June 2009 Question Two
- (a)Key disclosures items in the statement on employees
- (i)Number of employee; Average numberof employees in the financial year and actual number at the beginning and end of the financial year.
- (ii)Reason for changes in the number of employees during the financial year.
- (iii)Age distribution and sex of employees.
- (iv)Geographical location of major employment centers.
- (v)Costs and benefits associated with pension schemes.
- (vi)Cost and time spent on training of employees.
- (vii)Name of unions recognized by the entity for the purpose of collective bargaining and membership where available.
- (viii)Information concerning safety and health including the frequency and severity of accidents and occupational hazards or diseases.
- (i)Alignment with international best practice
- (ii)Accounting for disclosure of public funds
- (iii)Enable better decision making
- (iv)Acceptability of accounts by donors and other external parties
- (v)Enhanced comparability of financial information
- (vi)Improvement of professionalism of public sector accountants
- (vii)Overall economic growth and development
- Definition of Borrowing Cost And Qualifying Assets
December 2008 Question One
Disclosure requirements of IAS 21- Effects of changes in foreign exchange rates
- Exchange difference recognized in the income statement.
- Net exchange difference classified as a separate component of equity.
- Net exchange gain or loss closed to the income statement.
- When the presentation currency is different from the functional currency this should be disclosed together with the functional currency.
- Change in the functional currency of either the reporting entity or a significant foreign operation.
- when an entity disclose its financial statements or other financial information that is different from either its functional currency or presentation currency it shall;
- Clearly identify the information as a supplementary information.
- Disclose the currency in which the supplementary information is displayed.
- Disclose the entity’s functional currency.
December 2008 Question Four (b)
Benefits of adopting IPSASs
IPSASs are considered to be high quality reporting standards for use by publicentities around the world. The use of IPSASs by public sector entities and even governments will align the accounting practice in the public sector with best practice.
It is anticipated that the application of the requirements of IPSASs will enhance the accountability and transparency of financial reports prepared by governments and their agencies. This by extension will improve accountability, transparency and disclosure of government activities and resources to the public. The use of IPSASs will contribute to a more true and fair accounting of government assets and liabilities.
IPSASs would enable high quality financial reporting which would enable better decision making. In particular the government and the public at large will be able to assess performance of public sector entities. Adoption of IPSASs will facilitate measurement of efficiency and effectiveness of utilization of resources thus enabling the government to make better informed decisions on resource allocation.
Adoption of IPSASs will improve reliability of accounts and greatly increase the confidence of investors, general public and external agencies such as donors in the financial and non-financial information thereby contributing to a country’s economic growth and stability.
Use of IPSASs across the public sector entities and even governments will enhance comparability among entities and governments. This would make it easier to have cross border trade. It would also be easier to benchmark and identify areas of shortcomings for improvement purposes.
Adoption of IPSASs can improve the professionalism of public sector accountants if they adopt the Code of Ethics of Accountants, developed by IFAC’ International Ethics Standards of Accountants. If adopted it will contribute to accountability and transparency in the public sector which is a plus to the war against corruption.
With reduced misuse of public funds, increased emphasis on performance management and transparency, resources will be put to their intended use. Ultimately, this will yield improved standards of living and sustainable economic development.
June 2009 Question Three (a)
-Borrowing cost are costs that are necessarily incurred to get the qualifying asset ready for its intended use or sell.
It can also be defined as interest and other costs incurred by and entity in connection with the borrowing of funds.
– A qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use or sale
- (ii)Recommended alternatives for the treatment of borrowing costs
– The benchmark treatment of borrowing costs is that it should be expensed regardless of how the borrowings are applied.
– The allowable alternative is that the borrowing costs should be capitalized if it is directly attributable to the acquisition, construction, or production of a a qualifying asset during the period of capitalization.
- (i)Event no. 1
- (ii)Event no. 2
- (iii)Event no. 3
- (a)brief explanation of terms:
- (i)Biological asset; is a living animal or plant which has value for recognition in the financial statements.
- (ii)Biological Transformation; comprises the process of growth, degeneration production and procreation that cause qualitative or quantitative changes in biological assets.
- (iii)Active market; this is a market where all the following conditions exist:
No disclosure under IAS 24 is required in the consolidated accounts of intragroup transactions and balances eliminated on consolidation. IAS 24 does not address the situation where an undertaking becomes or ceases to be subsidiary during the year. However international practice would seem to indicate that the transactions between the related parties would be disclosed to the extent that they were undertaken when Soma was part of the group.
Disclosure should be made of the transactions between related parties if they were related at anytime during the financial period. Thus any transaction between Hila ltd and Soma ltd during the period 1 January 2008 to 31st march 2008 would be disclosed.
There is no related party relationship between Hila ltd and Amua ltd hence no disclosure is required.
Retirement benefits schemes for the benefit of employees of the reporting entity are related parties of the entity but are not specifically mentioned in IAS 24. The rendering or receipt of services is an example given in IAS 24 as regards a situation which could lead to disclosure and also the payment of contributions involves the transfer of resources.
Contributions paid to the scheme are exempt from disclosure under IAS 24 depending upon the nature of the plan and whether or not the reporting enterprise contributed to the plan, but it is the other transactions with Hila ltd which must be disclosed. The pension scheme’s investment manager would normally be considered a related party of the reporting sponsoring company if it can be demonstrated that the investment manager could exercise significant influence over the financial and operating decisions of Hila ltd through his position as anon-executive director of the company. Directors are deemed to be related parties and the fact that the fee paid is not material to the group does not mean that it should not be disclosed. It is possible that the fee will be material in this respect.
IAS 24 does not require disclosure of relationship and transactions between the reporting entity and providers of finance in the normal course of their business even though they may influence decisions. However Hila ltd has a 25% equity interest in Ujuzi ltd (Associate) which is a related party.
