CPA AFR Questions and Answers

CPA ADVANCED LEVEL FIANNACIAL REPORTING AND ANALYSIS
THEORY QUESTIONS AND ANSWERS

August 2022 Question Three
a. Accounting policy choices disallowed under the SMEs standard:
• Goodwill arising on acquisition of a subsidiary is always determined using the partial goodwill method. The fair value method of measuring the non-controlling interest is not available
• Intangible assets must be accounted for at cost less accumulated amortization and impairment. The revaluation model is not permitted for intangible assets
• The cost model can only be used if the fair value cannot be measured reliably

b. Determining the “control” of another entity
To determine control, an entity shall assess whether it has all the following;
i. Power over the other entity
ii. Rights to variable benefits from its involvement with the other entities
iii. The ability to use its power over the other entity to affect the nature or amount of the benefit from its involvement with the other entity

c. Exposure draft: Disaggregate information in more useful ways;
i. Operating expenses – under current IFRS standards, an entity can present a SPL that classifies expenses nature or faction
ii. Unusual income and expenses – the Board are proposing to define unusual income and expenses
iii. Required line item – goodwill must be disclosed as a separate line item on the SFP

d. Conceptual framework for financial reporting
The purpose of the conceptual framework is to assist:
i. IASB when developing new IFRS standards
ii. Preparation of financial statements when no IFRS standards applies
iii. All parties when understanding and interpreting IFRS standards

August 2022 Question Five (a)
Criteria that must be fulfilled in order for a financial instrument to be classified in the category of amortized cost
i. The business model tests – the entity must intend to hold the invest to maturity
ii. The contractual cash flow characteristic test – the contractual terms of the financial assets must give rise to cash flows that are solely of principal and interest

April 2022 Question Three (a)
Key factors that must be considered when determining the transaction price within a contract under IFRS 15.
The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle is delivered in a five-step model framework as follows: –
i. Identify the contract(s) with a customer.
ii. Identify the performance obligations in the contract.
iii. Determine the transaction price.
iv. Allocate the transaction price to the performance obligations in the contract.
v. Recognize revenue when (or as) the entity satisfies a performance obligation.

Transaction price is the amount of consideration a company is entitled to receive in exchange for transferring goods or services to customers. The following factors are considered when determining the transaction price:
i. Variable considerations.
ii. Existence of significant financing component.
iii. Non cash considerations – should be measured at fair value.
iv. Consideration payable to a customer.

April 2022 Question Five
(a) Differences between Related Party Disclosures under IPSAS 20 and IAS 24. Related party: Under IPSAS 20, Parties are considered to be related if:
• One party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions or
• The related party entity and another entity are subject to common control.
Related parties include:
 Entities that directly, or indirectly through one or more intermediaries, control, or are controlled the reporting entity.
 Associates;
 Individuals owning, directly or indirectly, an interest in the reporting entity that gives them significant influence over

the entity, and close members of the family of any such individual;
 Key management personnel, …
Disclosures:
 Disclosures should always be made where control exists.
 Type and element of a transaction should be disclosed where transactions are not at arm length.
 Disclosures should be made for key management personnel whose information is not publicly known.
NB: Unlike IAS 24 which requires disclosures for all related party transactions, IPSAS 20 does not require disclosure of normal trading transactions between related parties.

(b) Criteria for identifying a lease contract for the purpose of accounting in the financial statements of Lessees.
 IFRS 16 requires leases to lease recognize a right-of-use asset and a lease liability at commencement of all leases (Long-term lease) unless they are short term or a low value/minimum lease.
 The lessee will assess if the contract contains a lease or the whether it is simply a contract for a service.
 A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
 The lessee/customer controls the assets use if he has:
 The right to direct use of the asset.
 The right to obtain all economic benefit of the asset.

