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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 book (Question and answers) contains kasneb past examination past papers and our 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.

 

 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

1.1 (Assets and Liabilities as covered in Financial Accounting and Financial Reporting are also relevant here)

1.2 Leases Including Sale and leaseback and dealers in leased assets

1.3 Deferred Tax (With group aspects)

1.4 Employee Benefits

1.5 Share Based Payments

1.6 Financial Assets and Financial Liabilities (Impairment, Hedging, Embedded Derivatives and Disclosures)

1.7 Fair Value Measurement

1.8 Impairment of Assets

 

Preparation of Financial Statements for Interests in Other entities

2.1 Subsidiaries (Including foreign subsidiaries, piecemeal acquisitions, reduction in shareholding and disposals as well as statement of cash flows)

2.2 Accounting for Associates and Joint Ventures (Including foreign entities)

2.3 Disclosures of interests in other entities

 

Preparation of Financial Statements for other entities

3.1 Financial Statements for Banks

3.2 Financial Statements for Insurance Companies

3.3 Interim Financial Statements

3.4 Financial Statements in a hyperinflationary economy (including the preparation of financial statements)

3.5 Financial Statements complying with IFRS for SMEs.

 

Analysing Financial Statements

4.1 Earnings Per Share

4.2 Related Party Disclosures

4.3 Operating Segments

4.4 Financial Reorganisations and reconstructions

 

Public Sector Accounting Standards

5.1 Segment Reporting

5.2 Related Party Disclosures

5.3 Impairment of cash generating assets and non-cash generating assets

5.4 Disclosure of information about the general government sector

5.5 Consolidated Financial Statements

5.6 Investments in Associates and Joint Ventures

 

Other Reports and Emerging Issues in Financial Reporting

6.1 The conceptual Framework and the process of developing new accounting standards

6.2 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)

6.3 Management Commentary (Management Discussion and Analysis)

6.4 Capital Markets Authority Corporate Governance Reporting Requirements

6.5 Global Reporting Initiatives Guidelines on Sustainability Reporting

6.6 Integrated Reporting

6.7 Materiality Guidelines for Financial Reporting

6.8 Legal and Ethical issues in Financial Reporting.

 

 

SAMPLE WORK

Complete copy of CPA ADVANCED FINANCIAL REPORTING AND ANALYSIS 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

 

 

 

TOPIC 1

ACCOUNTING FOR ASSETS AND LIABILITIES

QUESTION 1

April 2023 Question Three

(a) International Accounting Standard (IAS) 12 “Income Taxes”, allows entities to recognise a deferred tax asset where they have unused tax losses, only to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilised.

 

Required:

In view of the above statement, explain FOUR key considerations for recognition of deferred tax assets on unused tax losses. (8 marks)

(b) The following statement of financial position relates to ABC Ltd., a public limited company, as at 31 March 2022:

The following information is relevant to the above statement of financial position:

1. The financial assets are classified as fair value through other comprehensive income as shown in the above statement of financial position at their cost on 1 April 2021, including transaction costs of Sh.0.5 million. The market value of the assets is Sh.10.5 million on 31 March 2022. Taxation is payable on the sale of the assets.
2. The stated interest rate for the long term borrowing is 8%. The loan of Sh.10 million represents a convertible bond which has a liability component of Sh.9.6 million and an equity component of Sh.0.4 million. The bond was issued on 31 March 2022.
3. The defined benefit plan had a rule change on 1 April 2021. ABC Ltd. estimates that of the past service cost of Sh.1 million, 40% relates to vested benefits and 60% relates to benefits that will vest over the next five years from that date. The past service costs have not been accounted for.
4. The tax bases of the assets and liabilities are the same as their carrying amounts in the statement of financial position as at 31 March 2022 except for the following:

                                                       

• Other intangible assets are development costs which were allowed for tax purposes when the costs were incurred in 2021.
• Trade and other payables include an accrual for compensation to be paid to employees. This amounts to Sh.1 million and is allowed for tax purposes when paid.

5. Goodwill is not allowable for tax purposes in the jurisdiction of ABC Limited.
6. Assume taxation is payable at the rate of 30%.

 

Required:

By applying the requirements of IAS 12 (Income Taxes):

(i)  Calculate the temporary differences after the necessary adjustments.     (10 marks)

(ii) Determine the deferred tax charge for the year ended 31 March 2022.      (2 marks)

ANSWER

1. a) Key consideration for recognition of deferred tax assets on unused tax losses
2. Whether the entity has sufficient taxable temporary differences against which unused tax losses can be offset
3. Whether it is probable that the entity will repay taxable profits before the tax losses expire
4. Whether the tax losses arose from identifiable causes which are unlikely to recur (otherwise the existence of unused tax losses is strong evidence that future taxable profits may not be available)
5. Whether tax planning opportunities are available that will guarantee future taxable profits

 

i) Temporary differences after the necessary adjustments

QUESTION 2

April 2023 Question Four B

The objective of International Financial Reporting Standard (IFRS) 13 “Fair Value Measurement” is to provide a single source of guidance for fair value measurement where it is required by a reporting standard, rather than it being spread throughout several reporting standards.

