FINANCIAL REPORTING

ACCOUNTING FOR ASSETS AND LIABILITIES

INVESTMENT PROPERTY (IAS 40)

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 [Link] 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.
2. Subsequent measurement-an entity shall choose either the use of:
 Cost model.-this requires asset to be measured at cost less accumulated
depreciation and any impairment loss in accordance with IAS 16. An entity that
will adopt cost model shall disclose the fair value of its investment property in the
notes to the financial statements
 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.

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.

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 PROPERTY, PLANT AND EQUIPMENT (PPE) IAS 16
 IAS 16 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 ie indicating the movement balances.

FINANCIAL INSTRUMENTS-IFRS 9/ IAS 39

RECOGNITION AND MEASUREMENT
A financial instrument is a contract that gives rise to a financial asset to one party and a financial
liability to another party e.g. cash, bank balance, commercial papers, loan, bond, debt, equity.

Financial assets.
IAS 39 classifies financial asset into 4 categories which include:
1. Financial asset at fair value.
2. available for sale financial asset.
3. Loan and receivable.
4. Held to maturity.

1. Financial asset at fair value

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 They are short term financial investment and therefore they are classified under the current
assets. They are measured and valued at fair value.
2. Available for sale /financial asset at amortized cost.
They are long term financial investment and therefore they are classified under non- current
assets. They are measured and valued at either fair value or amortized cost.

Measurement.
Financial instrument are measured either:
 On amortized cost.
 At fair value
Provisions governing initial measurement and subsequent measurement of financial asset.
 All financial instruments are initially measured at fair value plus or minus, in the case of
a financial asset or liability not at fair value through profit or loss.
 Subsequently, all financial instruments are measured at either amortized cost or fair value
through profit or loss or at fair value through other comprehensive income.

FAIR VALUE HIERARCHY OF IMPUT MEASUREMENT.

Fair value hierarchy categorizes the input used in valuation techniques into 3 levels.
1. Level 1 input (Quoted prices)
Level 1 input are quoted prices in the active market for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.
2. Level 2 input.
Level 2 input are inputs other than quoted market prices included within level 1 that are
observable for an asset or liability either directly or indirectly. They include quoted prices
for similar assets or liabilities (but not identical0 in an active market and quoted prices
for assets or liabilities in markets that are not active.
3. Level 3 input.
Level 3 input are unobservable inputs for the asset or liability. Unobservable inputs
should be used to measure fair value to the extent that observable inputs are not available
and where there is very little market activity for the assets or liability at the measurement
date.

Requirement for de-recognition of financial instruments.

 De-recognition is the removal of a previously recognized financial instrument from an
entity balance sheet. A financial instrument should be derecognized if either the entity’s
contractual rights or the asset’s cash flows have expired, or the asset has been transferred
to a third party along with the risks of ownership.
 If the risks and reward of ownership have not passed to the buyer, then the selling entity
must still recognize the entire financial instrument and treat any consideration received as
a liability.

Impact of IFRS 9 on the tax expenses of commercial banks.(may 2018 Q5b)

 IFRS 9 encompasses the accounting for financial instruments and their impairment.
 The objective of IFRS 9 is to recognize a whole year and lifetime expected credit losses
for all financial instruments for which there has been a significant increase in credit risk.

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  There is a high likelihood that the only incurred credit losses recognized on non-
performing loans and advances under IFRS 9 will be allowed as tax- deductible.
 The major issue with the adoption of IFRS 9 for banks is the effect of bigger and more
volatile impairment losses on capital ratios. From tax perspective, it may also mean
significantly lower profits but higher scrutiny of specific impairment loses, a apart of
which may be disallowed for tax purposes. Furthermore, there will be an increase in the
number of fair vale movement through the income statement which will need to be
properly tracked and adjusted for tax purposes.

Impact of IFRS 9 on the „provinsion of bad and doutiful debts by banks

 The highest effect of IFRS is the increases in loss provisions from new expected loss
impairment model, as compared to IAS 39 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 te new
credit loss model. The number and complexity 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 forecasts used in
the calculation of impairment under IFRS

EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES (IFRS 6)

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 user.
 Reliable.
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 explore.
2. Topographical, geological, geochemical and geophysical studies.
3. Exploratory drilling.
4. Trenching
5. Sampling
6. Technical feasibility.

Measurement at recognition.
Exploration and evaluation assets shall be measured at cost.

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,

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construction or production of a qualifying asset. They should be capitalized. Other borrowingcosts
are recognized as an expense eg legal expense.
Examples of borrowing costs.
a) Interest on loan/borrowing.
b) Floatation cost eg 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.

PROVINSIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37)

PROVINSION-a provision is a liability of uncertain timing or amount or event.

Recognition of a provision.
A provision should be provided and be recognized as a liability in the financial statement when;
1. An entity has a present obligation as a result of the past event.
2. It is probable that an outflow of resources will be required to settle the obligation.
3. A reliable estimate can be made of the amount of obligation.
4. When the probability of occurrence is more than 50%.

CONTINGENT LIABILITIES-It is a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future
event not wholly within the control of the entity. If an obligation is probable it is not a contingent
liability instead a provision is needed.
Contingent liability shall not be recognized but shall be disclosed.

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 CONTIGENT ASSET-A contingent asset is a possible asset that arises from past events and
whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain
future events.
A contingent asset must not be recognized.

ACCOUNTING POLICIES CHANGES AND ESTIMATES.

These are specific principles, rules and practices applied by the entity in preparing and
presenting financial statements.
A change in accounting policies is only recommended when:
 It is required by the IFRS.
 It results in the financial statement providing reliable and relevant information about the
effect of transaction.
A change in accounting policy shall be applied retrospectively.
Retrospectively application requires an entity to adjust the opening balance of the effected
components of equity and assets.
Circumstances in which an entity is permitted to change accounting policies.
1. When it is required to do so by the IFRS.
2. When the changes results into a more reliable information.
3. To comply with the changes in accounting standards.
4. To comply with the changes in legislation.

EVENTS AFTER THE REPORTING PERIOD (BALANCE SHEET DATE) IAS 10

These are events that take place between the balance sheet date but before the AGM.
There are two types of events.

1. ADJUSTING EVENTS.
These are those events that take place after the balance sheet date providing additional evidence
of conditions that existed at the end of the reporting period. This events needs to be adjusted in
the financial statement.
Examples of adjusting events.
a) Bankruptcy of the debtor after the reporting period needs debtor’s amount to be adjusted
by reducing.
b) Recovery of debt that had been previously written off.
c) Sales of inventories after the reporting period may give evidence about the net realizable
value of inventories.
d) Discovery of fraud or errors that shows that the financial statements are incorrect.
e) Settlement after the reporting period of the court case that confirms that the entity had an
obligation at the end of the period.
2. NON-ADJUSTING EVENTS.
This is an event after the reporting period that is indicative of a condition that arose after the end
of the reporting period which need not to be adjusted to the financial statement in that they do
not provide more evidence. They include
a) Decline in market value of investments after the reporting period.
b) Changes in tax rate after the reporting period.
c) Announcing a plan to discontinue an operation.
d) Declaration of dividend after the reporting period.

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Accounting treatment of subsequent events/event s after the reporting period.
1. Adjusting events requires amendments of the financial statement to incorporate them and
a disclosure of the nature of the subsequent events and material impact.
2. Non-adjusting events do not require amendment of the accounts, and only disclosure
notes is required in the notes to the account.

PRIOR PERIOD ERRORS ACCOUNTING AND DISCLOSURE REQUIREMENT.

A prior error is an omission from, or a misstatement of prior period financial statement. Such
errors must have been caused by the failure to use, or the misuse of information that was
available when financial statement were authorized for issuance and that could be expected to
have obtained eg mathematical mistakes, wrongful application of accounting policies,
misinterpretation of facts and figures.

Accounting treatment for material “prior period errors”.

 Prior period errors must be corrected retrospectively in the financial statement.
Retrospectively application means that the correction affects only prior comparative
figures.
 Therefore, comparative amount of each prior period presented which contains errors are
restated and Current period amount are unaffected.

GOVERNMENT GRANTS (IAS 20)-

 This are assistance inform of transfer of resources to an entity in return for past or future
compliance with certain condition relating to operating activities of the entity.
 Government assistance is an action by government designated to provide an economic
benefit specific to an entity.
 Government grants may be in-form of asset or income.
 Forgivable loans-This is any form of a loan in from government or organization which
its entirety or a portion of it, the lender is committed to forgive if certain conditions are
met by borrower.

Accounting treatment for the grants.

There are 2 broad approaches to the accounting for government grants.
(a) Capital approach. -This requires the grant to be provided out of P&L account. They
should be recognized as part of Equity/Capital in the statement of financial position
because no repayment is expected
This method is not recommended because the grant are receipt from other sources other
than shareholders therefore they should not be recognized as capital.
(b) Income approach. -Grant should be provided in the P&L as an income over one or more
period. This is the recommended method because government grant are earned through
compliance with their conditions. They should be recognized as income over the period
the entity benefits from such grants.
Circumstances under which government grants should be recognized in the financial
statement.
a. When the entity is certain that they will comply with the conditions attached to them.
b. When certain about receiving the grant.
c. When grants can be measure reliably

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 NON-CURRENT ASSETS HELD FOR SALE .
These are asset whose carrying amount should be recovered from the sale transaction rather than
through continuous use. It should be presented as a separate item under current assets. It is
valued at the lower of the carrying amount and the recoverable amount.

Conditions to be meet for an asset to be classified as held for sale asset.

1. The management is committed to plan to sell the asset.
2. The asset is available for immediate sale.
3. The active programme to locate a potential buyer has been initiated.
4. The sale is highly probable within 12 months from the date of the classification as held
for sale

REVENUE (IAS 18)

 Revenue is the gross inflow of economic benefit during the period arising in the course of
ordinary activities of an entity. Revenue includes only the gross economic inflow
received or receivable by the entity on its own account.
 Amount collected on behalf of the 3rd party such as sale taxes, VAT are not economic
benefit and therefore are excluded from revenue.
 Similarly in an agency relationship, revenue is an amount of commission and the amount
collected on behalf of the principal is not revenue.
Measurement of revenue.
Revenue is measured at fair value of the consideration received or receivable after taking into
account the amount of any trade discount.
IAS 18 shall be applied for accounting for revenue arising from the following transactions.
1. Sale of goods
2. Rendering of services.
Revenue should be recognized if the following conditions are meet.
 The amount of the revenue can be measured reliably.
 It’s probable that the economic benefit associated with the service will flow to the entity.
 The stage of completion of the service at the end of the reporting period can be measured
reliably.
 The cost incurred for the transaction and the cost to complete the transaction can be
measured reliably.