(c) Making materiality judgement in Financial Reporting.
Materiality concept in accounting refers to the concept that all the material items should be reported properly in the financial statements.
The Key Contents of Practice Statement when making Materiality guidelines
(i) Definitions and objectives – Information is said to be material if its inclusion or exclusion results in significant changes (Influences) in the decision making for the users of business information. The objective of financial statements id to provide useful information about the reporting entity.
(ii) Recognition and measurement – The applicable reporting standards (IFRS) on recognition and measurements should be used as a criterion when the effects are material
(iii) Presentation and disclosures – The applicable reporting standards (IFRS) on presentation and disclosure should be used as a criterion when the effects are material. Additional disclosures may also be provided the entity.
(iv) Users and their needs – judgement should be made on the primary needs of different users of financial information. Financial information should possess the following attributes for decision making different users:

 Relevance – confirmatory and predictive in decision making.
 Reliability/faithful representation – neutral, free from errors and misstatements.
 Comparability – used to compare performances: current and past or within the industry.
 Understandability – easy and simple to comprehend.
 Timeliness – readily available when required.
 Precise and brevity – have all relevant information for primary user need.
 Completeness – all disclosures have been made.
 Verifiability.
(v) Process – Information should be assessed to see if they are material or not so that financial statements can be drafted and reviewed thereafter.
Material items are considered as those items whose inclusion or exclusion results in significant changes (Influences) in the decision making for the users of business information.

(d) Fundamental elements of Integrated Reporting (IR).
• Organizational overview and external environment – What does the organization do and what are the circumstances under which it operates?
• Governance – How does the organization’s governance structure support its ability to create value in the short, medium and long term?
• Business model – What is the organization’s business model?
• Risks and opportunities – What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?
• Strategy and resource allocation – Where does the organization want to go and how does it intend to get there?
• Performance – To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
• Outlook – What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
• Basis of presentation – How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

December 2021 question Three (c)
Simplifications Introduced IFRS for SMES as compared to the full IFRS standard requirements.
(i) Depreciation of PPE and Amortization methods do not require an annual review.
(ii) Expenditures on both research and development is always expensed through profit or loss.
(iii) Borrowing costs are always expensed to profit or loss.
(iv) Simplified techniques are permitted when measuring a defined benefit obligation.
(v) Goodwill on acquisition is amortized over its useful life. If the useful life cannot be reliably established, an estimate of ten years or less should be used.
(vi) Cumulative exchange differences are not reclassified to profit or loss upon disposal of a foreign subsidiary.

December 2021 Question Five.
(a) Elements of Management Commentary in a set of Financial Statements of an entity.
(i) The nature of the business – the knowledge of the business engaged in and the external environment where the business operates
(ii) Management objectives and strategies – helps in determining the doubted strategies that might hinder the achieved of the objectives
(iii) Key resources, risks and relationships – The ability to obtain sustainable net inflow allocating resources carefully and considering the risk return trade off
(iv) Results and prospects – Is the objective achieved according to what was expected
(v) Its performance measures and indicators – ability to focus on critical areas such as: Market share, customers satisfaction, technology, leadership and governance, reputation and brand etc.
(vi) Contractual obligations – helps in understanding the contracts entered into the entity and how they are settled
(vii) General outlook – helps to under the business better in terms of what it does, key drivers, where it operates, visions and missions etc.

(b) How Value in Use of a CGU would be determined for the purpose of Impairment review.
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
• Value in use should be determined using pre-tax discount rate that reflects current market assessments.
• An estimate of the future cash flows the entity expects to derive from the asset
• Expectations about possible variations in the amount or timing of those future cash flows
• The time value of money, represented the current market risk-free rate of interest
• The price for bearing the uncertainty inherent in the asset
• Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset

(c) How revenue from exchange transactions should be recognized under IPSAS 9 and how it differs from IFRS 15. Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity, other than increases relating to contributions from owners.

Exchange transactions are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. Typical exchange transactions are the purchase or sale of goods or services based on market prices.

Under IPSAS 9
IPSAS 9 requires revenue from exchange transactions to be recognized when:
 It is probable that future economic benefits or service potential will flow to the and
 Those benefits can be measured reliably.

Under IFRS 15, an entity will recognize revenue when performance obligation is satisfied. The core principle is delivered in a five-step model framework as follows: –
(i) Identify the contract(s) with a customer
(ii) Identify the performance obligations in the contract
(iii) Determine the transaction price
(iv) Allocate the transaction price to the performance obligations in the contract
(v) Recognize revenue when (or as) the entity satisfies a performance obligation.