IAS 28 –Investment in Associate presumes that a person owning or able to exercise control over 20% or more of the voting rights of the reporting entity is a related party. An investor with 25% equity holding and a director on the board would be expected to influence over the financial and operating policies in such a way as to inhibit the pursuit of their separate interests. If it can be shown that such influence does not exist then there is no related party relationship.
If however, it is deemed that they are related parties then all material transactions will require disclosure including the management fees, interest, dividends and the terms of loan.
June 2009 Question Five
– The items traded within the market are homogenous.
– Willing buyer and sellers can normally be found anytime.
– Prices are available to the public.
- (b)Provisions and contingent liabilities
– Provisions are recognized as liabilities because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations.
– The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.
– An entity shall not recognize a contingent liability. A contingent liability is disclosed unless the possibility of an outflow of resources is remote.
– The following should be disclosed for a contingent liability;
. An estimate of its financial effect.
. An indication of the uncertainties relating to the amount or timing of any outflow.
. The possibility of any reimbursement.
Three types of risks under IFRS 7
- (i)Credit risk
- (ii)Liquidity risk
- (iii)Market risk
- (iv)Other risks
This is risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge obligation. An entity is required to disclose the amount that best represents its maximum exposure to credit risk.
This is the risk that an entity will encounter difficulties in meeting obligations associated with financial liabilities. An entity is required to disclose a maturities analysis for financial liabilities that shows the remaining contractual maturities.
This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices
– Currency risk; The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
– Interest rate risk; The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates
December 2009 Question Three
(b)Key Components of management’s discussion and analysis (MD&A)
- Nature of the business: In terms of regulations and macro-environment(political, social, economic, legal, cultural, technological etc)
- Objectives and strategies: Mission, vision, objective and strategies such as diversifications, acquisitions, mergers and process innovations.
- Key resources, risks and relationships: that is the physical and human resources processes and organizational structure.
- Results and prospects: Financial performance that is the firm’s performance position and changes in financial position with summarized financials for a given period.
- Performance measures and indicators: Key performance indicators such as revenue growth, earnings per share and return on capital employed.
Measurement and classification of financial instruments (IAS 39) provides that all financial assets and liabilities should be measured initially at fair value. This includes transaction costs unless the asst is classified at fair value through the income statements in which case the transaction costs are recognized in the profit and loss account.
Subsequent measurement depends on the classification of the financial instrument. Financial assets may be classified at fair value through income statements, held to maturity investments, loans and receivables available for sale financial assets.
Financial assets at fair value through profit and loss are financial assets that either held for trading or designated initially as such through the income statement. They are subsequently measured at fair value.
Held to maturity investments are financial assets with fixed and determinable payments and which the entity has an intention and ability to hold to maturity. They are subsequently measured at amortized cost.
Loans and receivables are not derivatives financial assets with fixed determinable payments that are not quoted in an active market. They are subsequently measured at amortized cost.
Available for sale financial assets are those non derivative financial assets designated as being available for sale. They are subsequently measured at fair value.
December 2009 Question Four (b)
This is a finance lease because;
– The lease term is for the major part of the asset’s remaining economic life.
– The PV of Min. L.P approximates the fair value ie 4.35m+ (4.35X2.49) =15.182m compared to the fair value of 15.2m.
– The lease contains a bargain purchase option.
Under IAS17, where a sale and lease back transaction results in a finance lease any excess of the sale proceeds over the carrying amount should be deferred and recognized over the lease term. And therefore the excess proceeds shs.5.2m(15.2m-10m) will be amortized over four years at shs 1.3m(5.2m/4) per annum. The asset and lease obligation are recorded at the sale value of shs.15.2m.
IAS 24 defines a related party as a party that controls or is controlled by the entity or has a significant influence or joint control over the entity. Directors are key management personnel and therefore are related parties.
The director of motor mart ltd has leased a number of vehicles from motor mart ltd for his family’s use and the transaction must be disclosed in the financial statements of motor mart ltd.
However he is not a director of enterprises ltd and directors of motor mart ltd and enterprises ltd are not related parties simply by virtue of their investment in motor mart ltd. Whether a director is related party of enterprises ltd will depend on whether the director is a key management personnel of enterprises ltd.
Motor mart ltd was a related party to enterprises ltd for the year ended 31st October 2009 and therefore the transaction between the two companies must be disclosed. The transaction probably need not be disclosed.
December 2009 Question Five
- (a)the standard setting process:
- (b)Benefits of adopting IPSASs
- (d)Vesting Conditions
- Setting the agenda: The IASB staffs prepare an issue paper including studying the approach of national standard setters.
- Project planning: The standard advisory council is consulted about the issues in the agenda and appointment of technical staff.
- Publication of a discussion paper: this includes a comprehensive overview of the issues, possible approaches on addressing the issue and other preliminary views.
- An exposure draft: this sets out a specific proposal in the form of a proposed standard or amendment of a new standard.
- Publication of the IFRS: after considering all comments received, an IFRS is approved by at least the majority of the members of the IASB. The final standard includes both basis for conclusion and any dysentery opinions.
- Improve accountability, transparency and disclosure of government activities and resources to the public.
- Will enable the government and the public at large to assess performance of public sector entities ie will facilitate measurement of efficiency and effectiveness of utilization of resources and generation of surpluses for future use.
- Will improve the reliability of accounts and boost the confidence of external agencies such as donors on dependability of accounts for example in credit worthiness analysis.
- Use of IPSASs across public sector entities and even governments will enhance comparability among entities and governments.
- With this reduced misuse of public funds, increased emphasis on performance management and transparency, resources will be put to their intended use. Ultimately this will yield improved standards of living and sustainable economic developments.
- IPSASs will improve consistency in preparation and reporting of financial information. This will in turn enable users to draw consistent conclusions given similar sets of financial statements.
- Adoption of IPSASs will improve the audit of public institutions. This will translate into timely audit report.
These are entities that do not have public accountability and publish general purpose financial statements for external uses.
Examples of external users include owners who are not involved in managing the business existing and potential creditors and credit rating agencies.
