (3 marks)

(iii) Disclosure requirements in the financial statements under the IFRS. (3 marks)

QUESTION 2

August 2022 Question Four A

On 1 January 2019, Brakewood Limited entered into a contract to lease an item of plant and equipment from a supplier for a three-year period. The terms of the lease were that Brakewood Limited was to pay Sh.500,000 each year with the payments commencing on 31 December 2019.

Initial direct costs incurred on the lease amounted to Sh.30,000 and were paid for by Brakewood Limited. The plant and equipment had a remaining economic useful life of five years at the inception of the lease. The lease contract did not contain any purchase option for the lessee.

Brakewood Limited can borrow at a rate of 10% a year.

Required:

Analyse the accounting treatment of the above lease transactions from the inception and for the three-year period of the lease contract. (10 marks)

QUESTION 3

August 2022 Question Five A

Discuss the business concept of “triple bottom line” as applied in financial reporting. (8 marks)

QUESTION 4

April 2022 Question Five A

With reference to International Accounting Standards (IAS) 41 – Agriculture:

(i) Describe the key provisions on measurement of agricultural produce. (5 marks)

(ii) Highlight six disclosure requirements where fair value of the farm produce cannot be measured reliably. (6 marks)

QUESTION 5

April 2022 Question Five B

Zeon Limited, a public limited entity is in the process of finalising its financial statements for the year ended 31 October 2021.

The following information has been extracted from its accounting records for the purpose of estimating the deferred tax balance:

Inventory is stated in the financial statements at the lower of cost and net realisable value. The company wrote down its inventory by Sh.120 million to a net realisable value of Sh.1,130 million. The reduction in value is ignored for tax purposes until the inventory is sold.
Trade receivables had a carrying amount of Sh.450 million after making a general provision for doubtful debts of Sh.30 million. The provision is not allowed for tax purposes.
Property, plant and equipment has a carrying amount of Sh.3,050 million and a tax base of Sh.2,750 million. During the year ended 31 October 2021, property was revalued upwards by Sh.150 million.
During the year to 31 October 2021, development expenditure amounting to Sh.480 million was capitalised. Amortisation of Sh.20 million was charged to profit or loss for the year. This development expenditure was allowed for tax purposes in full during the year.
Trade and other payables are carried at Sh.600 million. Included in the other payables are accrued expenses of Sh.100 million whose related expenses are deductible for tax purposes on cash paid basis.
Deferred tax liability as at 1 November 2020 amounted to Sh.272 million.
The income tax rate of 30% is applicable.

Required:

(i) Compute the relevant temporary differences. (5 marks)

(ii) Deferred tax account as at 31 October 2021. (4 marks)

QUESTION 6

December 2021 Question One A

Accounting in general and financial reporting in particular are undergoing a dynamic transformation both in function and practice. Global forces are continuously reshaping accountancy as a profession.

Required:

In the context of the above statement, describe how the following forces are transforming the future of accounting:

(i) Cloud based accounting solutions. (2 marks)

(ii) Automation of the accounting function. (2 marks)

(iii) Outsourcing of accounting services. (2 marks)

(iv) Data analytics. (2 marks)

QUESTION 7

September 2021 Question Five A

The International Financial Reporting Standard (IFRS) 9 – Financial Instruments, specifies how an entity should classify and measure financial assets, financial liabilities and some contracts to buy or sell non-financial items.

Required:

Describe the requirements of IFRS – 9 as they relate to:

(i) Initial measurement of financial assets. (2 marks)

(ii) Subsequent measurement of financial assets. (4 marks)

(iii) Debt instruments. (4 marks)

(iv) Equity instruments. (2 marks)

QUESTION 8

May 2021 Question Two A

In the context of International Financial Reporting Standard (IFRS) 9 “Financial Instruments: Recognition and Measurement”, explain the accounting treatment of financial instruments that are equity instruments, both on initial recognition and subsequent measurement. (8 marks)

QUESTION 9

November 2020 Question one A

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

QUESTION 10

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 11

November 2020 Question Three B

The following are the draft statements of financial position of Aby Limited and Benta Limited as at 30 April 2020:

	Aby Limited	Benta Limited
Assets:	Sh.“million”	Sh.“million”
Non-current assets:
Property, plant and equipment	25,290	5,420
Investments	8,120	NIL
	33,410	5,420
Current assets:
Inventory	2,750	1,295
Trade receivables	2,135	1,010
Cash and bank balances	1,220	575
Total assets	39,515	8,300
Equity and liabilities:
Equity:
Ordinary shares of Sh.10 each	12,500	3,800
Revaluation surplus	2,700	260
Retained profit	13,600	2,350
	28,800	6,410
Non-current liabilities:
Deferred consideration	1,800	NIL
10% debentures	2,450	500
Deferred tax	1,920	375
Current liabilities:
Trade payables	3,200	655
Current tax	1,345	360
Total equity and liabilities	39,515	8,300

Additional information:

On 10 May 2019, Aby Limited acquired 80% of the share capital of Benta Limited. At this date, the retained profit of Benta Limited amounted to Sh.2,200 million and the revaluation surplus stood at Sh.260 million.

Aby Limited paid an initial cash consideration of sh.5,940 million and agreed to pay the owners of Benta Limited a further Sh.1,800 million on 1 May 2021. The accountant of Aby Limited has recorded the full amounts of both elements of the consideration in investments. Aby Limited has a cost of capital of 8% and the appropriated discount factor is 0.857.

On 1 May 2019, the fair values of Benta Limited’s net assets were equal to their carrying amounts with the exception of some inventory which had cost Sh.193 million but had a fair value of Sh.233 million. On 30 April 2020, 10% of these goods remained in the inventory of Benta Limited.
During the year, Aby Limited sold goods worth $h.515 million to Benta Limited at a profit mark up of 25% above the cost. At 30 April 2020, Benta Limited still held Sh.75 million of these goods in its inventory.
On 1 May 2019, Aby Limited also acquired an investment of 30% of the ordinary shares in Ceda Limited which cost Sh.380 million, Ceda Limited reported a profit of Sh.850 million during the year ended 30 April 2020.
Aby Limited has a policy of valuing non-controlling interests at fair value. On 1 May 2019, the noncontrolling interest in Benta Limited had a fair value of Sh.1,317 million.
Impairment tests carried out on 30 April 2020 concluded that the value of the investment in Ceda Limited was impaired by Sh.85 million while the consolidated goodwill was impaired by Sh.100 million.

Required:

i) Calculate the carrying amount of the investment in Ceda Limited to be included within the consolidated statement of financial position using the equity method. (2 marks)

(ii) The consolidated statement of financial position for the Aby Group as at 30 April 2020. (12 marks)

(Total: 20 marks)

QUESTION 12

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 13

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 14

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 15

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 16

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 17

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 18

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 by banks and by extension, the ease of accessing bank loans. (6 marks)

QUESTION 19

November 2017 Question Five A

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

PART B

TOPIC 1

ACCOUNTING FOR ASSETS AND LIABILITIES

QUESTION 1

August 2022 Question One A

(i) The relevant international Financial Reporting Standards (IFRS) is IFR 6 -Exploration for and evaluation of mineral resources.

The scope of the standard is stated as follows:

An entry shall apply the IFRS to exploration and evaluation expenditure that it incurs.
An entry shall not apply the IFRS to exploration and evaluation expenditure that it incurred; before the exploration for and evaluation of mineral resources, such as expenditure incurred before the entry has obtained the legal right to explore the specific area; after technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

ii) Key provision on requirements

IFRS 6 effectively modifies the application of IAS 3 assets 6 impairment to exploration and evaluation; assets recognized by an entity under it accounting policy.

Entities recognizing exploration and evaluation assets are required to perform impairment test on those assets when specific facts and circumstances outlined in the standard indicated on impairment assets are required.
The fact and circumstances outlined in the IRFS 6 are non-exhaustive and are applied instead of the indicators of impairment in IAS 36.
Impairment loss shall be treated as an expense in the income statement
The company shall evaluate the indicators of impairment loss of its exploration assets

iii) Disclosure requirements

An entity shall disclose;

It accounting policies for exploration and evaluation expenditure including the recognition of exploration and evaluation of assets ‘
The amount of assets and liabilities, assets, income and expenses arising from the exploration for and evaluation of mineral resources.
An entity shall treat exploration and evaluation assets as a separate class of assets and make discloser required by either IAS 16 or IAS 38 consistent with how the assets are classified.
Impairment loss
Carrying amount