INTEREST, DIVIDENDS AND ROYALTIES.

Revenue from the above sources should be recognizes on the following basis.
1. Interest shall be recognized using the effective interest method (current market rate).
2. Royalties shall be recognized on an accrual basis.
3. Dividends shall be recognized when the shareholders have the right to receive.

REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)

IFRS 15 describes the following principle steps to be applied to all contracts with customers.

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 1. Identify the contract with the customer-a contract with customer will be within the
scope of IFRS 15 if the following conditions are met:
 The contract has been approved by the parties to the contract.
 Each party has a right in relation to goods or services to be transferred.
 The payment terms for the goods/services to be transferred can be identified.
 The contract has a commercial substance.
2. Identify the performance obligation to the contract-at the inception of the contract, the
entity should assess the goods or services that have been promised to the customer and
identify as performance objection.
3. Determine the transaction price-the transaction price is the amount which an entity
expects to be entitled in exchange of the transfer of goods or services.
Allocate the transaction price to the performance obligation in the contract.
4. Recognize revenue when or as the entity satisfied a performance obligation.
5. Revenue is recognized as the contract is performed either over time or at a point of
time.

INVENTORY [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.

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 Ie 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.

LEASES (IAS 17)

This is a contract between two parties where one party known as lessor (owner) gives another
party known as lessee the right to use the asset and enjoy the benefits and risk associated with the
utilization of the asset.
Types of leases.
(a) Operating lease.

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Finance lease.
(b) Sell and leaseback lease.
(c) Leverage lease

Operating lease/off balance sheet lease.

This is a short term [Link] has the following characteristics:
 The lease period is very short relative to the economic life of the asset.
 The lease contract can be cancelled by either party any time before end of lease period.
 The owner (lessor) incurs maintenance, operating and insurance expenses of the asset.
 The lessee is not given an option to buy the asset at the end of lease period.

Finance lease/capital lease.

This is long-term in nature and the lease period is almost equal to the economic life of the asset.
Characteristics.
 The lease period should be at least equal to 75% of the asset economic life.
 The lease contract cannot be cancelled by either party before lease period matures.
 The lessee incurs all maintenance cost.
 The lessee is given an option to buy the asset at the end of lease period.
Advantages of a lease.
1. Lease does not involve strict terms and conditions associated with long term debts.
2. Leasing has lower effective cost compared to long term debts.
3. It does not require a significant initial capital investment compared with cost of buying
new asset.
4. It reduces the risk of obsolescence.
5. It provides off-balance sheet financing i.e. operating lease are shown as foot notes to the
financial statements.

Differences between finance and operating lease.

Finance lease Operating lease

1. It is a long term lease taking more It is a short term lease.
than 75% of economic life of the
asset.
2. The lessee has an option to purchase The lessee has no such option.
the asset at the end of the lease period.
3. The contract cannot be cancelled The lease contract can be canceled any time
before maturity. before maturity.
4. The lessee incurs all incidental The lessor incurs the operating expenses and
operating expenses and account for the accounts for the asset in his books of account.
items in its financial statement

INCOME TAXES (IAS 12).

 Income tax –This include all domestic and foreign taxes which are based on taxable
profit.

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Deferred Tax-This is the tax payable in the future which arises as a result of taxable
temporary differences.
 Temporary Difference-Is the difference between the carrying amount and the tax base
of an asset or liability.
 Tax Base-Is the amount attributable to an asset or liability for the tax purposes.
 Taxable temporary Differences-This are temporary differences that will result in
deferred tax liability.
 Deductible temporary Differences-This are temporary differences that will result in
deferred tax asset.
 Deferred tax liability-these are amount of income taxes payable in future period in
respect of taxable temporary difference.
 Deferred tax asset-these are amount of income taxes recoverable in future period in
respect of deductible temporary difference.

Basis of measuring for current tax and deferred tax.

 Tax expense for the period is made up of two elements:
 Current tax
 Deferred tax.
 Current tax is the tax for the period based on the taxable profit for the year ie (gross
income-allowable expenses).
 Deferred tax on the other hand arises as a result of temporary differences. Increase in
deferred tax is an expense which increases the tax liability for the year while a decrease
in deferred tax is an income hence reducing the tax liability for the period.
THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES (IAS 21 & IPSAS 4
and 23)
An entity may carry on foreign activities as follows;
 Transaction in foreign currencies.
 Foreign operations.
 In addition, an entity may present its FS in foreign currency.
Definitions
1. Closing rate-is the spot exchange rate at the reporting date
2. Exchange difference-is the difference resulting from translating a given number of units
of one currency into another currency at different exchange rate.
3. Exchange rate-is the ratio of exchange for two currencies.
4. Foreign currency-is a currency other than the functional currency of the entity.
5. Foreign operation-is an entity that is a controlled entity, associate, joint venture or
branch of a reporting entity, the activities of which are based or conducted in a country or
currency other than those of the reporting entity.
6. Functional currency-is the currency of the primary economic environment in which the
entity operates.
7. Monetary items-refers to assets or liabilities to be received or paid in a fixed or
predetermined amount of money e.g. cash, receivable, payable and all liabilities.
8. Non-monetary liabilities-are other items in the financial statement other than monetary
items.

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 9. Net investment in a foreign operation is the amount of the reporting entity’s interest in
the net asset/equity of that operation.
10. Presentation currency is the currency in which the financial statement are presented.
11. Spot exchange is the exchange rate for immediate delivery.

Factors to consider in determining the functional currency of an entity.

(a) The currency that revenue is raised from, such as taxes, grants and fines.
(b) The currency that mainly influence sales price for goods and services.
(c) The currency that mainly influence labour, material and other costs.
(d) The currency in which receipt from operating activities are usually retained.
The functional currency of a foreign operation is different from the reporting entity‟s
functional currency when:
 The foreign operation carries its activities with a significant degree of autonomy.
 The foreign operations transactions with the reporting entity is low.
 The foreign operation’s cash flows do not directly affect the cash flows of the reporting
entity.
 The cash-flows of the foreign operation are not readily available for remittance to
reporting entity.
 The cash-flows of the foreign operation are sufficient to service existing and normal debt
obligations.
Recognition of exchange differences
Exchange difference arising on the settlement of monetary items or on translating monetary
items shall be recognized in surplus or deficit in the statement of performance/P&L during the
period in which they arise.

Disclosure requirement with reference to „Effects of Changes in Foreign Exchange Rates”

1. The amount of exchange difference recognized in profit or loss.
2. Net exchange difference recognized in other comprehensive income and recognized as a
separate equity component.
3. When the presentation currency is different from the functional currency, disclose the
fact.
4. Method used in translation.
Measurement and recognition of revenue from non-exchange transaction (IPSAS 23)
1. Revenue from non-exchange transactions shall be measured at amount of the increase in
net asset recognized by the entity.
2. When as a result of non-exchange transaction, an entity recognizes an asset, it also
recognizes revenue equivalent to the amount of the asset measured.
3. Reduction of a liability shall be recognized as revenue.
4. An inflow of resources from a non-exchange transaction recognized as an asset shall be
recognized as revenue

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 LONG TERM CONSTRUCTION CONTRACTS-IAS 11
These are contracts which take a period more than one year. The contractor is engaged by the
contractee to undertake such projects for consideration known as contract price.
The objective of IAS 11 is to help determine:
 The contract profit for each accounting period.
 The valuation of the work in progress.

Types of contracts.

1. FIXED PRICE CONTRACT/LUMPSUM CONTACT

It is a contract whose price is determined before the commencement/inception. The price can be
adjusted if there is escalation clause .this is a provision that allows for the adjustment of the price
depending on the changes in the economic environment of the contract eg increase in labour and
cost of materia

2. COST PLUS CONTRACT/PERCENTAGE RATE CONTRACTS

 This is a contract where the price is only determined after the contract has been fully
completed.
 The owner assumes most of the risk. The contract price equal to cost incurred plus agreed
profit margin.
o Cost incurred profit + margin
The method is mostly applied where it is difficult to determine the estimated total cost ofthe
contract. Also applied where the contract period is very short.
METHODS OF ACCOUNTING FOR CONSTRUCTION CONTRACTS.
1. Completed contract method.
This is where the revenue is only recognized after the contract has been completed. Also the
profit is recognized upon completion of the contract.
Contract gross profit=contract price- contract cost.
The method is applied where it is difficult to determine the estimated total cost of the contract.
2. Percentage of completion method.
This is applied where the cost of the contract can be reliably estimated as the contract progresses.
The revenue and the gross profit is recognized as the contract progresses.
Contract revenue and expenses are recognized by reference to the stage of completion

% of completion= cost to date× 100%

Estimated total cost
Revenue recognized=% of completion × contract price.

Disclosure requirement for contracts in progress in accordance to IAS 11

1. Aggregate cost incurred and recognized profit.
2. Amount of advance received.
3. Amount of retentions
4. Amount of revenue recognized.
5. Method used to determine the revenue.
6. Method used to determine the stage of completion
Methods used to determine the stage of completion of a construction contract (may 2019
q4b)
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 1. VALUE BASED METHOD
Value of work completed in proportion to total contract price. The value of work may be
determined by conducting a survey of work performed. Also the physical unit of work
completed in comparison with total number of units to be completed under the contract.
When this vale based method is used in accounting for profit making contracts, revenue
is recognized on the basis of work certified as complete whereas the contract cost is
measured as the balancing figure
2. COST BASED METHOD.
Cost incurred to date in comparison with total expected contract cost. When estimating the stage of
completion under this method, only those cost incurred must be considered that reflect the present
status of work performed.
When the cost based method is used in accounting for profit making contracts, cost is recognized
on the basis of stage of completion whereas contract revenue is measured as the balancing figure.

Terminologies.
ENEROUS CONTRACTS-is a contract entered into with another party under which the
unavoidable cost of fulfilling the terms of contract exceeds any revenue expected to be received
from the contract.
EXECUTRY CONTRACTS-it’s a contract under which neither party has performed any of its
obligations not both have partially performed their obligation to an equal extent.

FARMING ACTIVITIES ACCOUNTING/AGRICULTURE-IAS 41

IAS 41 provides for accounting for farming activities which is animal husbandry and crop
growing for profit generation. The animal and the crop are known as biological assets.
 Biological asset-are living animal and plant as a result of agricultural activities
 Agricultural activity-this is the management by an entity of the biological
transformation.
 Agricultural produce-this is the harvested product of entities biological asset.