The objective of financial statements of SMSs is to provide information about the financial position, performance and cash flows of the SMSs that is useful for economic decision making by abroad range of users who are not in the position to demand reports tailored to meet their particular information needs. The financial statements also show the result of stewardship of management ie the accountability of management for the resources entrusted to it.
These are the conditions that must be met before there is an entitlement to the shares.
If the condition is specifically related to the market price of the company’s shares then such conditions are ignored for the purpose of estimating the number of equity shares.
Vesting conditions includes;
– Service condition.
– Performance condition.
June 2010 Question 2Two
- (a)Differences between income statement view and balance sheet view of deferred taxes:
- (iii)Partial provision
- (iii)Full provision
- (a)Social and environment accounting has been defined as the process of communicating the social and environmental effects of an organizational economic activities to particular interest groups within society at large. As such it involves extending the accountability of organizations beyond the traditional role of providing a financial account to the owners of capital in particular shareholders. Such an extension is predicted upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders.
- (b)Challenges faced by IPSASs Board in promoting the use of IPSASs
When the income statement view of deferred taxes is taken, there is a focus on the differences between the accounting profit and and taxable profit ie timing differences. This was the view of deferred taxes taken internationally and in UK and USA until the 1990s. The balance sheet view focuses on the difference between the carrying amount of assets and liabilities and their tax bases. It is the method recommended by IAS 12.
This is where the financial statements are prepared without reflecting all the effects of tax ie there is not provision for deferred taxes.
Under this approach deferred tax is provided but not on all temporary differences. The management uses a subjective approach in deciding which temporary differences may crystallize.ie you provide for future tax consequences to the extent that you have reasonable evidence that it will reverse within a reasonable period of time usually 3 years.
Under this approach, deferred tax is provided for all temporary differences including those that may not crystallize.
IAS 12-Income Taxes recommends the use of full provision method incase of use of income statement liability method.
June 2010 Question Four
Emergence of social and environmental accounting and reporting
Social and environment reporting is gaining in importance politically. Most environmental reporting tends to be narrative and descriptive with entities using the document as a public relations exercise rather than as true measure of the environmental risks and liabilities they carry. This is due to the inherent difficulties of measurement of environmental factors and of applying accounting concepts to these factors.
Environmental information is however becoming essential for many businesses and their users. Indeed some organizations which see environmental issues as important are becoming market leaders in this area. Businesses are becoming ‘greener’ and we must develop accounting systems to enable environmental performance reporting to take place.
– Sovereignty of different countries: Each government operates independently as compared to private sector and therefore promoting a culture of uniformity in reporting may to be acceptable to all.
– Different counties also have different reporting requirements and procedures for the government departments. Some government departments do not prepare financial statements to the public.
– Counties also have different laws that apply in different government departments.
– Challenges in resources, systems and personnel to implement IPSASs.
– Resistance by staff in various government departments.
– Language barriers.
– Political instability in various countries
June 2010 Question Five
- (a)Importance of conceptual framework
- Objectives of financial statements(currently they are three relating to financial performance, financial position and changes in cash position0
- Qualities of useful financial information such as understandability, reliability, relevance and comparability.
- The elements of financial statements ie assets, liabilities, capital, incomes and expenses.
- Measurement of the elements using different values such as historical cost, exit value, present value and replacement value.
- Purpose and status of framework such as providing guidance on standard setting and does not override the requirements of a standard.
- Recognition of elements in the financial statements ie whether changes in future economic resources will be affected.
- Concept of profit and capital maintenance like financial and physical maintenance.
- (a)Factors that may indicate that a financial asset is impaired
- a significant financial difficulty of the issuer that is willing to pay interest or principal at the date of obligation.
- A breach of contract for example not complying with requirements of the terms( such as solvency levels)
- Becoming probable that the borrower will enter into bankruptcy or borrower enters into financial reorganization.
- A statement showing how the benefits of the efforts of an entity are shared between employees, providers of capital, the state and reinvestment. This statement will assist users to evaluate the economic performance of the entity. It is generally known as ‘value added statement.’
- Users will need to assess the performance of the entity in relation to employees. A report showing the size and composition of workforce relying on the entity for livelihood, the work contribution of employees and benefits earned would be useful. This is known as an employment report.
- Users may wish to assess the relationship between the entity and state. Thus a statement of money exchanges with the government will assist users to assess the economic function of the entity in relation to the society.
- A statement of future prospects, showing likely future profits, employment and investment levels. This statement will assist users to evaluate the future prospects of the entity and assess managerial performance.
- A statement of corporate objectives showing management policy and medium-term strategic targets. This statement will assist users to evaluate managerial performance, efficiency and objectives.
- A statement of the social and environment impact of the entity on the society surrounding it.
- A statement of the ‘risk’ inherent in the entity. Providing information on the potential risks associated with the entity’s activities may enable users to assess the possible consequence of materialization of that risk and whether suitable measures have been taken to mitigate it.
- Past trends in key financial figures and ratios, key financial highlights and stock trend data.
- Information in respect of innovations in the organization that will develop tangible and intangible capital/assets in the future.
A conceptual framework may be considered as an attempt to assemble a body of accounting theory (or interrelated concepts) as a guide to standard setting so that standards are (as far as possible) formulated on a consistent basis and not in an ad hoc manner. On another level, a conceptual framework may be thought of as a device to confer legitimacy and authority of a public body. The IASB, as a private sector standard setter, shares these reasons for developing conceptual framework.
Key issues to be addressed by framework
(b) challenges faced by accounting profession and entities with regard to the application of current international accounting standards on financial instruments
(i) The standards are very complex in interpretation and application especially on derivatives.
(ii) Some of the recommendations may be difficult to apply such as fair value and use of amortized cost.
December 2010 Question Two
December 2010 Question Five
Additional statements and reports which could be included as part of the annual accounts of reporting entity
(b)Challenges that has been faced in development of a globally acceptable accounting conceptual framework
– Counties have different laws that apply in different business entities. This as made it a challenge to come up with uniform conceptual framework for preparation and presentation of financial statements.