(d) Accounting treatment of Investment property under IAS 40.
Investment property is property held the owner or the lessee under a finance lease to earn rentals or for capital appreciation or both.
Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.
Measurement after initial recognition
IAS 40 permits entities to choose between:
(i) Fair value model
(ii) Cost model.
Fair Value Model:
 All investment properties are subsequently measured at fair value at each reporting date.
 Investment properties held at fair value model should not be depreciated or impaired.
 A change in fair value (gain or loss) should be recognized in profit or loss for the period.
Cost Model:
 Investment properties are measured at depreciated cost less any accumulated impairment losses.
 Depreciation and impairment loss should be recognized to Profit or loss for the period.
 An entity that adopts the cost model should disclose the fair value of its investment properties at fair value.

Pilot Paper: December 2021 Question Four
(a) Distinguish between Cash Generating Unit and Non-Cash Generating Unit in relation to IPSAS 21 and IPSAS 26.
Cash-generating unit
 The smallest identifiable group of assets held with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.
 An impairment loss of a cash-generating asset is the amount which the carrying amount of an asset exceeds its recoverable amount.
 Recoverable service amount is the higher of a non-cash-generating asset’s fair value less costs to sell and its value in use. Value in use is the present value of cash flows discounted using pretax cost of capital.
Non-cash-generating assets
 These are assets held with the primary objective of providing services and not to generate a commercial return
 An impairment loss of a non-cash-generating asset is the amount which the carrying amount of an asset exceeds its recoverable service amount.
 Recoverable service amount is the higher of a non-cash-generating asset’s fair value less costs to sell and its value in use. Value in use can be determined using either:
(i) Depreciated replacement cost approach
(ii) Cost restoration approach
(iii) Service unit approach

(b) Using suitable examples, explain external factors that indicate an asset is impaired under IPSAS 21 and IPSAS 26. External Sources:
(i) Decline/fall in market value of the asset.
(ii) Negative changes in technology, markets, economy, or laws E.g., IT equipment becomes obsolete before the end of its expected useful life.
(i) Increases in market interest rates
(ii) Net assets of the company higher than market capitalization

Internal Sources:
(i) Obsolescence or physical damage
(ii) Asset is idle, part of a restructuring or held for disposal
(iii) Worse economic performance than expected

(iv) For investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee

Pilot Paper: December 2021 Question Five:
(a) Using the revised conceptual framework, highlight the new definitions of assets and liabilities, their recognition and derecognition.
Definition of elements of financial statements. The definitions are quoted below:
(i) Asset – A present economic resource controlled the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
(ii) Liability – A present obligation of the entity to transfer an economic resource as a result of past events.
(iii) Equity – The residual interest in the assets of the entity after deducting all its liabilities.
(iv) Income – Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from holders of equity claims.
(v) Expenses – Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims.

Recognition and Derecognition.
 The Conceptual Framework states that only items that meet the definition of an asset, a liability or equity are recognized in the statement of financial position.
 Only items that meet the definition of income or expenses are to be recognized in the statement(s) of financial performance. (Profit or loss)
 However, their recognition depends on two criteria that provides users of financial statements with: –
(i) Relevant information about the asset or the liability and about any income, expenses or changes in equity
(ii) A faithful representation of the asset or the liability and of any income, expenses or changes in equity.
 The requirements for derecognition are driven two aims based on faithful presentation:
(i) The assets and liabilities retained after the transaction or other event that led to derecognition must be presented faithfully and
(ii) The change in the entity’s assets and liabilities as a result of that transaction or other event must also be presented faithfully.
 The framework also describes alternatives when it is not possible to achieve both aims.