Features of an agricultural activity.

 Capabilities of change-biological assets are capable of biological transformation.
 Management of change-management facilitates biological transformation.
 Measurement of change.

Circumstances under which an entity should recognize a biological asset. (Disclosure

requirements)
1. The entity controls the asset as a result of past events.
2. It is probable that the future economic benefit associated with the asset will flow to the
entity.
3. The asset value can be measured reliably.
Accounting treatment for a biological asset.
1. Agricultural produce is measured at fair value less estimated cost to sell at point of
harvest.
2. The gain on initial recognition of biological asset at fair value less cost to sell and

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 changes in fair value less cost to sell is included in profit and loss.
3. A gain on initial recognition of agricultural produce at fair value less cost to sell is
included in profit or loss for the period.
4. All costs related to biological asset that are measured at fair value are recognized as
expense when incurred other than cost to produce biological asset

Key provisions on measurement of agricultural produce.(IAS 41)

1. Biological asset within the scope of IAS 41 are initially and subsequently
measured and recognized at fair value less estimated cost to sell , unless to fair
value cannot be estimated.
2. Agricultural produce is measured at fair value less estimated cost to sell at the
point of harvest.
3. The gain on initial recognition of the biological asset and changes in fair value are
included to profit or loss.
4. All costs related to biological assets are recognized as expense when incurred
rather than the cost to purchase biological asset.
Disclosure requirement when fair value of the farm produce cannot be measured
reliably.
1. Description of the asset.
2. Deprecation method.
3. Useful lives or depreciation rates.
4. An explanation of why fair value cannot be reliably measured.
5. If possible a range within which fair value is likely to lie.
6. Gross carrying amount and the accumulated depreciation, at beginning or end.
7. Impairment loss if any.

ACCOUNTING FOR HIRE PURCHASE.

This is a transaction which allows for acquisition of an asset by paying for the deposit and taking
possession of the asset immediately the deposit is paid. The balance is payable in installment and
it is subject to interest.
Accounting for hire purchase requires application of “substantive over the form principle” where
the economic aspect of a transaction overrides the legal aspect of the transaction.

Hire purchase price = deposit + all installments

Or
Hire purchase = cash price + interest

Interest can be allocated using the following methods:

1. Straight line method-this is where the total interest is allocated equally over the hire
purchase period.
2. Sum of digits method-the interest is allocated on the basis of the sum of hire purchase
period.
3. Actuarial method-this involves discounting the cashflows

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 Methods of accounting for hire purchase.
There are two major methods of accounting:
1. Interest method
Under this method, sales are recognized at cash price. Interest is computed separately and
considered as an income. The method usually applies where the company has few units
of sale which are of high value.
2. Sales method.
Under this method, sales are recognized at hire purchase price.
The gross profit = hire purchase price – cost of sales.
The interest is not recognized as a separate income.
Accounts prepared under this method include:
 Debtors account
 Repossession account
 Provision for URP account
Difference between interests and sale method.

Sales method Interest method

Sales are recognized at hire purchase price Sales are recognized at cash price
Interest is not computed separately Interest is computed separately

PUBLIC SECTOR ACCOUNTING.(IPSAS)

Public institutions are formed to provide services to the members of public. They are formed
with no objective of making profit.

Differences between public and private entities

PUBLIC SECTOR PRIVATE SECTOR

1. Objective-the main objective is to provide 1. The main objective is to make profits.
services.
2. Funding-they are funded by the general 2. Are funded by entrepreneurs.
public mainly through taxation.
[Link]-mainly owned by general 3. Owned by individuals in form of sole
public(government) proprietorship, partnership or companies.
4. Accountability-they are accountable to the 4. Accountable to the owners.
public through institutions like auditor’s
general office and parliament.

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Methods of accounting for public sectors.
1. Cash accounting.
2. Fund accounting.
3. Budgeting accounting.
4. Accruals basis accounting.
Benefits of adopting IPSAS
 They improve accountability and transparency.
 It improves the reliability of accounts and boosts the confidence of external agencies.
 It enhances comparability among government entities.
 It emphasis on performance as well as reducing misuse of public funds.
 Improvement in consistency in preparing and reporting of financial information.
 It improves audit of public institutions.
Challenges in promoting adoption of IPSAS.
 Sovereignty of difference countries-each government operates independently as
compared to private sector.
 Different countries have different reporting requirements.
 Countries have different laws that apply to different government entities.
 Challenges in resources, system and personnel to implement IPSAS.
 Language barriers.
 Lack of political goodwill.
 Staff resistance.
Benefits of adopting IFRS.
1. Increase foreign direct investments
2. Enhanced quality reporting
3. Increased Transparency and comparability.
4. IFRS contributes to economic efficiency by helping investors to identify opportunities
and risks across the world.
Better access to capital including from foreign sources
5. Facilitates mergers and acquisitions.
6. Enhances competitiveness.
7. Ease of using one consistent reporting standards in subsidiary from different countries.
8. Improves ability to attract and monitor listing by foreign companies
9. Enhances standardization of financial disclosures.
10. Improves regulatory oversight and enforcement.
Key success factors for IFRS adoption/factors promoting adoption of IFRS.
1. Self-enforcement by companies.
2. Professional system of corporate governance.
3. Professional support with IFRS experience.
4. Sufficient funding.
5. Trained workforce.
6. Technological enhancement to support adoption.
7. Executive and board support
Challenges in adopting IFRS
 Insufficient training and funding.
 Complexity of conversion.
 Compliance and lack of enforcement.

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  Ethical environment.
 Challenges in resources, system and personnel to implement IPSAS.
 Language barriers.
 Lack of political goodwill.
 Staff resistance.

Accounts prepared by government entities.

[Link]-records the amount allocated to various government units.
[Link] account-it’s an account into which tax funds and other funds are deposited.
[Link]-is the cash account operated by the individual government [Link] records
[Link]-this records amounts to be generated by each government unit from its operations.
[Link] account-shows estimated expenditure, the amount over or under spent
for a particular year.
Terminology.
1. General fund-this is the primary government fund. It is established to account for
resources devoted to financing the general service which the government unit performs
for its citizens.
2. Excess vote-this is the expenditure of a given ministry over the approved limit for the
year. The exchequer and audit act does not permit the government ministry to spend
beyond its allocation.
3. Encumbrance-this is the restriction placed on funds under commitment accounting to
ensure that expenditure by way of commitment does not exceed available funds.
4. Vote of account-this is the authority granted by the national assembly for withdrawal
from the consolidated fund not exceeding half the total allocation.
5. Exchequer over issue-this is any amount remaining unspent by the ministry at the
financial year end. This amount should be surrendered as an over issued to the
consolidated fund.
6. Consolidated fund-this is the main fund operated by the government

ACCOUNTING FOR CO-OPERATIVE SOCIETIES

Cooperatives are voluntary association of persons who work together to promote their economic interest.
It is a form of business where individual belonging to the same class join their hands form the promotion
of their common goals.
The philosophy of the cooperative formation is “ all for each and each for all”. Cooperation work with the
feeling of helping others.
Characteristics of cooperative society.
 Voluntary association.
 Open membership
 Democratic management
 Service motive.
 Utilization of surplus.
 Self-help through mutual cooperation.
 Fixed rate of return.

Main objectives of cooperative society.

1. Enhancing cooperation
Cooperative society aim to encourage complete cooperation between everybody involved with an

JM@KCAU UNIVERSITY Page 19

 organization. They are generally against the idea of any sort of hierarchy, and consider everyone
to be equal.
This can improve relationship between staff members and senior management, as well as between
service providers and customers.
2. High level of service.
Better working relationships naturally lead to higher productivity levels, so a better service is
given to customers. This raises customer satisfaction levels, which is primary aim of many
cooperative societies.
3. Higher profits
Many cooperative societies are essentially out to make a profit and believe that enhancing
relationships will lead to high profit levels. Some charities also have benefited from operating as
cooperatives, as charity members become more focused on their work, raising more money for
the cause in question.
Role of cooperative society.
1. Creation of unit.
Unity is strength and the guiding principle of a cooperative society. In this purpose cooperative
united the stronger and guide them to go ahead with mutual cooperation which helps to endure
social relationship
2. Awaking working zeal.
Cooperative society helps to awake a new working spirit in the mind of those people who are
defeated and spiritless in the struggle of life. Cooperative encourages people to dream new dream
and work with new inspiration.
3. Bringing welfare for the members.
A cooperative society is established just for bringing the economic and social welfare for its
members. In this purpose, cooperative society develops thinking working attitude as well as
mental condition of the constituents.
4. Reducing inequality of wealth.

Capitalism creates inequality of wealth, and cooperative society helps to reduce this as well as
helps the equal distribution of wealth. It creates self-employment opportunities and encourages
the members to compete with others.
5. Establishing equal rights.
To establish equal rights, cooperative society fixed the limitation of purchasing shares. Besides
this, democracy and equal voting rights are also followed. Equal right contributes to establishing
social order and justice.
6. Improving skills.
Cooperative society leads a great role by providing a training program for improving the skills of
uneducated poor and unskilled members.
7. Removal of middle man-
The cooperative society helps to protect the lower and middle class people of the society which
have fixed income, from the greedy clutch of profiteering, capitalist, and the middle man.
8. Loan facilities-
Poor producers suffer from capital problems. Cooperative society lends money to those people at
a very lower interest rate
9. Economic development.
By developing small scale traders and giving loans and financial counseling for small industries
and cottage. It helps to remove poverty and ensure economic development of the country.

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 Merits/advantages of cooperative society
 Easy formation
 Open membership
 Democratic management
 Limited liability
 Stability and continuity
 Mutual help
 Mobilization of savings
 Government support
 Elimination of middle man profit.

Limitation of cooperative society

 Limitation of capital.
 State control
 Inefficient management
 Absence of business secrecy
 Lack of motivation
 Political interference
 Internal quarrel and rivalries
 Lack of public management

Types of cooperative society.

1. Consumers’ cooperative
2. Credit cooperatives
3. Farming cooperative society
Producers cooperative society

Factors responsible for the survival of cooperative organization.

 Moral, social and educational benefits
 Open membership
 Democratic management
 Limited liability
 Stability and continuity
 Mutual help
 Mobilization of savings
 Government support
 Elimination of middle man profit.

Problem facing cooperative societies.

1. Management inefficiency
2. Illiteracy
3. Lack of unit and co-operation
4. Lack of planning.
5. Lack of sacrifice and sincerity
6. Deficiency of capital

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 7. Ignorance of principles
Corruption and nepotism

Solutions for problem of cooperative society.