– Some countries in the world have not yet subscribed to the International financial standards and there still preparing financial statements in their own ways.
– There have been a lot of political interferences in the setting of standards and these have led to establishment of various standards that are not globally acceptable.
– Several countries in the world do not enough trained personnel in accountancy who may be able to implement the change in accounting that from time to time.
– Different countries have different economic activities that may be different from another country and as such an a country framework as set may not easy apply in some countries in the world.
– Language barrier may also challenge.
(c ) Exclusion from requirements under IFRS 4(Insurance Contracts)
– Product warranties issued directly by manufacturer, dealer or retailer.
– Employers’ assets and liabilities under employee benefit plans.
– Contractual rights obligations that are contingent on the future use of, or right to use a non-financial item( for example some license fees, royalties, contingent lease payments and similar items), as well as lessees’ residual value guarantee embedded in a finance lease.
– Financial guarantees into which an entity enters or retains on transferring to another party financial assets or financial liabilities within the scope of IAS 39, regardless of whether the financial guarantees are described as financial guarantees, letters of credit or insurance contracts.
– Contingent consideration payable or receivable in a business combination.
– Direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policy holder). However a cedant shall apply this IFRS to reinsurance contracts that it holds.
JUNE 2011 QUESTION TWO (a)
(i) Assets Carrying Tax Temporary
Amount Base Difference
Shs’million’ Shs’million’ Shs’million’
PPE 980 640 340
Deferred Development Costs 45 0 45
Patents 40 0 40
Deferred tax liability: 30%X425= Shs.127.5M
Deferred tax expense
Balance C/f 127.5M
Balance B/f (105M)
(ii)Discounting Deferred Tax
This is not allowed under IAS 12 because deferred tax balance is not exactly known in terms of cash and time.
Post-acquisition profits in the subsidiary and associates
The holding company has a potential tax liability on post-acquisition profits because there is a possibility of receiving them when dividends are paid. However, IAS 12 prohibits providing deferred tax in the case of subsidiary because the holding company has control on when these should be paid. For the associates, a provision can be made.
(b) Factors indicating Impairment
– Period for which the firm has the right to explore or will expire and there is no right to renew.
– There has been or will be substantive expenditure on further expenditure on further exploration which is not budgeted.
– Exploration for and evaluation has not led to discovery of commercially viable quantities.
– Even though development in the specific areas is likely to proceed the carrying amount of the exploration will not be recovered.
JUNE 2011QUESTION THREE
(b) Differences between management discussion and analysis (MD&A) and footnotes
Among other things, Management Discussion and Analysis (MD&A) provides an overview of the previous year of operations and how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to the new projects.
The MD&A is very important section of the annual report, especially for those analyzing the fundamentals which include management and management style. The management will also discuss results of operations including discussion of trend in sales and categories of expenses, capital resources and liquidity, outlook based on known trends and other factors.
Footnotes are additional information provided in a company’s financials. Footnotes to the financial statements report the details and additional information that are left out of the main reporting documents such as the balance sheet and income statement. This is done mainly for the sake of clarity because these notes can be quite long and if they were to be included, they would cloud the data reported in the financial statements.
JUNE 2011 QUESTION FOUR
- (a)Factors that should be considered in determining an entity’s Functional Currency
– The currency that influences sales prices for goods and services.
– The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services.
– The currency that influences labour and raw materials.
JUNE 2011QUESTION FIVE
(a) Accounting reports are not sufficiently accurate and are not suffiently truthful to be accurate and hence are neither accurate nor truthful. Critically comment on the statement.
Neither of these two characteristics (truthfulness and accuracy) has ever been cited by the accounting experts as key components of the financial information. This is because the accounting experts recognize that there is necessary too much estimation or approximation in accounting information and measurements and too many areas of ‘judgment. This means that accountants cannot justify such fairly absolute terms of certainty and virtue as “accurate” and “truthful”. It is important to understand that the apparent precision or preciseness of accounting does not itself guarantee accuracy or truth or indeed even other less absolute characteristics such as comparability, relevance and reliability.
(b) Importance of ethics in accounting practice
Accounting ethics is primary a field of applied ethics, the study of moral values and judgements as they apply to accountancy. It is an example of professional ethics. Accounting ethics were first introduced by Luca Pacioli, and later expanded by government groups, professional organizations and independent companies
Due to the diverse range of accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted within the accounting profession. These collapses have resulted in widespread disregard for the reputation of the accounting profession. To combat the criticism and prevent fraudulent accounting, organizations and governments have developed regulations and remedies for improved ethics among the accounting profession.
The nature of the work carried out by accountants and auditors requires a high level of ethics. Shareholders, potential shareholders and other users of the financial statements rely heavily on the yearly financial statements of the company as they can use this information to make informed decision about investments. They rely on the opinion of the accountants who prepared the financial statements as well as the auditors who verified them, to present the true and fair view of the company. Knowledge or ethics can help accountants and auditors overcome ethical dilemmas allowing for the right choice that although it may not benefit the company, will benefit the public at large who relies on the accountant/auditor’s reporting.
DECEMBER 2011 QUESTION TWO
- Impairment is the differences between the carrying amount and recoverable amount. The recoverable amount must be less than the carrying amount.
- (b)Types of hedge
- (1)Introduction- purpose of the framework, uses and their information needs. The introduction defines what the framework is, its purpose and describes the nature, function and limits of financial reporting.
- (2)The objectives of financial statements- these guide the preparer towards providing information about the financial position, changes in equity and financial performance for the entity.
- (3)Underlying assumptions- these help the preparer to understand the key assumptions underlying the preparation of accounts of accrual, going concern etc.
- (4) Qualitative characteristics of financial statements- these assist to know the characteristics he should include in its financial statements ie understandability, relevant, reliability, comparability etc.