(b) Disclosure requirements under the three pillars (Economic, Social and Environmental) of Sustainability Reporting.
ESG disclosure or Sustainability reporting disclosures is a term that relates to the qualitative and quantitative disclosures of data covering the organization’s operations across ESG standards (Economic, Social, Environmental and Governance)
Importance of ESG disclosures
(i) ESG disclosures are beneficial for developing better sustainability and governance practices, as well as stronger financial performance.
(ii) The data revealed in such reports helps businesses to align their purpose, strategy, and operations to ESG.
(iii) Shareholders and investors, on the other hand, can use the ESG reports to understand the related opportunities and risks that may affect their portfolios.
(iv) Shareholders would also be able to see how one company generates sustainable returns and mitigates risks.
(v) ESG disclosures are a suitable tool for maintaining transparency within the company, as well as among its shareholders.
(vi) It acts as a guide to shape better environmental, social, and governmental practices to prevent financial risks.

ESG Disclosures/What to include in Sustainability Reporting
(i) Environmental impact – Information on the company’s water and energy usage, waste management, and greenhouse gas emissions.
(ii) Social interactions – Details of community engagement, labor practices, and diversity efforts of your organization.
(iii) Governance – This includes details about your business’ compliance, political contributions, and board structure and diversity.

In general, the quality of the company’s sustainability report can be assessed in terms of:
 Balance – Are they reporting on the good and not-so-good ESG-related matters affecting the company?
 Comparability – Are they following baseline standards for reporting?
 Accuracy – Does the report accurately and correctly represent factual information? Are audits done to ensure the accuracy of the report content?
 Timeliness – Is the company reporting on the most recent information?
 Clarity – Is the report easy to understand? Are the issues clearly addressed?

(c) Management commentary and the contents of Management Commentary (MD and A). Management Commentary/Management Discussion and Analysis
 A narrative report that relates to financial statements that have been prepared in accordance with IFRSs.
 Management commentary provides users with historical explanations of the amounts presented in the financial statements, specifically the entity’s financial position, financial performance and cash flows.

 It also provides commentary on an entity’s prospects and other information not presented in the financial statements. Management commentary also serves as a basis for understanding management’s objectives and its strategies for achieving those objectives.

Contents of Management commentary.
(i) The nature of the business – the knowledge of the business engaged in and the external environment where the business operates
(ii) Management objectives and strategies – helps in determining the doubted strategies that might hinder the achieved of the objectives
(iii) Key resources, risks and relationships – The ability to obtain sustainable net inflow allocating resources carefully and considering the risk return trade off
(iv) Results and prospects – is the objective achieved according to what was expected
(v) Its performance measures and indicators – ability to focus on critical areas such as: Market share, customers’satisfaction, technology, leadership and governance, reputation and brand etc.
(vi) Contractual obligations – helps in understanding the contracts entered into the entity and how they are settled
(vii) General outlook – helps to under the business better in terms of what it does, key drivers, where it operates, visions and missions etc.

September 2021 Question 3a(i)
Differentiate between permanent difference and temporary differences
1. Permanent Timing differences – Differences between the carrying amount of an asset or liability in the statement of financial position and its tax bases that will not reverse in the future. i.e., certain items are allowed for accounting purposes but disallowable (non-taxable) for tax purposes and will not reverse in future years e.g., fines, donations, disallowable entertainment expenses.
2. Temporary differences – Differences between the carrying amount of an asset or liability in the statement of financial position and its tax bases that will reverse in the future. Temporary differences are categorized into two as follows: –
(a) Taxable temporary differences Temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
(b) Deductible temporary differences Temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled

September 2021 Question 4
(a) Types of hedges and their accounting treatment.
(i) Fair Value Hedge
Hedge of the exposure to changes in fair value of a recognized asset or liability that is attributable to a particular risk. Hedging instruments are measured at fair value with gains or losses recognized in P&L
Example of Fair value hedge
 Interest rate swaps used to hedge exposure to fair value changes of a fixed-rate debt
 A hedge of a price risk or a currency risk in a firm commitment to purchase an inventory
(ii) Cash Flow Hedge
Hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of: a recognized asset or liability. Under cash flow hedge, changes in fair value of hedging instrumentsare recognized in OCI and are accumulated in a cash flow reserve within equity.
Examples of Cash Flow Hedge
 Interest rate swaps used to change floating rate debt to fixed-rate
 Hedges against changes in interest rate risk in a planned debt issuance
 Forward contract for inventory to hedge exposure to cash flows resulting from future sale of inventory
(iii) Hedges of a Net Investment in A Foreign Operation
• Hedges of a net investment in a foreign operation work essentially the same as cash flow hedges, with the hedged item being the net investment in a foreign operation.
• Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity.
• The difference resulting from translating functional currency to presentation currency at different exchange rates will be recognized in OCI and are accumulated in a forex reserve within equity