1. Adoption of realistic plan.
2. Spreading of education.
3. Reduction of unequal competition.
4. Accuracy in accounting.
5. Widespread publicity.
6. Giving incentive to executives
7. Restrain corruption and nepotism.
8. Effective coordination

EMPLOYEE BENEFITS-IAS 19
These are all forms of consideration given by an entity in exchange for services rendered by
employees.

The objective of IAS 19 is to specify the accounting treatment and the associated disclosure
requirement when accounting for employee benefits.

Types of employee benefits.

1. Termination benefits.
This becomes payable upon employment/work being terminated either by employee or
employer.
2. Short term employee benefit.
This is employee benefit that are to be settled within 12 months after the employee has
offered the services e.g. salaries, bonuses, medical cover, housing benefits, car benefits,
free gifts.
They are expensed in the period of service to which they relate.
3. Long term benefits.
They include benefits not settled within 12 months such as sabbatical leaves and long
term services benefit. Actuarial gain and loses arising are recognized immediately .All
past service cost are recognized immediately.
4. Post-employment/retirement benefits/pension
This is an arrangement by which the entity provides pension to the employee after
they [Link] entity should recognize contributions to defined plan scheme as an
expense when the employee has rendered the services for which contributions relates.
Hence it’s a benefit payable upon retirement.
.
There are 2 types of pension plans:
i. Defined contribution plan.
ii. Defined benefit plan.

Defined contribution plan.

The pension payable on retirement usually depends on the contributions paid into the plan by theemployee and
employer. Under this scheme the employee bears the uncertainties of the amount that will be paid upon
JM@KCAU UNIVERSITY Page 22
retirement. The amount will depend on the performance of the investment.

Defined benefit plans.

The pension payable on retirement under this plan will depend on either the final salary or the
average salary of the employee during his career. The calculation is based on actuarial
[Link]
2× average salary× service years
3
Actuarial assumptions comprise:
1. Demographic assumptions-this assumption are about the future characteristic of current
and formal employee and their dependent. demographic assumption deals with matters
such as:
 Mortality both during and after employment.
 Rate of employment turnover.
 Claim rate under medical plans
2. Financial assumptions-this deals with items such as:
 Discount rate.
 Future salary and benefit level.
 Expected rate of return on plan asset.
Within the statement of total comprehensive income for the year, the movement is separated into
3 components as follows.
1. Service cost component-this includes current service cost and past service cost together
with gains/losses on curtailment and settlement.
CULTAILMENT-this is a significant reduction in the number of employees covered by
the plan.
2. Interest cost component.
3. Re-measurement component-this includes actuarial gains and losses.
Multi-employer plan
Small entities do not have resources to run a pension plan in-house. It pays pension contribution
over to an insurance company which it runs a multi-employer i.e. pension plan for several
employers.

FUNDING –is the process of making cash payment to a pension scheme so as to meet future
obligation of paying retirement benefit. Typically the funding monies will be placed in a trust
fund independent from the employer’s other assets.

FUNDED SCHEME
Is a plan which the employer transfers contributions to an external entity which is separate and
distinct from the employer.

UN-FUNDED SCHEME.
Is where contribution are not transferred to an external entity rather they are retained in the
company and re-invested in the business.

Over-funded and under-funded scheme

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 Overfunding scheme
This occurs when the fund asset are more than expected to meet benefits payment. Overfunding
is corrected by adjusting the current and future contribution and spread the surplus over the
remaining service life of the employees covered having made suitable allowances for
contribution holiday. The annual charge to the income statement will therefore be computed as
follows:
Charge to P&L=regular pension costs – (surplus ÷ remaining service year)

Underfunded scheme
This arises where fund asset are insufficient to meet payment of benefits. Underfunding is
corrected by adjusting the current and future cost and spreading the deficient over the expected
remaining service life of the employees covered. The annual charge to P&l of the employer is
computed as follows:

Charge to p&l=regular pension cost + (deficiency ÷ remaining service life)

Accounting and reporting by retirement benefit plan-IAS 26

The pension entities usually prepares the following statement”

1. Statement of changes in net asset (fund account)
2. Statement of net ass

Statement of changes in net asset statement of net asset

For the year ended xxx as at xxx
Incomes assets
Contributions-employer Xx non-current assets
-employee Xx investment xx
Transfer from other schemes Xx PPE xx
Investment incomes Xx current assets
Expenses contribution receivables xx
Pension and other benefits (xx) cash and bank xx
Administration expenses (xx) contribution due in day’s xx
Transfer to other schemes (xx) current liabilities
Other expenses (xx) pension payable (xx)
Surplus/deficit xx/ (xx) accruals (xx)
Net asset xxx
Financed by:
Fund balance/accumulated fund xx
Surplus xx
Xxx

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 BUSINESS COMBINATION/CONSOLIDATION (GROUP)
 Consolidation or business combination refers bringing together of separate entities into
one reporting entity. The result of all business combination is that one entity (acquirer)
obtains control over one or more other entities. Business combination brings about parent
subsidiary relationship.
 Subsidiary-a subsidiary is an entity that is controlled by another entity for more than
50% of its equity capital.
 Control-this is the power to govern the financial and operating policy decision of the
investee.
 Consolidated financial statement-these are financial statement of different/group of
companies presented by those of a single entity.
 Group this comprises the parent and all its subsidiary.
 Non-controlling interest (NCI)-This is the proportion of net asset in the subsidiary that
is not owned by the parent company.

IFRS 3 allows two alternatives method of determining NCI:

1. NCI at their proportionate share of the fair value of the subsidiaries net asset.
2. NCI at fair value.

Group structures
There are 3 types of structures.
1. Horizontal structure-this is where the parent acquire controlling interest in one or more
subsidiary.
2. Vertical structure-this occurs where the parent acquires controlling interest in a
subsidiary and the subsidiary acquires a controlling interest in another subsidiary.

3. Mixed structure/D structure-this occurs where the parent acquires a controlling in a

subsidiary and the subsidiary with the parent acquires a controlling interest in another
subsidiary.
Preparation of consolidated financial statement.
The parent company prepares a consolidated financial statement using uniform accounting
policies. However the parent need not prepare consolidated F/S due to the following:
Exemptions from preparing consolidated financial statements.

 The parent is itself a wholly owned subsidiary or partially owned subsidiary of another
entity of which the other entity prepares the group accounts.
 Its debt or Equity instrument is not traded in the local/foreign public market.
 It is an investment entity eg Britam, cytoon, centum
 It did not file nor is in the process for filling its financial statement with the security
commission for the purpose of issuing any class of instrument.
 Its ultimate or intermediate parent prepares consolidated financial statement that complies
with IFRS.
GOODWILL ON ACQUISITION
IFRS 3 defines goodwill as future economic benefit arising from assets that are not capable of
being individually identified and separately recognized.
It’s also the difference between the purchase consideration and the net asset acquired.

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 It is computed as follows:
Cost of investment xxx
Less fair value of net asset acquired (xxx)
Goodwill xxx

Methods of computing goodwill

There are 2 methods
1. Full goodwill method
This is where the goodwill of the subsidiary is determined as a whole. The goodwill comprises
the parent and NCI goodwill. Under this method, the NCI is measured at fair value. its
determined as follows:

Purchase consideration xx
Fair value of NCI nets asset xx
Xx
Less: net asset acquired
Ordinary share capital xx
Share premium xx
Pre-acquisition retained earnings xx
Pre- acquisition reserves xx (xx)
Full goodwill xxx

2. Partial goodwill method

This is where only parent goodwill is recognized and the NCI is measured at their proportionate
share of fair value of subsidiary net asset.

JOINT ARRANGEMENT IFRS 11.

This is an arrangement of which two or more parties have joint control. Joint control is a
contractual agreement of sharing control.

Types of joint arrangement.

1. JOINT OPERATION.

This is an arrangement whereby the parties that have a joint control have rights to the asset and
obligation for the liabilities. Joint operations may or may not be separate entities. Each venture
will record its share of the operations asset, liabilities, expenses and gains as determined by the
substance of the contract setting up the joint operation. There are no adjustments needed on
consolidation
2. JOINT VENTURE.
This is a joint arrangement whereby the parties that have joint control have right to net assets and
liabilities. The parties are called JOINT [Link] will be a separate legal entity. In this
situation, the investment is accounted for either at cost or in accordance with IFRS 9 in the
individual financial statement of each venture on consolidation

FORMS OF JOINT VENTURE.

1. PROJECT BASED JOINT VENTURE.
JM@KCAU UNIVERSITY Page 26
 Under this joint venture, companies enter into a joint venture in order to achieve a
specific task which can be an execution of any specific project or a particular service to
be offered together. In other word, these types of joint ventures are bound by time or a
particular project.
2. FUNCTIONAL BASED JOINT VENTURE.
Under this type of joint venture agreements, companies come together to achieve a
mutual benefit on account of synergy in terms of functional expertise in certain areas
which together enables them to perform more efficiently and effectively. The rationale
companies focus on before entering such joint venture is whether the likelihood of
performing better is more together tan doing it separately and more effectively.
3. VERTICAL JOINT VENTURE.
Under this type of joint venture, transactions take place between the buyer and supplier. It
is usually preferred when bilateral trading is not beneficial or economically viable.
Normally in such joint ventures, maximum gain is captured by supplier while limited
gains are achieved by buyers. Under these types of venture, different stages of an industry
chain are integrated within to create more economies of scale.
4. HORIZONATL JOINT VENTURE
Under this type of joint venture, the transaction happens between companies that are in
the same general line of business and that may use the products from joint venture to sell
to their own customers or to create an output that can be sold to the same group of
customers.
FORMS OF JOINT VENTURE UNDER PUBLIC SECTOR (IPSAS 8)
1. JOINT CONTROLLED OPERATIONS.
The operations of some joint ventures involve use of the asset and other resources of the
ventures rather than the establishment of a corporation, partnership or other entity. Each
venture uses its own PPE and its own inventory.
2. JOINTLY CONTROLLED ASSET
These joint ventures do not involve the establishment of a corporation, partnership or
other entity or financial structure that is separate from ventures themselves. Some joint
venture involves the joint control and often the joint ownership by, the venture of one or
more assets contributed to, or acquired for the purpose of joint venture and dedicated to
the purpose of joint venture.
3. JOINT CONTROLLED ENTITIES.

