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TOPIC 1
ACCOUNTING FOR ASSETS AND LIABILITIES
QUESTION 1
April 2024 Question One B, C and D
(b) The conceptual framework refers to two main measurement bases; historical cost and current value. Management should refer to the fundamental qualitative characteristics of relevance and faithful representation when selecting a measurement basis.
Required:
Discuss FOUR factors to be considered when choosing a measurement basis. (4 marks)
ANSWER
Factors to consider when choosing measurement basis
- Current values which reflects changes in value may be more relevant than historical cost particularly when the asset or liability is sensitive to market factors
- Historical cost is verifiable, this is less likely for a current value measurement
- Using different basis of asset or liabilities that are related to one another can create measurement inconsistences which would compromise fair representation.
- Where current values requires the use of estimates, measurement uncertainity arises
- Use of different measurement basis reduces comparability
- Understandability is reduced where measurement basis is changed.
(c) Q Ltd. holds the following assets measured at fair value:
- Listed equity shares measured at quoted price.
- Land held for sale which is measured at fair value by reference to sales prices of comparable land in a similar location (price per square metre) adjusted for key attributes such as land size.
- Investment properties whose fair value is measured using an income approach based on discounted estimated rental income to reflect current market rates per square metre.
Required:
Identify the inputs used in each measurement of the above assets and explain how the valuation corresponds to the fair value hierarchy of International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement”. (6 marks)
ANSWER
Fair Value Measurement
1) The equity shares are measured using quoted pries of the shares. This is quoted prices for identical asset in an active market. This is level 1 input meaning that the overall fair value is level 1 measurement.
2) Land held for sale is measured by adjusting the selling price of comparable attributes such as size. The price of comparable land is an observable input to the measurement. Therefore this is level 2 movement.
3) Investment property are measured by discounting estimated future rental incomes. Rental income is based on current market rates per square metre, however the income streams must be adjusted to reflect , for example expected vacancy rate and expected rental price. therefore this is level 3 input measurement.
(d) JK Ltd. has access to two markets when selling its inventory. The markets are: Country A and Country B. Information about these markets is provided below:
| Country A | Country B | |
| Total units sold (in “millions”) | 16 | 13 |
| Sales (Sh.“million”) | 6 | 7 |
| Sales price per unit (Sh.) | 9 | 10 |
| Transaction costs per unit (Sh.) | 4 | 3 |
| Transport cost per unit (Sh.) | 1 | 1 |
Required:
With reference to International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement” determine the:
(i) Principal market. (2 marks)
(ii) Most advantageous market. (2 marks)
(iii) Fair value of one unit of inventory. (2 marks)
ANSWER
i) Principal market
In the absence of further information, IFRS 13 would permit JK ltd to assume that the principal market is the one it most regularly trades in. However, data is readily available that demonstrates that the principal market for this inventory is actually country A.
ii) Most advantageous market
- In country A, Jk Ltd makes a profit per unit of 4 (9-4-1)
- In country B, Kj ltd makes a profit per unit of 6 (10-13-1)
- The most advantageous is country B market
iii) Fair price
- The fair price is measured by reference to the principle market that is country A.
- Transport cost are factored in as they are characteristic of an asset. Transaction cost are not factored into the fair value measurement because they relate to the sales transaction.
- Fair value of one unit is therefore 8 (9-1)
QUESTION 2
April 2024 Question Two A
In the context of International Financial Reporting Standard (IFRS) 5 “Non-Current Assets Held for Sale and Discontinued Operations”, explain how non-current assets held for sale should be measured. (4 marks)
ANSWER
Measurement of Non current Asset held for sale
- Non current asset held for sale an asset whose carrying amount shall be recovered from the sale rather than continuous use. It shall be present as a separate item under current asset.
- It shall be recognized/measured based on the lower of the carrying amount or fair value less cost to sell.