(b) General Government Sectors (IPSAS 22) and their disclosure requirements.
General Government Sectors A group of government-controlled entities that provide public services which are mainly:
 Non-market in nature;
 For the collective consumption of the community, involving the transfer or redistribution of income; and
 Budget-funded or obtain their funds from government

Disclosures made in respect of the general government sector shall include at least of the following:
 Assets major class, showing separately the investment in other sectors;
 Liabilities major class;
 Net assets/equity;
 Total revaluation increments and decrements and other items of revenue and expense recognized directly in net assets/equity;
 Revenue major class;
 Expenses major class;

 Surplus or deficit;
 Cash flows from operating activities major class;
 Cash flows from investing activities; and
 Cash flows from financing activities.

September 2021 Question Five
(a) Limitations of IASB’s Conceptual framework for Financial Reporting
(i) It is difficult to develop a set of principles that are applicable fairly to every situation.
(ii) Limited global adoption – Different parts of the world with different economic and cultural norms may need different principles.
(iii) The economic consequences of accounting standards may be ignored.
(iv) The principles underlying the framework are subject to general interpretation.
(v) Many areas of accounting that could benefit from general principles are not covered in the conceptual framework.
E.g., Recognition of Gains and Losses through P&L or through OCI

(b) Fair Value Hierarchy under IFRS 13 “Fair Value Measurement”
Three levels of Fair Value hierarchy under IFRS 3 “Fair Value Measurement”
(i) Level 1 inputs – quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.
(ii) Level 2 inputs – Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include:
 Quoted prices for similar assets or liabilities in active markets
 Quoted prices for identical or similar assets or liabilities in markets that are not active
 Inputs other than quoted prices that are observable for the asset or liability, for example
 Interest rates and yield curves observable at commonly quoted intervals
 Inputs that are derived principally from or corroborated observable market data correlation or other means (‘market-corroborated inputs’).
(iii) Level 3 input – unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereallowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.

May 2021 Question Five
(a) Objectives of Conceptual framework and how conflicts may be resolved.
Conceptual framework was designed to set out fundamental concepts that underlie the preparation and presentation of financial statements. The following are the reasons/Objectives for development of the framework
(i) To assist the IASB in developing and amending standards.
(ii) To reduce the number of alternatives accounting treatments permitted IFRS.
(iii) To assist other standard setters in developing standards.
(iv) To provide guidance to prepares and auditors in applying and assessing application of IFRS.
(v) To assist users of financial statements to interpret the information presented.

Conflicts between the Framework and a particular standard
(i) The conceptual framework is not an IFRS and does not seek to provide guidance on any specific accounting transaction.
(ii) The conceptual framework does not overrule any IFRS and in case of any conflict, the IFRS will prevail.
(iii) Number of conflicts will decline since more advancements are made to revise IFRSs and the conceptual framework.
(iv) The IFRSs are more detailed and the Conceptual framework seeks only to give a guide of the application of the standards.

(b) Sustainability Reporting and Integrated Reporting
How sustainability reporting might address the limitations of financial reporting and improve the usefulness of the annual report.
 Sustainability reporting is a complex and contested concept.
 It is about ensuring that there are sufficient resources available for future generations which is difficult to be addressed at the individual level of the firm.
 Sustainability reporting is about reporting on the Triple Bottom Line of the Firm of Economic, Social and Environmental aspects of the Firm.
 Many entities are producing separate ESG disclosures/sustainability reports in addition to the annual financial statements.

How Integrated Reporting might address the limitations of financial reporting and improve the usefulness of the annual report.
 Integrated Reporting is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term
 Value is created in terms of a wide range of capitals not just financial capitals.
 Integrated Reporting is more forward looking than the traditional annual financial report thereassisting users in decision making.