A joint controlled entity is a joint venture that involves the establishment of a

corporation, partnership or other entity in which venture has an interest. The entity
operates in the same way as other entities except that a binding arrangement between the
ventures establishes joint over the activity of the entity.
A jointly controlled entity controls the asset of the joint venture, incurs liability and
expenses and earns revenue. It may enter into contract in its name and raise finances for
the purpose of joint venture activity.
NB. Only subsidiary is consolidated and for the ordinary share capital and share premium
only for the parent is recognized.

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JM@KCAU UNIVERSITY Page 28
 SPECIALIZED TRANSACTION
1. Intergroup balance
This refers to inter-company indebtness. It’s a case where the group company’s owes each
other. Intergroup balances are eliminated in full on consolidation from both account
receivables and account payables. Any cash in transit need to be adjusted before eliminating
the inter group balances.
DR: Payables
CR: Receivables
2. Intergroup sale and unrealized profit on closing inventory.
Intergroup sale occurs where group companies sells goods to each other at a profit.
Intergroup sale are eliminated in full from both sale and cost of sales:
DR: Sales
CR: cost of sales
Unrealized profit occurs where intergroup sale of inventory remains in the stock at the end
of the year. The URP is eliminated in full by:
DR: cost of sales
CR: closing stock
When determining the URP, it’s important to differentiate between margin and mark-up:
MARGIN-is determined in relation to sales.
MARK UP –this is determined on cost

Illustration.
A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a profit margin of 20%. Determine the URP and show the
relevant journal entries.
Solution:
URP =20%× 120=24
Dr: cost of sale 24
Cr: closing inventory 24

Illustration 2.
A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a mark-up profit of 20%. Determine the URP and show the
relevant journal entries.
Solution:

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 URP =20/120× 120=20
Dr: cost of sale 20
Cr: closing inventory 20
Illustration 2.
A ltd controls B ltd 90% of its equity. During the post-acquisition period, B ltd sold goods to A
ltd worth 120 million reporting a mark-up profit of 1/3. Determine the URP and show the
relevant journal entries.
Solution:
URP =1/4× 120=30
Dr: cost of sale 30
Cr: closing inventory 30

3. Intergroup sale of fixed asset.

This is the sale of a fixed asset by one Group Company to another. In case of this transaction,
two adjustments need to be made:
(a) Eliminating any profit recognized.
Dr: cost of sale (p&l)
Cr: PPE account
(b) Adjusting for overcharged depreciation.
Dr: PPE account
Cr: cost of sale (p&l)
4. Dividend from subsidiary.
Dividends are distribution of profit to the shareholders. Dividends may be paid out of pre-
acquisition profit (pre-acquisition dividend) or paid out of post-acquisition profit (post
acquisition dividend).
The parent share of pre-acquisition dividend is credited to the cost of investment:
DR: cash/bank/dividend receivable a/c
Cr: cost of investment a/c
Parent share of post-acquisition dividend is a return on investment (investment income)
Dr: cashbook
Cr:investment income (p&l)
NB: dividend receivable or received from subsidiary are intra group balances and should
be eliminated in full)

5. Fair value adjustments.

IFRS 3 requires the identifiable assets and liabilities of the acquiree to be measured initially
by the acquirer at their fair value at the acquisition date.

When the subsidiary company’s assets are revalued on acquisition:

The subsidiary may have not incorporated the revaluation in its own book. In this case the
revaluation needs to be adjusted before consolidating subsidiary. A depreciation adjustment
may also be required for depreciable asset.
6. Piece meal (step) acquisition of subsidiary.
Step acquisition occurs when the parent acquires control over the subsidiary in stages. This is
achieved by buying blocks of shares at different times. IFRS 3 requires that the acquisition
method to be applied only when control is achieved (above 50%

JM@KCAU UNIVERSITY Page 30

 Any pre-existing equity interest is accounted for in accordance with relevant IFRS. On the
date when the entity acquires a controlling interest:
1. Re-measure the previously held equity interest at fair value.
2. Recognize any gain/loss to p&l for the year.
3. Calculate goodwill and the NCI in accordance with IFRS 3.
The cost of acquiring control will be the fair value of the previously held equity interest plus
the cost of the most recent purchase of shares at acquisition date.

ILLUSTRATION
H ltd holds 10% in S ltd at sh. 24,000 in accordance with IFRS [Link] 1st June 2018 it acquired
a further 50% of S ltd equity shares at a cost of sh.160,000. On this dare the fair value were
as follows:
 S ltd net asset sh 200,000
 NCI sh 100,000
 The 10% investment sh.26,000
NCI is measured using fair value method.
Required: calculate the goodwill using both methods
Solution.
(i) Partial goodwill method.

Purchase consideration (160+26)-fair value 186,000

Less net assets acquired;
(10%+50%)*200,000 (120,000)
Goodwill 66,000

(ii) full goodwill method

Purchase consideration 186,000
Fair value of NCI 100,000
Net asset (200,000)
Full goodwill 86,000

BRANCH ACCOUNTING.
A branch is a segment or part of a business situated at another part away from the entities
head office. A branch belongs to a business that has already been established and therefore
branches have no share capital.

PURPOSE FOR BRANCH ACCOUNTING

1. To ensure proper control of branches.
2. To safeguard the cash and inventory of goods in the hands of branches.
3. To ascertain the profit and loss from the branches operations.
4. To compare the profitability of different branches.
5. To maintain adequate records regarding the transactions between head office and
branches.

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To calculate commission to managers in based on the profits of the branch.
Types of branches.
1. Dependent branches-this is a small branch whose main activity is to sell the goods
supplied by the head office. They do not maintain accounting records. The accounting
records are usually maintained by the head office.
2. Independent branches-they are branches which operates as separate business from the
business that has established them (head office). They maintain their own set of
accounting record. In additional to the goods supplied to them by the head office, they
may have authority to purchase goods locally.
3. Foreign branches-these are branches located in a foreign country. They can either
maintain their own accounting record or they can be maintained by the head office.
Ledger accounts maintained where goods are sent to branches at selling price/cost plus
markup.
i. Branch stock account.
ii. Goods sent to branch account.
iii. Branch debtors account
iv. Markup /stock adjustment/provision for URP account.
v. Branch expenses account.
vi. Branch income statement.

Journal entries
 Goods sent to the branch Dr: Branch stock account (invoice price)
Cr: Goods sent to branch (at cost)
Cr: Branch mark-up account (profit)
 Goods returned to head office by branch
Dr: goods sent to branch-cost
Dr: branch mark-up account-profit
Cr: branch stock account-invoice price

 Sales made by branch Dr: cash/bank/debtor

Cr: branch stock account
 Returns of good by branch customer Dr: branch stock account
Cr: debtors account
 Returns of good by branch customer to head office
Dr: goods sent to branch account-cost
Dr: branch mark-up account-profit
Cr: branch debtors account
 Goods stolen in the branch Dr: goods stolen/loss account-at cost
Dr: branch mark-up account
Cr: branch stock account-invoice price
 Cash sales stolen Dr: cash stolen account
Cr: branch stock account
 Increase in price in the branch Dr: branch stock account
Cr: branch mark-up account

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  Transfer of goods from one branch to another
o Books of receiving branch Dr: branch stock account-invoice price
Cr: branch mark-up account.
o Books of selling branch Dr: branch mark-up account
Cr: branch stock account-invoice
Balancing goods sent to branch account-this account is balanced and its balancing figure is
closed to purchases account.
Financial statements of independent branches.
Independent branches will be required to prepare and present the income statement and
statement of financial position at the end of each economic period. The financial statement of
independent branches will then be combined with those of head office so as to present the FS
of the combined business.
Income statement format.
XYZ Ltd
Statement of comprehensive income for the year ended 31 Dec 2020
HO Branch combined
Sales (external only) xx Xx xx
Good sent to branch xx - -
Total sales xx xx xx
Cost of sales
Opening stock xx xx xx
Add purchases xx xx xx
Goods received - xx -
Goods available for sale xx xx xx
Less goods stolen/lost (xx) (xx) (xx)
Less closing stock (xx) (xx) (xx)
Cost of sales xx xx xx
Gross profit xx xx xx
Provision for URP xx - -
Adjusted gross profit xx xx xx
Less expenses (xx) (xx) (xx)
Profit xx xx xx
Transfer of branch profit xx (xx)
Xx - xx

ILLUSTARTION 1.
X ltd deals in electronics goods. The head office is In Nairobi and has a branch all over the
country. All purchases are made by the head office and goods are charged to branches at cost
plus (mark up) 25%.the following information relates to Nakuru branch for the year ended
31/12/2017.

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JM@KCAU UNIVERSITY Page 34
 Opening balances 1/1/2017.
Branch inventory (invoice price) 300,000
Branch debtors 450,000
Closing balances 31/12/2017.
Branch inventory (invoice price) 250,000

Transactions for the year

Goods sent by the head office to branch (invoice price) 2,500,000
Goods returned by branch to head office (invoice price). 200,000
Cash sales 800,000
Credit sales 2,700,000
Returns from customers to branch 100,000
Discount allowed. 30,000
Bad debts written off 20,000
Branch expenses 500,000
Goods stolen at branch 30,000
Cash sales stolen at branch (not included in other sales) 15,000
Cash received from branch debtors 2,450,000
Required:
a) Branch inventory account
b) Branch adjusted /mark up account
c) Goods sent to branch account
d) Branch debtors account
e) Branch income statement.

EXAMPLE 2
Kassmatt ltd operates a supermarket chain with the head office in Nairobi and branches in
Meru and Eldoret.

Goods are transferred from the head office to Meru branch at a mark-up of 25% and to Eldoret
branch at a gross profit margin of 25%. The branches do not maintain separate books of
accounts.

The following transactions took place during the year ended 31 March 2016.

MERU BRANCH ELDORET BRANCH

Opening stock at invoice price 10,000 10,000
Goods transferred to branch at invoice price 50,000 40,000
Cash remittance by branches 28,385 43,715
Returns by branches at invoice price 3,000 -
Cash at branch (1 April 2015) 2,000 1,000
Cash at branch (31 March 2016) 1,000 500

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 Debtor balance (1 April 2015) 840 600

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 Debtor balance (31 March 2016) 1,200 860
Returns by branch customers directly to head office 180 150
Cash received from branch debtors 16,800 14,200
Discount allowed 360 270
Bad debt written off 90 105
Expenses paid by branch 9,000 3,000

Additional information:
1. Meru branch transferred to Eldoret goods which had cost the head office sh. 4,500,000.
2. Eldoret branch had remitted sh.2,000,000 in cash to Meru branch

Required:
a. Branch inventory accounts.
b. Branch mark-up account.
c. Branch debtors account.
d. Branches cash account.