Required:

In light of the above statement and citing examples, briefly describe THREE hierarchical level inputs required by IFRS 13 “Fair Value Measurement”.      (6 marks)

 

ANSWER

Hierarchical level input required by IFRS13 fair value measurement

1. Level 1 input – unadjusted quoted prices for identical assets in active market
2. Level 2 inputs – observable prices other than those in level I input they may include
   • Quoted prices for identical asset in less active market
   • quoted prices for similar asset but not identical in active markets
3. Level 3 input – unobservable inputs which could include cash or profit forecast using entity’s data.

 

QUESTION 3

December 2022 Question One

(a) In the context of IAS 16 (Property, Plant and Equipment):

(i)  Explain how the initial cost of property, plant and equipment should be measured and the treatment of subsequent expenditure.  (4 marks)

(ii) Describe the requirements regarding the revaluation of non-current assets, the treatment of surpluses and deficits on revaluation and the gains or losses on disposal.       (6 marks)

(b) Voxy Limited leased a factory to Teana Limited with effect from 1 July 2022. The lease is for four (4) years at an annual lease rental of Sh.4,000,000 payable annually in arrears. The lease contract provides that the lessee shall be responsible for the insurance and maintenance of the factory during the lease term. The implicit rate of interest in the lease is 15% per annum.

 

Required:

Demonstrate, with suitable calculations, the accounting treatment of the above lease transactions in the financial statements of Voxy Limited (lessor) for the years ended 30 June 2023, 2024, 2025 and 2026.       (10 marks)

 

ANSWER

(a) i) How the initial cost of property, plant and equipment should be measured and the treatment of subsequent expenditure

• The cost of an item of property, plant and equipment comprises its purchases price and any other cost directly attributable to bringing the assets into a working condition for its intended use such as installation cost, testing cost, professional cost etc.
• Subsequent expenditure depends on whether it is a capital or revenue expenditure.
• Capital expenditure shall be capitalized while all other revenue expenditure such as repair and maintenance cost should be written off or expensed.

 

(ii) Requirements regarding the revaluation of non-current assets, the treatment of surpluses and deficits on revaluation and the gains or losses on disposal

• Where an entity chooses to revalue an item of PPE it must also revalue the class to which it belongs.
• Revaluation should be based on market value and be done by an independent valuer.
• Revaluation surplus or deficit should be based on the revalued amount and carrying amount on revaluation date.
• In the first period of revaluation, any gain should be taken to revaluation reserve while revaluation loss should be expensed.
• In subsequent period, any gain will still be transferred to a revaluation reserve and if there was any revaluation loss should in previous period, then, it should be reversed first.
• A revaluation loss should be expensed but if there was any gain in the previous period taken to a revaluation reserve then that loss should be charged to revaluation reserve first.

 

(b)  Lease accounting by lesser

Initial lease investment:

This will be equivalent to present value of lease rentals receivable.

Note: The net lease investment (current assets) is the principal for the net year while non-current lease investment is the balance c/d for the next year.

 

QUESTION 4

December 2022 Question Two B

IFRS 2 “Share Based Payments”, identifies three types of share based transactions.

Required:

Explain the THREE types of share based transactions in each case indicating their accounting treatment in line with IFRS 2 “Shared Based Payments”.           (6 marks)

 

ANSWER

Types of share based transactions

1. Equity settled share based payment transaction

Transactions in which an entity receives goods or services in exchange for its equity instruments

The transactions are recorded by increasing expenses and equity i.e.

                  Dr : Expenses   XX

                  Cr : Equity                  XX

2. Cash settled share based payment transaction.

Transaction in which an entity acquires goods and services and the amount being payable being settled in cash measured with reference with share price.

      Dr: Expenses   XX

      Cr : Liability            XX

 

3. Hybrid /cash and equity selected share based transaction.

Transactions where entity receives goods and services and either the entity or supplier has the choice as to whether the entity settles in cash or by equity.

These transaction are accounted for as cash settled if the entity has a liability to settle in cash or equity if no such liability has been incurred.

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QUESTION 5

August 2022 Question Two A

B Limited operates a factory as its sole cash generating unit (CGU). During the year ended 30 April 2022, there was an explosion in the factory which necessitated an impairment review.

The carrying amounts of the factory assets were as follows:

Additional information:

1. An impairment review revealed a net selling price of Sh.19,200,000 and a value in use of Sh.31,200,000 for the factory.
2. Half of the machinery have been destroyed and have no resale value.
3. The patents have been superseded and are now considered worthless.
4. The company follows the cost model as permitted by International Accounting Standards (IAS) 16 “Property, Plant and Equipment”.

 

Required:

Discuss, with suitable calculations, how any impairment loss in the cash generating unit (CGU) would be accounted for in accordance with the International Accounting Standard (IAS) 36 “Impairment of Assets”.                                                                        (10 marks)

ANSWER

Allocation of Impairment Loss

An asset is said to be impaired if the carrying amount exceeds recoverable amount

• Recoverable amount is the higher of value in use and fair value less cost to sell
• Net selling price 19,200
• Value in use 31,200
• Therefore recoverable amount is sh.31,200

Carrying amount	47,600
Recoverable amount	(31,200)
Impairment loss	16,400

 

The total impairment loss of sh.16,400 will be charged to P&L

SAMPLE WORK

Complete copy of CPA ADVANCED FINANCIAL REPORTING AND ANALYSIS 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