 Issues of risks and governance are given priority than traditional financial reporting since Integrated Reporting views the entity as a whole.
 Financial and Non-financial information are included in this report and therefore financial and management accounting are connected.

(c) Differences under IPSAS 39 and IAS 19 “Employees benefits”
Elements of the remeasurement component of the net defined benefit liability (Asset)
 Actuarial gains and losses
 Return on plan assets excluding amounts included in net interest component
 Any change in the effect of asset ceiling
Accounting Treatment under IPSAS 39
 According to IPSAS 39, the remeasurement of the net defined benefit liability/asset constitutes defined benefit cost, service cost and interest cost components.
 The remeasurement shall not be reclassified to surplus or deficit in a subsequent period.
Accounting Treatment under IAS 19
 According to IAS 39, the remeasurement of the net defined benefit liability/asset constitutes defined benefit cost, service cost and interest cost components.
 The remeasurement (actuarial gain/loss) shall be recognized through other comprehensive income under items that will not be reclassified to profit or loss in subsequent periods.

November 2020 Question One (a)
(a) Circumstances under which impairment tests on exploration and evaluation of assets are required:
i) When the technical feasibility and commercial viability of extracting a mineral resource become demonstrable, at which point the asset falls outside the scope of IFRS 6 and is reclassified in the financial statements;
ii) When facts and circumstances suggest that the asset’s carrying amount may exceed its recoverable amount.
iii) The period for which the entity has the right to explore in the specific area has expired
iv) Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;
v) Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources, and the entity has decided to discontinue such activities in the specific area;
vi) Estimate suggests that the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or sale

November 2020 Question One (b)
(b) Circumstances that may potentially threaten the professional accountant’s compliance with the fundamental principles of ethics
i) Self-Interest Threat – The threat that a financial or other interest or of immediate or close family will inappropriately influence the professional accountant’s judgment or behavior.
ii) Self-Review Threat – The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed the professional accountant, or another individual within the professional accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service.
iii) Advocacy Threat – The threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised.
iv) Familiarity Threat ─ The threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work.
v) Intimidation Threat – The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant.

November 2020 Question One (d)
(d) Benefits an organization will derive from providing social and environmental reports.
i) They provide a useful means for users to evaluate the overall impact of the organization to the whole community for users to make additional judgment on the performance and impact of the organization.
ii) They enable the organization to behave responsibly to the society and the environment ensuring that it is accountable in its reporting
iii) They enhance the reputation of the firm in the eyes of the society
iv) It gives the information to assess the effectiveness of the programs on ecology and community development.
v) The managers try to focus their attention on those activities where reports and evaluations are necessary.
vi) It provides information that allows management to compare the effectiveness of different social programs.
vii) It gives the right to manage and provide information to external groups that rely on the company requirements for social performance

November 2020 Question Two (a)
(a) How public sector entities identify reportable segments According to IPSAS 18, a public sector entity shall:
 Identify its reportable segments
 The entity shall present information about those segments based on distinguishable activity or a group of activities of an entity for which it is appropriate to separately report financial information for the purpose of

evaluating the entity’s past performance in achieving its objectives and making decisions about the allocation of resources.
 Segments in Public sector entities comprise service segments and geographical segments which are distinguishable components of an entity that engages in providing related output or achieving particular operating objectives in line with the overall mission of the public sector entity of providing services within a particular region.
According to IFRS 8: Operating segments
 Operating segments should be reportable if the following criteria are met:
i) Its revenue (Sales) both internal and external is 10% or more of the total revenue of all segments
ii) Its reported profit or loss is 10% or more of all the segments profits or loss
iii) Its assets are 10% or more of the total assets of all the segments
iv) Segment should be reportable until 75% of the entity’s external revenue has been disclosed.

November 2020 Question Three (b)
(b) Conditions/criteria to classify an asset as being held for sale/disposal group
i) The asset must be available for immediate disposal
ii) The sale must be highly probable.
iii) Management must be committed to a plan to sell the asset;
iv) An active program to find a buyer must be initiated;
v) The asset must be actively marketed for sale at a price that is reasonable to its current fair value;
vi) The sale must be completed within one year from the date of classification;
vii) Significant changes to be made to the plan must be unlikely.