- (5)The elements of financial statements- these assist the preparer in identifying the building blocks of financial statements ie assets, liabilities, equity, income and expenses.
- (6)Recognition of elements of financial statements- these provide the criteria for inclusion of various elements in the financial statements.
- (7)Measurements of the elements of financial statements- this provides guidelines or how to measure various items and record them eg historical cost, current cost, realizable value etc.
- Accounting theory is the logical reasoning in the form of a set of broad principles that provides a general frame of reference by which accounting practice can be evaluated as well as guide the development of new practices and procedures. Thus, the function of the theory is to assist in the resolution of practical problems. The existence of theory would mean that we could say and explain why given a number of assumptions method A is to be preferred to method B.
- Criteria for determining related party transactions
- Enterprises that directly or indirectly through one or more intermediaries could or are controlled by or are under common control with the reporting enterprise( This includes holding companies, subsidiaries and fellow subsidiaries).
- Individuals owning directly or indirectly an interest in the voting power of the reporting enterprise that gives them significance influence over the enterprise and close family members of such individuals.
- Key management personnel that is those persons having authority and responsibility for planning, directing or controlling the activities of the reporting enterprise, including directors and officers of companies and close members of the families of such individuals.
- Enterprises in which a substantial interest in the voting power is owned, directly or indirectly by any person described in (iii) and (iv) above or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprises that have a member of the key management in common with the reporting enterprise.
- (c)Types of share based payments
Where recoverable amount is the higher of is the higher of value in use or fair value less cost to sell.
Fair value hedge
A hedge against adverse movement in market prices or fair value
Cash flow hedge
A hedge against adverse movements in future cash receipts and payments.
Hedge of a net investment in a foreign operation
A hedge against adverse movements in exchange rates that may affect share prices.
Sections of the IAS B Framework
DECEMBER 2011 QUESTION THREE
– Equity– settled share based payment where an entity issues its own equity instruments as consideration for goods and services.
– Cash settled share based payment- where an entity pays a cash amount that is calculated by reference to the price of its own equity instrument as a consideration for goods or services.
– Choice settlement- where the management provides either the entity or counterparty with the choice of settlement in cash or equity.
- (i)Limitations of IPSAs
- Whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy. An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency.
- Whether transactions with the reporting entity are a high or a low proportion of the foreign operation’s activities.
- Whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it.
- Whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity.
- The standards are very complex in interpretation and application especially on derivatives.
- Some of the recommendations may be difficult to apply such as fair value and use of amortised costs.
- Sovereignty of different countries. Each government operates independently as compared to the private sector and therefore promoting a culture of uniformity in reporting may not be acceptable to all.
- Different countries have different reporting requirements and procedures for the government departments. Some government departments do not prepare financial statements for the public.
- Countries have different laws that apply in different government departments.
- Challenges in resources, systems and personnel to implement IPSASs.
- Language barrier.
- Lack of political goodwill.
- Staff resistance
- (i)Limitations of IPSAs
The obligating event is the contamination of the environment which gives rise to a constructive obligation because the policy and previous conduct of the government has created a valid expectation that the government will clean up the contamination.
An outflow of resources embodying economic benefits or service potential in settlement is probable.
A provision is recognized for the best estimate of the costs of the clean up.
IPSAs will introduce a measure of uniformity in accounting and presentation of financial statements across the government and government operations and agencies. This would make it easier and possible to compare the financial statements of governments and government agencies.
IPSAs are developed after consultations with a wide variety of stakeholders. Because they incorporate the widest ranging views they are likely to lead to increased quality of financial statements of governments and government agencies.
Transparency and accountability
Just like IFRS they prescribe certain disclosures that are not required under the traditional cash basis of accounting. In addition IPSAs prescribe the use of accrual basis of accounting. These factors combined will lead to greater accountability and transparency in government and government departments.
In some jurisdictions the reporting framework of the government and government agencies is stipulated in law. Thus adoption of IPSAs would be subordinate to the entrenched legal reporting framework.
June 2010 question 1( a)
Factors considered in determining presentation currency of financial statements
June 2010 question 4 (a)
Social and environmental accounting is the process of communicating the social and environmental effects of organizations economic activities to particular interest groups within society at large. It involves extending the accountability of organization beyond traditional role of providing a financial account to the owners of capital, in particular shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders.
Social and environmental reporting is gaining importance politically. Most environmental reporting tends to be narrative and descriptive with entities using the document as a public relations exercise rather than as a true measure of the environmental risk and liabilities they carry. This is due to the inherent difficulties of measurement of environmental factors and of applying accounting concepts to these factors.
Environmental information is becoming essential for many businesses and their users. In deed some organizations which see environmental issues as important, are becoming market leaders in their area.
June 2010 question 5 (b)
August 2009 question 5
(a) Challenges in promoting the use of IPSASs
(b) Accounting treatment of non exchange transactions in public sector accounting
Non-exchange transactions: are transactions that are not exchange transactions. In a non-exchange transaction, an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.
For example, taxpayers pay taxes because the tax law mandates the payment of those taxes. Whilst the taxing government will provide a variety of public services to taxpayers, it does not do so in consideration for the payment of taxes.
Taxes are the major source of revenue for many governments and other public sector entities. Taxes are defined as economic benefits compulsorily paid or payable to public sector entities, in accordance with laws or regulation, established to provide revenue to the government, excluding fines or other penalties imposed for breaches of laws or regulation.
Noncompulsory transfers to the government or public sector entities such as donations and the payment of fees are not taxes, although they may be the result of non-exchange transactions.
Measurement of Assets on Initial Recognition
An asset acquired through a non-exchange transaction shall initially be measured at its fair value as at the date of acquisition.
An entity shall recognize an asset in respect of transfers when the transferred resources meet the definition of an asset and satisfy the criteria for recognition as an asset. Assets are defined as resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.An asset shall be recognized as an asset when and only when:
(a) It is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and
(b) The fair value of the asset can be measured reliably.