QUESTION 2

August 2022 Question Four A

Lease contract (IFRS 16)

Accounting treatment of the above lease transactions

QUESTION 3

August 2022 Question Five A

Business concept of Triple bottom line as used in Financial Reporting

Triple bottom line is an accounting framework that incorporates three dimensions of performance; social, environmental and financial

The concept behind triple bottom line is that companies should focus as much on social and environmental issues as they do on profits
The triple bottom line consists of three elements; profit, people and the planet.
TPL theory holds that of 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 profits
People; this measures how socially responsible an organization has been throughout its history
Planet; this measures how environmentally responsible a firm has been.

QUESTION 4

April 2022 Question Five A

i) At provision on measurement of agricultural product

Biological asset within the scope of IAS 41 are initially measured and recognized at fair value less estimated cost to sell, unless fair value cannot be reliably measured.
Agricultural produce is measured at fair value less estimated cost to sell at the pant of harvest
The gain on initial recognition of biological asset at fair value less cost to sell and changes in fair value during the period are included in profit or loss.
All cost related to biological assets are recognized as expenses when incurred that cost to purchase biological assets

ii) Disclosure requirement where fair value cannot be measured reliably

Description of the assets
Depreciation method
Useful lives or depreciation rates
An explanation of using why fair value cannot be reliably measured
If possible a range within which fair value is likely to lie
Gross carrying amount and the accumulated depreciation beginning or ending

QUESTION 5

QUESTION 6

December 2021 Question One A

How the following forces are transforming the future of accounting

i) Cloud based accounting solution

This is a new concept which is based on the concept of using shared resources including accounting software that runs on the provider’s server and being able to access financial information in the clouds.

Cloud computing has made accounting information more accessible, less costly to automate.

ii) Automation of accounting function.

This is the trend where manual processes have been phased out and replaced with application of software. This leads to efficient utilization and management of resources.

iii) Outsourcing of accounting services.

This is the transferring of accounting recording, transaction and preparation of accounts to another third party outside the organization, usually at a fee.

Outsourcing allows a business to focus on its core business which enhances output and increases efficiency.

iv) Data analytics.

Advancements in data centres, database benchmarks and software have ushered in the age of big data and mining of data to and management decisions. This will enhance business decision making

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 7

September 2021 Question Five A

Requirements of IFRS

(i) Initial measurement of financial asset

All financial instruments are initially measured at fair value plus or minus, in the case of financial asset or financial liability not at fair value through profit or loss.

(ii) Subsequent measurement of financial assets

IFRS divides all financial assets that are currently in the slope of IAS 39 into classification. Those measured at amortised cost and those measured at fair value.

Where asset are measured of fair value, gains and losses are either recognized to profit or loss or recognized to other comprehensive income.

(iii)Debt instrument

A debt instrument that meets the criteria for a financial liability should be measured either at

a)At amortised cost (net of any written down impairment

b)At fair value- Even if an instrument meets the two requirement to be measured at amortised cost, at initial recognition, financial liability or asset must be measured at fair value

iv) Equity instrument

All Equity investment in the scope of IFRS 9 are to be measured at fair value in the statement of financial position, with the value changes recognized in profit or loss except for those equity investment for which the entity has elected to present value changes in other comprehensive income

QUESTION 8

May 2021 Question Two A

Initial recognition of equity instrument

Initial recognition

Equity instrument should be measured upon fair value upon initial recognition.
The fair value is due to consideration given on acquisition of equity investment or received from issue of equity instruments. The fair value may exclude the transaction cost, the treatment of which will depend on subsequent measurements.

Subsequent initial measurement

Following initial recognition, equity instrument are measured either at fair value through profit or loss or at fair value through other comprehensive income.

Subsequent can be measured at amortized cost.

QUESTION 9

November 2020 Question one A

Accounting treatment of contigent assets

As per IAS 37, Contigent assets are not recognized but they are disclosed when it is more likely that an inflow benefit will occur.

However when the inflow of benefits is virtually certain an asset is recognized in the statement of financial position because that asset is no longer considered to be contigent

Examples of contigent asset