November 2020 Question Four (a)
(a) Types of joint arrangements as described IFRS 11 “Joint arrangements”
i) Joint Operation – The parties to the arrangements have rights to particular assets, and obligations for particular liabilities. A joint operator recognizes and measures its share of the assets and liabilities (and recognize the related revenues and expenses) in accordance with the substance of the contract setting up the joint operation. There are no adjustments needed on consolidation.
ii) Joint venture – The parties the arrangements have joint rights to the net assets of the arrangement. The investment is accounted for using the equity method (just like associates) or in accordance with IFRS 9. “Financial
Instruments”

November 2019 Question One (a)
(a) Steps followed in the process of setting International financial Reporting Standards
International Financial Reporting Standards (IFRSs) are developed through an international consultation process, the “due process”, which involves interested individuals and organizations from around the world. The due process comprises six stages to ensure compliance at various points throughout:
i) Identifying and reviewing all issues with the topic
ii) Studying national and regional accounting requirements and practices
iii) Consultation with the member bodies standard setting bodies other interested groups
iv) Public exposure of the draft international financial reporting Standard (IFRS)
v) Evaluation the steering committee and the board of the comments received on the exposure drafts
vi) After receiving the comments on the exposure draft, the IASB issues the final international reporting standard (IFRS)

November 2019 Question One (b)
(b) Reasons why reporting entities would prefer to adopt IFRSs
i) Investors both individual and corporate would like to be able to compare financial results of different companies internationally as well as nationally in making investment decisions.
ii) Multinational companies will include better access to foreign investor funds.
iii) There would be easier appraisals of foreign enterprises for takeover and mergers
iv) It would enable many companies to comply with reporting requirements of overseas stock exchanges
v) Governments of developing countries would save time and money adopting international accounting standards
vi) Tax authorities would find it easier to calculate the tax liability of investors including multinationals who receive income from overseas sources.
vii) regional economic groups usually promote trade within a specific geographical region. This would be aided common accounting practices within the region.
viii) Large international accounting firms could benefit as accounting and auditing would be much easier if similar accounting practices existed throughout the world.

Challenges that reporting entities are likely to encounter while implementing IFRSs
i) Lack of skilled manpower or personnel
ii) Lack of strong accountancy bodies which would press for better standards and greater harmonization
iii) Cultural differences that result in different accounting systems from country to country
iv) Nationalism that results in unwillingness to accept another country’s accounting standards
v) Different user groups: Countries have different ideas about who the relevant user groups are and their respective importance.
vi) Different legal systems: these prevents the development of certain accounting practices and restricts the options available.

vii) Different purposes of financial reporting: In some countries, the purpose is solely for tax assessment while in others, it is for investors decision making.
viii) Need for developing countries: Most developing countries are behind in the standard setting process and they need to develop the basic standards and principles that are already in plane in most developed countries.
ix) Interpretation of the standards iv a very tedious task
x) Some standards are very bulky making it difficult to comprehend

November 2019 Question One (c)
(c) Objectives of Integrated Reporting (IR)
i) To promote a more cohesive and efficient approach to financial reporting that draws on different reporting standards and communicates the full range of factors that materially affect the ability of an organization to create value over time.
ii) To improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.
iii) To support integrated thinking, decision making and actions that focuses on the creation of value over the short, medium and long-term.
iv) To enhance accountability and steward with respect to broad base of capitals. (Financial, manufactured, intellectual, human, social and relationship and natural capitals) and promote an understanding of their interdependencies.

November 2019 Question Two (a)
(a) Explain the treatment of exchange differences arising on translation distinguishing between the treatment in individual and consolidated financial statements
Individual Entity Stage:
 According to IAS 21, translation differences (gains/losses) arising on retranslation of monetary assets and liabilities should be recognized through profit or loss in the period in which they arise.
 Non-monetary assets are not retranslated instead, non-monetary assets measured in historical cost are translated and reported at historical rate at the date of original translation.
 Non-monetary assets measured at fair values are translated using the exchange rate at the date when the fair values were determined.