FINANCIAL STATEMENT ANALYSIS.

Financial statement analysis is the process of analyzing a company’s financial statement for
decision making purposes. External stakeholders use it to understand the overall health of an
organization as well as to evaluate financial performance and business value.

Tools of analyzing financial statement.

1. Common size analysis
2. Comparative analysis
3. Ratio analysis

1. COMMON SIZE ANALYSIS

Common size analysis is categorized into 2:
i) Vertical analysis
ii) Horizontal analysis.

Vertical common size analysis.

 In vertical common size analysis, each account or item in the financial statement is
expressed as percentage (%) of the base account.
 The base account for the income statement is the sales revenue. Every item in the
income statement is expressed as percentage of sales holding sales revenue 100%. This
type of analysis allows an analyst to determine how various component of the income
statement affects the company’s profit.
 The base account for the statement of financial position (Balance sheet) is total asset
or total equity and liabilities . Every item in the balance sheet is expressed as percentage
of total asset holding total assets as 100%.
Illustrations 1
Consider the following financial statement for EVIBS ltd and prepare vertical common size
income statement .

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EVIBS ltd income statement for the year ended 31 Dec 2020
Sh “000”
Revenue 30,000
Cost of sales (12,000)
Gross profit 18,000
Administration expenses (1,500)
Distribution expenses (1,200)
EBIT 15,300
Investment income 500
Earning before tax (EBT) 15,800
Income tax expense (3,000)
Net income 12,800

SOLUTION

EVIBS ltd income statement for the year ended 31 Dec 2020
Sh “000”
Revenue 30,000 100%
Cost of sales (12,000) 12000÷30000×100%=40%
Gross profit 18,000 18000÷30000×100%=60%
Administration expenses (1,500) 1500÷30000×100%=5%
Distribution expenses (1,200) 1200÷30000×100%=4%
EBIT 15,300 15,300÷30000×100%=51%
Investment income 500 500÷30000×100%=1.67%
Earning before tax (EBT) 15,800 15,800÷30000×100%=52.67%
Income tax expense (3,000) 3,000÷30000×100%=10%
Net income 12,800 12,800÷30000×100%=42.67%

Summary
 Gross profit-60%
 Operating profit -51%
 Net profit-42.67%--this means that for every 1sh in sales, EVIBS ha a net income
0.4267 cent

ILLUSTARTION 2
Consider the following financial statement for EVIBS ltd and prepare vertical common size
Balance sheet.
EVIBS ltd Balance sheet as at 31 Dec 2020
Sh “000
Non-current assets
PPE 22,000

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 Intangible assets 12,000
Investment property 5,000
Total 39,000
Current assets.
Inventories 9,500
Trade receivables 11,500
Cash and bank 500
Total current assets 21,500
Total asset 60,500
Equity and liabilities
Ordinary share capital 20,000
Share premium 6,000
Retained earnings 11,900
Non-current liabilities.
10% debentures. 12,000
Current liabilities
Trade payables 6,400
Bank overdraft 4,200
Total equity and liabilities 60500

SOLUTION

EVIBS ltd Balance sheet as at 31 Dec 2020

Sh “000
Non-current assets
PPE 22,000(22000/60500×100%=36.6%
Intangible assets 12,000 12000/60500×100%=19.83%
Investment property 5,000 8.26%
Total 39,000 64.46%
Current assets.
Inventories 9,500 15.75%
Trade receivables 11,500 19%
Cash and bank 500 0.83%
Total current assets 21,500 35.54%
Total asset 60,500 100%
Equity and liabilities
Ordinary share capital 20,000 33.05%
Share premium 6,000 9.9%
Retained earnings 11,900 19.67%
Non-current liabilities.
10% debentures. 12,000 19.83%
Current liabilities
Trade payables 6,400 10.58%
Bank overdraft 4,200 60.94%
Total equity and liabilities 60500 100%

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Horizontal common size analysis.
Under horizontal analysis, each account value is expressed as percentage of a designated base
year account values. This allows the analyst to see how the items have changed over a given
duration of time. Horizontal analysis is also known as trend analysis.

Horizontal common size

SOLUTION

EVIBS ltd statement of financial position

2019` 2020
Sh “000” Base year
Revenue 30,000 100% 34,000 113.33%
Cost of sales 12,000 100% 12,500 104.17%
Gross profit 18,000 100% 21,500 119.44%
Administration expenses 1,500 100% 1,200 80%
Distribution expenses 1,200 100% 1,800 150%
EBIT 15,300 100% 18,500 120.92%
Investment income 500 100% 200 40%
EBT 15,800 100% 18,700 118.35%
Tax expense 3,000 100% 4,000 133.33%
EAT 12 800 100% 14,700 114.84%

2. COMPARATIVE STATEMENT ANALYIS

Comparative statement deals with the comparison of different items in profit or loss account and
balance sheet of two or more periods.
 Comparative income statement.
Three important information are obtained from the comparative income statement. They
are gross profit, operating profit and net profit.

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 The changes or the improvement in the profitability of the business concern is determined
over a period of time.
 Comparative statement of financial position.
The financial condition of the business concern can be found out by preparing
comparative balance sheet. The various items in the balance sheet for two different
periods are used.

ILLUSTARTION
Consider the following financial statement for EVIBS ltd and prepare comparative income
statement for the year 2019 and 2020
EVIBS ltd income statement for the year ended 31 Dec
2019` 2020
Sh “000”
Revenue 30,000 34,000
Cost of sales 12,000 12,500
Gross profit 18,000 21,500
Administration expenses 1,500 1,200
Distribution expenses 1,200 1,800
EBIT 15,300 18,500
Investment income 500 200
EBT 15,800 18,700
TAX EXPENSE 3,000 4,000
EAT 12 800 14,700

SOLUTION
First, compute absolute change: P1-P0
Where: P1- subsequent year/period
P0- base year
Second, determine the % change as (P1-P0)÷Po

EVIBS ltd income statement for the year ended 31 Dec

2019` 2020
Sh “000” Po P1 ±Absolute change % change
Revenue 30,000 34,000 +4,000 +13.33%
Cost of sales 12,000 12,500 +500 +4.167%
Gross profit 18,000 21,500 +3,500 +19.44%
Administration expenses 1,500 1,200 -300 -20%
Distribution expenses 1,200 1,800 +600 +50%
EBIT 15,300 18,500 +3,200 +20.92%
Investment income 500 200 -300 -60%
EBT 15,800 18,700 +2,900 +18.35%
TAX EXPENSE 3,000 4,000 +1,000 +33.33%
EAT 12 800 14,700 +1,900 +14.84%
Summary.
Revenue increased by 13.66% from 2019 to 2020.
Net profit increased by 14.84% from 2019 to 2020.

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 Advantages of common size analysis/comparative analysis.
1. Easy to understand
Common size statement helps the users of the financial statement to make clear about the
ratio or percentage of each individual item to total assets/revenue.
2. Helpful for time series analysis-
A common size statement helps the analyst to find out a trend relating to percentage share
for each asset in total asset for a given period.
3. Comparison at a Glance-
An analyst can compare the financial performance at glance since percentage of increase
or decrease of each individual component.
4. Helpful in analyzing structural composition.
A common size statement helps the analyst to ascertain the structural relations of various
components of cost/expenses/assets/liabilities etc to the required total
assets/liabilities/capital or sales.
Limitations of common-size statement.
1. Lack of standard ratio
Common size statement does not help to take decision since there is no standard
ratio/percentage in the various components of items.
2. Changes in price-level
Common size statement does not recognize the changes in price level i.e. inflationary
effect, so it supplies misleading information since it is based on historical costs.
3. Following consistency
If consistency in accounting principle, concepts, and conventions is not maintained then
common size statement becomes useless.
4. Seasonal fluctuations-
Common size statement fails to convey proper records during seasonal fluctuations in
various components of sales, assets and liabilities.
5. Window dressing
Effect of window dressing in financial statement cannot be ignored and common size
statement fails to supply the real position of the financial statement items.
6. Qualitative element
Common size statement fails to recognize the qualitative elements eg quality of work,
customer relations etc .
Advantage of ratios analysis.
1. They are used to determine the ability of the company to meet its financial obligations i.e.
Liquidity ratios.
2. They indicate the extent to which the company has borrowed fund e.g. gearing ratios.
3. They are used to compare the performance of the company with that of the industry. (Industrial
analysis).
4. They are used to compare the performance of the company with other competitors (cross
sectional analysis).
5. They can be used to compare the performance of the company over time (trend analysis).
6. Ratios are used to determine the value of the company.(valuation ratios)
Disadvantages.
1. Ratios ignore the effect of the inflation.
2. Difference in the size of the companies.

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 3. Differences in the accounting policies.
4. Ratios fail to capture the qualitative aspect of the company.
5. In case of monopolistic company it’s difficult to compare performance.
6. Window dressing/manipulation of financial records.
Attributes of a good financial statement analysis.
 Timeliness
 Objectivity
 Precision and brevity
 Understandability
 Relevance
 reliability

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 RATIO ANALYSIS ILLUSTRATIONS.

ILLUSTRAION 1.
The following are the summarized financial statement of Bonoko ltd.

Bonoko ltd statement of financial position as 31 December:

2015 sh”000” 2016 sh”000”
Non-current assets 4,995 12,700
Current assets
Inventory 40,145 50,455
Account receivable 40,210 43,370
Cash at bank 12,092 5,790
Total assets 97,442 112,315
Current liabilities
Account payable 34,389 39,215
Taxation 2,473 3,260
36,862 42,475
Long-term liabilities
10% loan note 19,840 19,480
Total liabilities 56,702 62,315
Net asset 40,740 50,000
Equity
Ordinary share(sh 0.25) 9,920 9,920
Retained earnings 30,820 40,080
Shareholders’ funds 40,740 50,000

Bonoko ltd income statement for the year ended 31 December

2015 sh”000” 2016 sh”000”
Revenue 486,300 583,900
Operating profit 17,238 20,670
Interest payable (1,984) (1,984)
Profit before tax 15,254 18,686
Tax expense (5,734) (7,026)
Profit for the year 9,520 11,660

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 Notes: sh “000” 31 Dec 2015 31 Dec 2016
Retained profit brought forward 23,540 30,820
Dividend paid during the year 2,240 2,400
Required:
For each of the year, calculate:
a) Earnings per share (EPS)
b) Dividend cover
c) Current ratio
d) Acid test ratio
e) Return on capital employed(ROCE)
ILLUSTRAION 2.