Measurement of Transferred Assets
Transferred assets are measured at their fair value as at the date of acquisition.
Debt Forgiveness and Assumption of Liabilities
Lenders will sometimes waive their right to collect a debt owed by a public sector entity, effectively canceling the debt. For example, a national government may cancel a loan owed by a local government. In such circumstances, the local government recognizes an increase in net assets because a liability it previously recognized is extinguished.
Entities recognize revenue in respect of debt forgiveness when the former debt no longer meets the definition of a liability or satisfies the criteria for recognition as a liability, provided that the debt forgiveness does not satisfy the definition of a contribution from owners. Revenue arising from debt forgiveness is measured at the fair value of the debt forgiven. This will normally be the carrying amount of the debt forgiven.
Fines are economic benefits or service potential received or receivable by a public sector entity, from an individual or other entity, as determined by a court or other law enforcement body, as a consequence of the individual or other entity breaching the requirements of laws or regulations. Fines are recognized as revenue when the receivable meets the definition of an asset and satisfies the criteria for recognition as an asset.
A bequest is a transfer made according to the provisions of a deceased person’s will. The past event giving rise to the control of resources embodying future economic benefits or service potential for a bequest occurs when the entity has an enforceable claim, for example on the death of the testator, or the granting of probate, depending on the laws of the jurisdiction.
Gifts and Donations, including Goods In-kind
Gifts and donations are voluntary transfers of assets including cash or other monetary assets, goods in-kind and services in-kind that one entity makes to another, normally free from stipulations. The transferor may be an entity or an individual. For gifts and donations of cash or other monetary assets and goods in-kind, the past event giving rise to the control of resources embodying future economic benefits or service potential is normally the receipt of the gift or donation.
Goods in-kind are tangible assets transferred to an entity in a non-exchange transaction, without charge, but may be subject to stipulations. External assistance provided by multilateral or bilateral development organizations often includes a component of goods in-kind. Gifts and donations (other than services in-kind) are recognized as assets and revenue when it is probable that the future economic benefits or service potential will flow to the entity and the fair value of the assets can be measured reliably.
With gifts and donations, the making of the gift or donation and the transfer of legal title are often simultaneous, in such circumstances, there is no doubt as to the future economic benefits flowing to the entity.
Goods in-kind are recognized as assets when the goods are received, or there is a binding arrangement to receive the goods. If goods in-kind are received without conditions attached, revenue is recognized immediately. If conditions are attached, a liability is recognized, which is reduced and revenue recognized as the conditions are satisfied. On initial recognition, gifts and donations including goods in-kind are measured at their fair value.
Services in-kind are services provided by individuals to public sector entities in a non-exchange transaction.
Public sector entities may be recipients of services in-kind under voluntary or non-voluntary schemes operated in the public interest, for example:
(a) Technical assistance from other governments or international organizations;
(b) Persons convicted of offenses may be required to perform community service for a public sector entity;
(c) Public hospitals may receive the services of volunteers;
(d) Public schools may receive voluntary services from parents as teachers’ aides or as board members; and
(e) Local governments may receive the services of volunteer fire fighters.
Pledges are unenforceable undertakings to transfer assets to the recipient entity. Entities do not recognize pledged items as assets or revenue.
Advance Receipts of Transfers
Where an entity receives resources before a transfer arrangement becomes binding, the resources are recognized as an asset when they meet the definition of an asset and satisfy the criteria for recognition as an asset. A liability is recognized until the event which makes the transfer arrangement binding occurs and all other conditions under the agreement are fulfilled. When that event occurs and all other conditions under the agreement are fulfilled, the liability is discharged and revenue is recognized.
Dec 2009 question three (b)
Content of management discussion and analysis
Although the relevant focus of management commentary will depend on the facts and circumstances of the entity, a decision –useful management commentary includes information that is essential to an understanding of:
- The nature of the business;
- Management’s objectives and strategies for meeting those objectives;
- The entity’s most significant resources, risks and relationships; the results of operations and prospects; and
- The critical performance measures and indicators that management uses to evaluate the entity’s performance against stated objectives.
- The industries in which the entity operates;
- The entity’s main markets and competitive position within those markets;
- Significant features of the legal, regulatory and macro economic environment that influence the entity and the markets in which the entity operates;
- The entity’s main product and services, business processes and distribution methods; and
- The entity’s structure and its economic model.
Nature of business
A description of the business helps users of the financial reports gain on understanding of the entity and the external environment in which it operettas, that information serves as a starting point for assessing and understanding an entity’s performance, strategic options and prospect. Depending on the nature of business, management commentary may include discussion of matters such as:
Objectives and strategies
Disclosure of objectives and strategies are most useful when they enable users of the financial reports to understand the priorities for action as well as the resources that must be managed to deliver results management’s explanations about how success will be measured and over what period of time is should be assessed may also be useful. For example, how management intends to address market trends and the threats and opportunities those market trends represent provides users of the financial reports with insight that may shape their expectation about the entity’s future performance. Discussion of the relationship between objectives strategies, management actions and executive remuneration is also helpful.
Resources, risk and relationships
Management commentary that includes a clear description of the most important resources, risks and relationships that management believes affect the entity’s long-tern value and how those resources, risk and relationships are managed provides useful information for users of the financial reports.
Disclosure about resources depends on the nature of the entity and the industry in which the entity operates. Management commentary should set out the critical financial and non financial resources available to the entity and how those resources are used in meeting management’s stated objectives for the entity. Analysis of the adequacy of the entity’s capital structure, financial arrangements (whether or not recognized in the statement of financial position), liquidity and cash flows, as well as plans to address any indentified inadequacies or surplus resources, are examples of disclosures that can provide useful information.