- An impairment loss should be recognized when carrying amount is greater than not realized value
- When carrying amount is to be written down to net realizable value(NRV) the impairment loss reduces the carrying amount as outlined by IAS 36(Impairment of assets) that is, write down goodwill first and then allocate the remaining loss to other asset on a pro-rata basis (based on their carrying amount)
- Non current assets held for sale should not depreciated, even if they are still being used by the entity.
QUESTION 3
April 2024 Question Four B and C
On 1 April 2021, each of the seven directors of Hill Ltd. received 16,000 share options as an award. Hill Ltd. prepares its accounts to 31 March each year. The condition attached to the award of the share options was that the directors must remain in employment for three years. The fair value of each share option as at the grant date was Sh.100. The fair value of each share option as at 31 March 2022, 2023 and 2024 was Sh.105, Sh.110 and Sh.115 respectively.
As at 31 March 2022, it was estimated that two directors would leave before the end of three years. Due to an economic upturn, the estimate of the number of directors who were going to leave as at 31 March 2023 was revised to one director. The expense for the year as regards the share options had not been included in the statement of profit or loss for the current year and no director had left by 31 March 2023. However, one director eventually left the company by 31 March 2024.
Required:
Demonstrate the accounting treatment of the above share option transactions in the financial statements of Hill Ltd. for the years ended 31 March 2022, 2023 and 2024. (8 marks)
ANSWER
This is an equity settled share based payment scheme
| Period | Equity | Expenses |
| 31 March 2022 | (7-2) × 16,000 × 100 × 1/3 = 2,666,667 | 2,666,667 |
| 31 march 2023 | (7-1) × 16,000 × 100 × 2/3 = 6,400,000 | 3,733,333 |
| 31 March 2323 | (7-1) × 16,000 × 100 × 3/3 = 9,600,000 | 3,200,000 |
| Accounting treatment | 2022 | 2023 | 2024 |
| Dr: Expense & staff cost | 2,666,667 | 3,733,333 | 3,200,000 |
| Cr: Equity | 2,666,667 | 6,400,000 | 9,600,000 |
(c) On 1 January 2023, Kauma Limited issued 10,000 bond instruments with a face value of Sh.100 each at a market price of Sh.95 per instrument. Bond brokers charged fees totaling Sh.18,000 in relation to the bond issue. The bonds carry a coupon rate of 5% and are redeemable in 3 years at face value.
Kauma Limited wishes to account for the bonds using IFRS 9 “Financial Instruments” specifically the amortised cost method. However, there was some confusion about how the bonds should be accounted for. The cash received from the bond issue of Sh.950,000 has been recognised as a non-current liability. The broker fees of Sh.18,000 were deducted from the non-current liability carrying amount and the coupon payment of Sh.50,000 has been expensed in arriving at profit before tax. The effective rate of interest is 7.62%.
Required:
The necessary accounting treatment, with justification, of the above transaction in conformity with the requirements of IFRS 9 “Financial Instruments” for the year ended 31 December 2023. (6 marks)
ANSWER
c) Financial instruments
Maturity value = 10, 000×100 = Sh 1,000,000
Coupon interest = 5% x1000,000 = Sh 50,000
Amount received 10,000 × 95= 950,000
Less: Bond cost incurred (18,000)
Carrying amount 932,000
Amortization schedule
| Period | Balance b/d | Interest 7.62% | Payment | Balance c/d |
| 2023 | 932,000 | 71,018.4 | (50,000) | 953,018.4 |
| 2024 | 953,018.4 | 72,620 | (50,000) | 975,638 |
| 2025 | 975.638 | 74,344 | (50,000) | 1,000,000 |
Income statement extract
| 2023 | 2024 | 2025 | |
| Interest expense | 71,018.4 | 72,620 | 74,344 |
Statement of financial position extract
| 2023 | 2024 | 2025 | |
| Non-current liabilities | 953,014.4 | 975,638 | 1,000,000 |
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