The following is a summary of the financial data for Ulimwengu ltd for the financial year ended
31 Dec 2017 and 31 Dec 2018.

Income statement 2018 sh “000” 2017 sh “000”

EBIT 29,498 27,012
Interest (3,106) (3,726)
Tax (8,694) (7,452)
PAT 17,698 15,834
Dividend payable 9,600 6,200

Statement of financial position

2018 sh “000” 2017 sh “000”
Shareholders’ funds 79,800 70,174
Long term debt 28,000 35,000
107,800 105,174

Additional information:
2018 2017
The number of outstanding shares (000) 28,000 28,000
Required:
Calculate the following ratios for the year 2017 and 2018.
a) Return on capital employed(ROCE0.
b) Interest coverage ratio
c) Earning per share (EPS)
d) Dividend yield

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 CONSTRUCTION CONTRACTS
QUESTION ONE
Jenga construction contract ltd was awarded a contract Z on 1 January [Link] contract price
was fixed at sh 120 million and the estimated total cost of the contract was sh. 105 million. The
following information relates to the contract for the three years from 1 January 2006 to 31
December 2008 when the contract was completed.

2006 2007 2008

Sh “000’’ Sh “000’’ Sh “000’’
Cost incurred 20,000 42,000 32,000
Estimated further costs 70,000 36,000 -
Billing to clients 30,000 50,000 40,000
Collection from client 12,000 38,000 60,000
Administrative expenses 2,000 2,500 1,000

Required:
For each of the year ended 31 Dec 2006, 2007 and 2008, prepare extract of the income
statement and statement of financial position using the percentage of completion approach in
line with IAS 11, LONG TERM CONSTRUCTION CONTRACTS (14 marks).

QUESTION TWO.
(a). Explain the following terms as used in accounting for construction contracts:
I. Completed contract method.
II. Percentage of completion method.
(b)
On 1 January 2014, ujenzi ltd was awarded a contract for the construction of a road. The
contract was for 3 year period. The contract price was sh.250 million. The following information
has been extracted from the books of the company:

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 Year ended 31 December (sh millions)
2014 2015 2016
Total cost incurred to date 80 170 220
Estimated additional cost to complete contract 120 90 -
Billing made during the year on contract. 90 100 60
Cash received on the contract in the year 80 90 70
General administration expenses in the year 4 6 5

Required:
Using the percentage of completion method, prepare the following in the books of ujenzi ltd.
a) Income statement extract for the year ended 31 Dec 2014, 2015 & 2016 (10 marks)
b) Statement of financial position extract as at 31 Dec 2014, 2015 & 2016 (5marks)
Your answer should be in conformity with IAS 11 (construction contracts)

QUESTION THREE
(a) Explain the difference between a fixed price contract and cost plus contract.

(b) Jenga ltd is a construction company whose financial year ends on 31 March. The
information below was extracted from the books of the company in connection with
three contracts undertaken by the company during the financial year ended 31 march
2015.
Sh “000”
Contact 468 469 470
Contract price 3,600 4,800 2500
Cost incurred up to 31 March 2014 1800 3000 1500
Cost incurred during the year 600 1000 500
Estimated total cost of the contract. 3000 5200 2300
Total billings to date. 2800 4500 1800
Total cash received to date 2600 4200 1700
Total profit/loss reported to date 360 30 (20)
General administrative expenses 60 120 30
Required:
Using the percentage of completion method, prepare
a) Income statement for each of the contract. (10 marks)
b) Statement of financial position for each year as at 31 march 2015. (6 marks)

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 ADVOCATE
Sabina and Hekima are partners in SH and company Advocate.
The trial balance extracted from the books of account as at 31 Dec 2009 was as follows:
Sh 000 sh 000
Capital 4,140
Office equipment 1,840
Furniture and fixtures. 805
Account payable 378
Client account 575
Work in progress 1,483
Client disbursement 759
Bank: client 575
Office 690
Library books 644
Accruals 253
Loan from bank 1,450
6,796 6,796
The following transactions were carried out during the year ended 31 Dec 2010.
1. Charged client sh 14,700,000 for services rendered during the year.
2. Received sh 1,850,000 on behalf of clients.
3. Received 11,400,000 from client in settlement of the amount due for services rendered
4. Used, 1,500,000 to acquire a house for a client who had a credit balance of 800,000 with
the firm.
5. Received 300,000 from client in settlement of disbursement made on their behalf.
6. Purchased library books worth sh 366,000 paying cash and repaid sh 550,000 of the loan
from bank.
7. Incurred the following expenses which were paid in the year ended 31 Dec 2010.
Office (sh 000) client (sh000)
Rent 600 120
Salaries and wages 2,450 150
Office provisions 410 -
8. Incurred the following expenses which had not been paid for as at 31 Dec 2010.
Sh 000
Legal fee 3,400
Salaries and wages 1,650
Rent 1,720
9. Partners withdrew sh 1,750,000 from the bank

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 10. Withdrew sh 450,000 from client account as professional fees.
11. Acquired office premises for sh 6,500,000 and paid 3,000,000 in cash. The balance was
financed through a mortgage which attracts interest at the rate of 12% per annum.
Assume the office premises were acquired on 1 Jan 2010
12. Donated sh 2,000,000 to charitable trust.
13. Represented a client whose work in progress as at 31 Dec 2010 was valued at 1,170,000.
The work in progress had not been invoiced to client.
14. The firm provides for depreciation on non-current asset on book value at the following
rates:
Non-current asset rate %
Office equipment 10
Furniture and fixtures 15
Library books 12.5
Office premises 2.5
Required:
(a) Prepare in columnar format:
i) Client account ( 4 marks)
ii) Cash book. (5 marks)
(b) Income statement for the year ended 31 Dec 2010. (5 marks)
(c) Statement of financial position as at 31 Dec 2010 ( 6 marks)

Question two

The following trial balance was extracted from the records of Maena and company Advocates, a
small size law firm, as at 30 April 2016:
Maena and Company Advocate
Statement of financial position as at 30 April 2016
Sh “000” sh “000”
Assets
Non-current assets
Equipment 1500
Furniture 500
Library books 300
Current assets
Work in progress 480
Stationery 80
Disbursement-client 450
Cash at bank: office 350
Client 280
Total assets 3940
Capital and liabilities
Capital 3350
Current liabilities
Creditors 310
Client-for money held on their behalf 280

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JM@KCAU UNIVERSITY Page 50
 3940
The following transactions were carried out during the year ended 30 April 2016:
1. Charged clients sh 1,420,000 for services rendered and received payments of sh 850,000
from the clients.
2. Received sh 1,680,000 on behalf of client and spent sh 270,000 to pay rent and
sh.820,000 to purchase land on behalf of clients who had credit balances with the firm.
3. The firm used sh 500,000to purchase ordinary shares from the stock exchange on behalf
of the client who had a credit balance of sh. 180,000 with the firm.
4. The client authorized the firm to transfer sh 600,000 from client account to the office
account.
5. The firm received sh 180,000 from clients in settlement of disbursement made on their
behalf.
6. A client deposited sh 350,000 with the firm on 28 April 2017 for the purchase of land in
May 2017.
7. The firm paid salaries and wages of sh 280,000 and office expenses of sh 70,000 for the
year ended 30 April 2017.
8. The creditors balance is in relation to the purchase of stationery. The form purchased
stationery worth sh 280,000 on credit and paid creditors sh 430,000 during the period
ended 30 April 2017. On 30 April 2017, stationery in hand was valued at sh.110,000.
9. The firm provides for depreciation on non-current assets at the following rates based on
the books values:
 Equipment 10% p.a
 Furniture 12.5% p.a
 Library books 20% p.a
10. The partners made a total drawing of sh. 650,000 from the firm in the year ended 30
April 2017.
11. Work in progress as at 30 April 2017 which had not been invoiced on clients was valued
at sh.280,000.
Required:
a. Income statement for the year ended 30 April 2017 (10 marks)
b. Statement of financial position as at 30 April 2017 (10 marks)

QUESTION THREE
Juma and Company Advocate is a law firm operating upcountry town.
Provided below is the balance sheet of the firm as at 30 June 2018.
Statement of financial position as ta 30June 2018
Sh ‘000’ sh ‘000’
Assets
Non-current assets
Equipment 800
Furniture 350
Library books 280
Current assets
Work in progress 210

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 Stationery 140
Debtors and disbursements 330
Cash at bank-office 300
- Client 250
2660
Capital and liabilities
Capital 1800
Non-current liabilities
Loan 500
Current liabilities
Creditors 110
Client account 250
2660
The following transactions were carried out by the firm during the year.
1. Received sh 850,000 on behalf of the client.
2. Spent the following amount on behalf of client which was all paid in cash.
 Purchase of equipment 260,000
 Payment of rent 130,000
 Repair cost 80,000
3. Purchased new equipment for the office use for 400,000 and paid 100,000 and the
balance remaining is a loan.
4. Spent 350,000 on the purchase of the land on behalf of the client who had a credit
balance with the firm of 120,000.
5. Charged client 1,050,000 for the services rendered during the year.
6. Received 680,000 from client in settlement of the amount due for services rendered.
The firm further received authority from client to transfer 240,000 from client account
in settlement of amount due to the firm.
7. The following expenses were incurred and all were settled in cash.
 Rent 120,000
 Salaries 360,000
 Office expenses 90,000
 Interest on loan 30,000
 Loan repayment 300,000
8. During the year, the firm received 480,000 from client in settlement of disbursement
made during the year on their behalf by the firm.
9. Purchased library books worth 160,000 and paid them by cash.
10. Purchased stationery on credit for 210,000 and paid creditors a total of 240,000 during
the year.
11. Drawings for personal use during the amounted to 180,000.
12. On 30 June 2018, stationery in the store was valued at 160,000. On the same date work
in progress was valued at 350,000.
13. The firm provides depreciation on book value using the following rates.

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Equipment 5% per annum.
 Furniture 10% per annum.
 Library books 12.5% per annum.
Required:
(a) Income statement for the year ended 30 June 2018 (10 marks)
(b) Statement of financial position as at 30 June 2018. (10 marks)

HIRE PURCHASE
QUESTION ONE
Lipa pole ltd commenced business on 1 January 2016 as a supplier of refrigerators. All sales are
made on hire purchase terms, with the company taking credit for the gross profit, including
interest, in proportion to the installments collected.
Throughout the year ended 31 December 2016 and 2017, the total price including interest
charged to every customer was 50% above the cost of goods sold or in the case of repossessed
goods, 50% above the value at which the goods were taken back into the stock. The hire
purchase contract required no deposit and provided for the payment of 12 equally monthly
installments.
The following trial balance was extracted from the books of Lipa pole ltd as at 31 Dec 2017.