Disclosure of an entity’s principal risk exposures, it plans and strategies for bearing or mitigating those risks, and the effectiveness of its risk management strategies, help users to evaluate the entity’s risk as well as its expected outcomes. It is important that management distinguish the principal risks and uncertainties facing the entity, rather than listing all possible risks and uncertainties. Management should disclose its principal strategic, commercial, operational and financial risks, being those that may significantly affect the entity’s strategies and development of the entity’s value. The description of the principal risks facing the entity should cover both exposures to negative consequences and potential opportunities.
Management commentary provides useful information when it discusses the principal risks and uncertainties necessary to understand management’s objectives and strategies for the entity both when they constitute a significant external risk to the entity and when the entity’s impact on other parties through its activities, products or services affects its performance.
Management provides information useful to users of the financial reports when it indentifies the significant relationships the entity has with stakeholders, how those relationships are likely to affect the performance and the value of the entity, and how those relationships are managed. This type of disclosure helps users of the financial reports to understand, for example, whether a single customer, or a small group of principal customers, represents a significant portion of an entity’s business and whether that entity and its investors may be exposed to substantial risk if that customer takes its business to a competitor.
Results and prospects
Management commentary should include a clear description of the entity’s financial and non-financial performance, the extent to which that performance may be indicative of future performance and management’s assessment of the entity’s prospects. Useful disclosure in that area can help users to make their own assessment about the assumptions and judgments used by management in preparing the financial statements.
Explanations of the performance and development of the entity during the period and its position and the end of the period provide users of the financial reports with insight into the main trends and factors affecting the business, those explanations are useful when they describe the relationship between the entity’s results, management’s objectives and management’s strategies for achieving those objectives. Discussion and analysis of significant changes in financial position, liquidity and performance compared with those of the previous period (s)can help users to understand the extent to which past performance may be indicative of future performance.
An analysis of the prospects of the entity, including targets for financial and non –financial measures, helps users of the financial reports to understand how management intends to implement its strategies for the entity over the long term., when targets are quantified, management should explain the risks and assumptions necessary for users to assess the likelihood of achieving targets.
Performance measures and indicators
The disclosure of performance measures and indicators (both financial and non financial) that are used by management to assess progress against its stated objectives can help users of the financial reports assess the degree to which goals and objectives are being achieved performance measures are quantified measurements that reflect the critical success factors of entity. Indicators can be narrative evidence describing how the business is managed or quantified measures that provide indirect evidence of performance.
The performance measures and indicators that are most important to understanding an entity are those management uses to mange that entity. The performance measures and indicators will usually reflect the industry in which the entity operates. Comparability is enhanced if the performance measures and indicators are acceptable and used widely, either within an industry or more generally. Consistency reporting of performance measures and indicators increase the comparability of management commentary over time. However, management should consider whether the performance measures and indicators used in the previous period continue to be relevant. As strategies and objectives change, management might decide that the performance measure and indicators presented in the previous period management commentary are no longer relevant, when management changes the performance measures and indicators used, the changes should be indentified and explained.
If information from the financial statements has been adjusted for inclusion in management commentary, that fact should be disclosed, if financial performance measures that are not required or defined by IFRSs are included within management commentary, those measures should be defined and explained and when possible, reconciled to measures presented in the financial statements.
Dec 2009 question three (c)
Classification of Financial Assets
IAS 39 requires financial assets to be classified in one of the following categories:
- Financial assets at fair value through profit or loss
- Available-for-sale financial assets
- Loans and receivables
- Held-to-maturity investments
Those categories are used to determine how a particular financial asset is recognised and measured in the financial statements.
Financial assets at fair value through profit or loss; This category has two subcategories:
Designated. The first includes any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss.
Held for trading. The second category includes financial assets that are held for trading. All derivatives (except those designated hedging instruments) and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-term profit taking are held for trading.
Available-for-sale financial assets (AFS) are any non-derivative financial assets designated on initial recognition as available for sale or any other instruments that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. AFS assets are measured at fair value in the balance sheet. Fair value changes on AFS assets are recognised directly in equity, through the statement of changes in equity, except for interest on AFS assets (which is recognised in income on an effective yield basis), impairment losses and (for interest-bearing AFS debt instruments) foreign exchange gains or losses. The cumulative gain or loss that was recognised in equity is recognised in profit or loss when an available-for-sale financial asset is derecognised.
Loans and receivables are non-derivative financial assets with fixed or determinable paymentsthat are not quoted in an active market, other than held for trading or designated on initial recognition as assets at fair value through profit or loss or as available-for-sale. Loans and receivables, for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, should be classified as available-for-sale. Loans and receivables are measured at amortised cost.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments that an entity intends and is able to hold to maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or loss or as available for sale. Held-to-maturity investments are measured at amortised cost. If an entity sells a held-to-maturity investment other than in insignificant amounts or as a consequence of a non-recurring, isolated event beyond its control that could not be reasonably anticipated, all of its other held-to-maturity investments must be reclassified as available-for-sale for the current and next two financial reporting years. Held-to-maturity investments are measured at amortised cost.
Classification of Financial Liabilities
IAS 39 recognises two classes of financial liabilities:
- Financial liabilities at fair value through profit or loss
- Other financial liabilities measured at amortised cost using the effective interest method
The category of financial liability at fair value through profit or loss has two subcategories:
- Designated. a financial liability that is designated by the entity as a liability at fair value through profit or loss upon initial recognition
- Held for trading. a financial liability classified as held for trading, such as an obligation for securities borrowed in a short sale, which have to be returned in the future
Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value through profit or loss).
Measurement Subsequent to Initial Recognition
Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with the following exceptions:
- Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be measured at amortised cost using the effective interest method.
- Investments in equity instruments with no reliable fair value measurement should be measured at cost.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Quoted market prices in an active market are the best evidence of fair value and should be used, where they exist, to measure the financial instrument.
- If a market for a financial instrument is not active, an entity establishes fair value by using a valuation technique that makes maximum use of market inputs and includes recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis, and option pricing models. An acceptable valuation technique incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.
- If there is no active market for an equity instrument and the range of reasonable fair values is significant and these estimates cannot be made reliably, then an entity must measure the equity instrument at cost less impairment.