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 Sh “000” sh “000”
Share capital 35,000
Non-current asset at cost 10,000
Provision for depreciation as at 1 Jan 2017 1,000
Hire purchase installment due less provision
For unrealized profit as at 1 Jan 2017. 28,350
Stock as at 1 Jan 2017 at cost 6600
Purchases 59,000
Cash received from customers 80,625
Bank balance 6500
Creditors 4860
General expenses 16,150
Revenue reserve as at 1 Jan 2017 5,115
126,600 126,600
Additional information.
1. The sales, including interest for the year ended 31 December 2017 were sh. 94,650,000.
2. In October 2017, the company repossessed some goods which had cost sh. 4,800,000 and
had been sold earlier in the year. The unpaid installment on these goods amounted to sh.
2,400,000 in respect of which nothing was recovered apart from the goods, which were
taken back into the stock at a valuation of sh. 2,000,000 the repossessed goods were re-
sold before the end of the financial year. The total selling price, both on the original sale
and on resale of repossessed goods were included in the sales for the year ended 31 Dec
2017.
3. All installments were paid on time except for those referred to in note 2 above.
4. All goods unsold as at 31 Dec 2017 were in good conditions and were to be valued at cost
5. Provisions for depreciation on the non-current assets were to be provided at the rate of
10% per annum on cost.
Required:
a. Income statement for the year ended 31 December 2017. (10 marks)
b. Statement of financial position as at 31 December 2017. (10 marks

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QUESTION TWO.
Kopesha ltd has been in business for several years dealing in electronic goods. All goods are sold
on hire purchase terms. The following trial balance was extracted from the books of the form as
at 31 March 2016.
Sh “000” sh “000”
Ordinary share capital 53,200
Cash at bank and in hand 1,800
Accounts payable 5,000
Operating expenses 16,000
PPE (1April 2015) 55,000
Depreciation (1 April 2015) 20,000
Hire purchase installments receivables 34,200
Hire purchase sales 55,200
Purchases 24,600
Inventory (1 April 2015) 1,800
133,400 133,400
Additional information;
1. Inventory as at 31 March 2016 was valued at sh. 2,400,000.
2. PPE should be depreciated at sh. 5 million for the year ended 31 March 2016.
3. Each unit was sold on hire purchase basis on the following terms:
Sh sh
Cash price 40,000
Deposit (10,000) 30,000
Interest 6,000
36,000
4. Assume that all the sales are made at the end of each quarter the quarter ends on 31
March, June, September and December respectively. The balance due on each hire
purchase sale is payable in four equally installment of sh. 9,000 per quarter payable at the
end of each quarter and commencing in the quarter following that of which the sales was
made.
The numbers of units sold during each quarter were as follows:
Quarter to number of units sold
30 June 2015 100
30 Sep 2015 200
31 Dec 2015 300
31 March 2016 600
All installments were received on their due dates.
5. The sum of digits method is to be used to apportion interest, the appropriate amount
being credited to the quarter in which the installment is received.
6. Included in the operating expense is a lease rental payment of sh 2 million paid at the
commencement of the financial year. This relates to equipment whose fair value is sh 8
million. The payment has been treated as an operating lease whereas it is a finance lease.
The duration of the lease is 5 years and interest is at 10% per annum. Lease rentals are
paid in advance.
Required:
a) Income statement for the year ended 31 December 2017. (10 marks)

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 b) Statement of financial position as at 31 December 2017. (10 marks)

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 EMPLOYEE BENEFITS &
PENSION SCHEMES

QUESTION THREE (JUNE 2011 Q3C)

The following trial balance was extracted from the books of Juhudi Retirement Benefit as at 31
March 2011.
Sh million sh million
Accumulated funds 23,070
Accrued expenses 12
Administrative expenses 142
Demand deposits 1,173
Reduction in market value of investments 1,132
Commutation & lumpsum retirement benefits241
Contribution due within 30 days 247
Employer normal contributions 1,504
Employer additional contribution 320
Individual transfer from other schemes 157.5
Individual transfer to other schemes 93
Investment income 2,370
Investment property 6,616
Fixed income investment 13,180
Members normal contribution 912
Member voluntary contribution 228
Pension paid 382
Equity investment : quoted 4,392
Unquoted 999.5
Unpaid benefits 16
28,597.5 28,597.5

Required:
(a) Statement of changes in net asset
for the year ended 31 March 2011 (7 marks)
(b) Statement of net asset as at 31
March 2011 (7 marks)

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 PUBLISHED
The following balance has been extracted from the books of Zed ltd as at 31 October 2009.
Sh million Sh million
PPE 6,800
Accumulated dep as at 1 Nov 2008 2,400
Intangible assets 2,000
Accumulated amortization as at 1 Nov 2008 400
Investment property (land) 500
Inventory as at 1 Nov 2008 1,200
Purchases 8,000
Sales 15,000
Administrative expenses 2,600
Distribution expenses 2,400
Interest paid on debentures 100
10% debentures 2,000
Suspense account 2,000
Ordinary share capital (sh 100) 5,000
Share premium 1,000
Retained profits (1 Nov 2008) 1,500
Revaluation reserve (PPE) 200
Cash at bank 2,000
Receivables 6,200
Payables 3,000

Financial assets: at fair value 600

Available for sale 1,000
Deferred tax 500
Obligation under finance lease (1 Nov 2008) 1000
Lease rental paid 200
Installment tax paid 400
Additional information.

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 1. The cost and net realizable value of the inventory as at 31 October 2009 was sh 1,600 and
sh. 1,500 respectively.
2. Depreciation on PPE is to be provided at sh. 800 million and classified under cost of
[Link].10 million of this amounts related to excess depreciation on revaluation.
3. Intangible assets are to be revalued to sh.1, 800 million. Amortization of sh 400 million is
to be charged and classified under administrative expenses.
4. Land is held for capital appreciation and it is accounted for at fair value. As 31 October
2009, the market value of the land was sh 550 million.
5. The suspense account related to a new issue of shares by Zed ltd. On 1July 2009, it issued
12 million shares for sh. 150 each .The balance in the suspense account is the investment
income.
6. The financial assets were purchased during the year. The financial assets are to be
recognized as at 31 October 2009 as follows:
At fair value 700 million
Available for sale 1,200 million
Deferred tax of sh 60 million is to be recognized as a result of revaluation of available for
sale.
7. Current year estimated tax is 500 million. The deferred tax liability is to be reduced to sh
300 million.
8. Interest on the finance lease is at the rate of 10% per annum and is payable together with
the rental on 31 October each year.
Required:
a. Published statement of comprehensive income for the year ended 31 October 2009
(10 marks)
b. Summarized statement of changes in equity. (4 marks)
c. Published statement of financial position as at 31 October 2009 (6 marks)

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 CASH-FLOW-IAS 7
NASA Group
Statement of cash flow for the year ended xx/xx/2070
Operating Activities cash flows
Profit before tax xx
Adjustments (non-cash items)
Depreciation xx
Amortization/Impairment xx
Loss on disposal xx
Finance cost xx
Gain on disposals (xx)
Associate profit/joint venture profit (xx)
Investments income/Dividends income (xx)
Xxx
Changes in working capital
Increase/Decrease in inventory (xx)/ xx
Increase /Decrease in receivables (xx)/ xx
Decrease /Increase in payables xx/ (xx)
Gross operating cash flows xxx
Tax paid (xx)
Net operating cash flows. Xxx
Investing Activities cash flows
Cash proceed from disposals xx
Dividends /interest /investment income received xx
Purchase on non-current assets (xx)
Net investing cash flows xxx
Financing Activities cash flows
Cash received from issue of shares xx
Cash received from issue of debentures xx
Loan borrowed xx
Loan paid (xx)
Dividend /interest paid (xx)
Lease rentals paid (xx)
Net financing cash flows xxx
Cash and cash equivalents xxx
Add: cash balance b/d xx
Cash and cash equivalent balance c/d xx

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 FR CASHFLOWS
MAY 2014 Q4.
The consolidated income statement of Uongozi ltd for the year ended 30 Sep 2013 together with
the comparative consolidated statement of financial position as at 30 September 2013 and 2012
are shown below.
Consolidated income statement for the years ended 30 September 2013.
Sh million
Sales 7,640
Cost of sales (5,240)
Gross profit 2,400
Operating expenses (600)
Finance cost (60)
Profit before tax 1,740
Group share of associate profit after tax 40
1780
Income tax expense (540)
Profit for the period 1240

Attributable to: parent company 1,160

Non-controlling interest 80
1240
Consolidated statement of financial position as at 30 September:
Assets 2013 2012
Non-current assets sh million sh million
Property plant and equipment 3,780 3,660
Intangible assets 1,300 600
Investment in associate company 190 160
Current assets.
Inventory 2,840 1,880
Account receivable 1,980 1,360
Cash 140 -----
Total assets 10,230 7,660
Equity and liabilities.
Ordinary share capital (sh 10 each) 1,500 1,000
Share premium 700 200
Revaluation reserve 280 -
Retained profit 3,140 2,760
Non-controlling interest 270 200
Non-current liabilities
10% debentures 600 200
Bank loan 520 600
Deferred tax 620 280
Current liabilities
Bank overdraft - 230
Account payable 1,750 1,460
Accrued loan interest 30 10

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 Dividend payable 560 400
Current tax 260 320
Total 10,230 7,660

Additional information.

1. The cost of sales included depreciation of PPE amounting to sh 640 million and a loss on
sale of plant of sh 100 million.
2. Intangible assets are stated at the net book value and comprises:
2013 2012
Sh million sh million
Goodwill 360 400
Others 940 200
1300 600
Other intangible assets acquired during the year ended 30 September 2013 amounted to
sh 1,000 million. The cost of intangible asset is included in the above analysis.
3. During the year ended 30 September 2013, the holding company acquired new plant
which cost sh 500 million. The company also revalued its building by sh 400 million.
4. On 1 October 2012, the holding company made a bonus issue of 1 share for every 10
shares held. The issue was financed from the revaluation reserves.
5. The detailed analysis of retained profits as at 30 September 2013 and 2012 were as
follows:
2013 2012
Sh million sh million
Balance brought forward 2,760 2,400
Profit for the year 1,160 960
Transfer from revaluation reserve 20 -
Dividend declared and paid (800) (600)
Balance carried down 3,140 2,760
Required:
Group statement of cash flows for the year ended 30 September 2013, in conformity with IAS 7“statement of
cashflows”

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