Amortised cost is calculated using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. Financial assets that are not carried at fair value though profit and loss is subject to impairment test. If expected life cannot be determined reliably, then the contractual life is used.
Dec 2010 question five (a)
- Value added statement
- Employees report
- Statement of social responsibility reports
- Environmental reports
- Statement of the risks inherent in the entity
- Past trends in key financial figures and ratios
Dec 2010 question five (b)
- Different economic development levels – it may not be practical to require countries at different economics development levels to use similar accounting standards e.g. the USA and some African and Asian countries.
- Ideological differences – Green that IASB sits in Europe, i.e. the West, some countries may not be comfy with the international standards being a product of their ideological enemies, e.g. some countries in the Muslim world may not, for ideological reasons, accept international standards.
- Different countries – The different cultural background may be an obstacle to the use of similar standards e.g. interest is prohibited under sheria law thus international standards emphasizing disclosures of interest will be irrelevant in such cultures.
- National price – Some countries may not be ready to drop their local standards simply to protect national standards .e.g. the USA and UK have been hesitant to immediately drop their local standards.
- Implementation – There may be logistical problems in the smooth implementation of global standards e.g. the local professional accountancy bodies may be reluctant in the implementation (or even inefficient)
- Conversion cost – some countries may argue that the cost of correcting for local standards to international standards is too high e.g. may cause a huge unfavorable effect in the stock markets when financial statements are restated to international standards.
Dec 2010 question five (c)
An entity shall not apply IFRS4 (INSURANCE CONTRACTS) to:
- Product warranties issued directly by a manufacturer, dealer or retailer (see IAS 18 Revenue and IAS 37 Provisions, Contingent Liabilities and Contingent Assets).
- Employers’ assets and liabilities under employee benefit plans (see IAS 19 Employee Benefits and IFRS 2 Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans (see IAS 26 Accounting and Reporting by Retirement Benefit Plans).
- Contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee’s residual value guarantee embedded in a finance lease (see IAS 17 Leases, IAS 18 Revenue and IAS 38 Intangible Assets).
- Financial guarantee contracts unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, in which case the issuer may elect to apply either IAS 39, IAS 32 and IFRS 7 or this Standard to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable.
- Contingent consideration payable or receivable in a business combination (see IFRS 3 Business Combinations).
- Direct insurance contracts that the entity holds (ie direct insurance contracts in which the entity is the policyholder). However, a cedant shall apply this IFRS to reinsurance contracts that it holds.
June 2011 question three (b)
Management commentary provides a context within which to interpret the financial position, financial performance and cash flows of an entity. It also provides an opportunity to understand management’s objectives and its strategies for achieving those objectives. Users of financial reports in their capacity as capital providers routinely use the type of information provided in management commentary as a tool for evaluating an entity’s prospects and its general risks, as well as the success of management’s strategies for achieving its stated objectives.
Management commentary should provide existing and potential capital providers with information that helps them place the related financial statements in context. Management commentary that fulfils that purpose explains management’s view on not only what has happened, but also why management believes it has happened and what management believes the implications are for the entity’s future.
Management commentary may also help users of the financial reports assess the performance of the entity and the actions of its management relative to stated strategies and plans for development. That type of commentary may help users of the financial reports to understand, for example:
- The entity’s risk exposures, its strategies for managing risks and the effectiveness of those strategies;
- How resources that are not presented in the financial statements could affect the entity’s operations; and
- How non-financial factors have influenced the information presented in the financial statements
Footnotes are additional information provided in a company’s financial statements. They report the details and additional information that are left out of the main reporting documents such as income statement and statement of financial position. This is done for clarity because these notes can be quite long and if they were included, they would cloud the data reported in the financial statements.
June 2011 question five (a)
Neither of these two characteristics (truthfulness and accuracy) has ever been cited by accounting experts as key components of financial information. This is because accounting experts recognize that there is necessarily too much estimation or approximation in accounting information and measurements and too many areas of judgment. This means that accountants cannot justify such fairly absolute terms of certainty and virtue as accurate and truthful. It is important to understand that the apparent precision or preciseness of accounting does not of itself guarantee accuracy or truth or in deed even other less absolute characteristics such as comparability relevance and reliability.
June 2008 Question Five (b)
- (ii)How the initial cost of Plant and equipment should be measured
IAS 16 states that an item of property, plant and equipment which qualifies for initial recognition as an asset must initially be measured at cost. Cost comprises of;
– Purchase price less any trade discount or rebates.
– Import duties and not-refundable taxes.
– Directly attributable costs of bringing the asset to working condition for its intended use.
N/B Administration costs and start up operating losses are not part of the cost
- (iii)Circumstances under which subsequent expenditure on property, plant and equipment should be capitalized
– Subsequent expenditure on an item of property, plant and equipment after purchase and recognition may be added to the carrying amount of the asset.
– Subsequent expenditure must only be included in the carrying amount where the initial criteria are met. The standard gives examples of such improvements as;
- Modification to extend useful life.
- Upgrade of parts of a machine to improve quality.
- Adoption of a new production process reducing the operating costs.
(iii) Revaluation of non-current assets
IAS 16 allows property, plant and equipment to be shown at revalued amounts. However the following should be observed regarding revaluation:
- When an item of property, plant and equipment is revalued, the whole class of asset it belongs to should be revalued
- Revaluation must be sufficiently regular, consistent and up -to-date.
- Any surplus should be credited to a revaluation surplus/reserve except where it is reversing a previous decrease, and then it should be treated as an income.
- Any decrease should be recognized as an expense except where it is reversing a previous increase. Then it is debited to revaluation reserve.
Gain on disposal/loss on disposal
Gains or losses on disposal are the differences between the net disposal proceeds and the carrying amount of an asset. They should be recognized as an income or expense in the income statement. Any revaluation surplus remaining on the disposed asset should be transferred to retained earnings.
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