Consolidated Financial Statements:
 The exchange differences (gains/losses) resulting from the retranslation of net assets and goodwill on acquisition of a foreign subsidiary using the closing rate should be recognized through other comprehensive in consolidated statement of comprehensive income and also recognized separately within equity as exchange reserves in the consolidated statements of financial position.
 The exchange differences of a foreign subsidiary should be allocated to the parent entity and the non-controlling interests based upon their respective shareholding in the foreign subsidiary.

November 2019 Question Three (a)
(a) Factors that encourage reporting entities to disclose social and environmental information
i) Company and stakeholder’s relationship. – The report will create a socially and environmentally responsible firm in the eyes of different stakeholders and thus enhance the relationship with both customers and other stakeholders.
ii) Current Trend for Many Firms; – Many governments and other groups are also lobbying for firms to be socially and environmentally responsible and hence provision of such information may be in line with current trends and compliance with relevant legislation.
iii) Public Recognition – Firms that provide such information would get awards such as FIRE (Financial Report) and COYA (Company of the Year Award) and as such get strategic publicity recognition.
iv) Legal Requirements –
v) Reputation –
vi) Expectations from the society –
vii) Pressure of society and economic factors –

May 2019 Question One
a) Implementation challenges that are faced the International Accounting Standards Board (IASB) in its push towards a successful move to IFRSs
(i) Legal framework may present difficulties in adopting IFRSs
(ii) Cost and time implications
(iii) Complexity and volume of IFRS calls for expertise in their implementation
(iv) Translation of IFRS could cause difficulty where it gives rise to ambiguity
(v) Problems in enforcements
(vi) IFRSs have become increasing complex and prescriptive for SMEs

b) Reasons why there is a need to develop IFRSs specifically for SMEs
(i) Full IFRSs have become more detailed and harder to follow
(ii) The implementation cost may exceed the benefit since full compliance is required in IFRSs
(iii) Users of Financial Statements for SMEs may have different needs from those of public companies
(iv) The detailed disclosure may hinder the users to obtain the required information

c) Objectives of Sustainability Reporting
(i) It acts as a key dialogue for the company and its stakeholders
(ii) The core values of a sustainable business i.e., economic viability, environmental reporting and social accounting makes the business to excel.
(iii) It helps to measure business performance since it integrates environmental, social and economic values

d) With reference to IPSAS 20 “related Party Disclosures”, briefly explain the related party relationships and how related party disclosures under IPSAS 20 differ from those of commercial sector entities under IAS 24 “Related Party
Disclosures”.
(i) Disclosures should always be made of related party transactions where control exists
(ii) Related parties include individuals and entities owning interests directly or indirectly e.g key management personnel
(iii) Related party relationships exist where one party has the ability to control or exercise significant influence over the other party in making financial and operating decisions
(iv) IPSAS 20 does not require disclosure of information about business transactions between related parties which occur at arm’s length

May 2019 Question Three (a) – i
With reference to IAS 19 “Employee Benefits”, briefly explain the accounting treatment of the defined benefit pension surplus (plan asset) in the financial statement of an employer.
(i) The amount recognized as net pension asset in the statement of financial position should not exceed the recoverable amount
(ii) Any loss in value of a net pension asset (impairment loss) should be charged to other comprehensive income
(iii) The net pension asset should be measured at the lower of: (Asset Ceiling)
 Net reported pension asset
 Present value of any future refunds or reductions of future contributions to the pension plan.

May 2019 Question Four (a)
Classifications of Financial Instruments a per IFRS 9 “Financial Instruments”
A financial instrument is any contract that gives rise to a financial asset to one entity and a financial liability or equity component to another entity
Financial assets
When an entity first recognizes a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:
(i) Financial Assets at Amortized Cost
A financial asset is measured at amortized cost if both of the following conditions are met:
Business Model Test – The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows;
Contractual Characteristics Tests – The cash flows are solely payments of principal and interest on the principal amount outstanding.
(ii) Fair value through Other Comprehensive Income
Financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved both collecting contractual cash flows and selling financial assets. Any Change in market value is taken to the statement of Comprehensive Income and shown as a reserve in the Statement of Financial Position.
(iii) Fair value through profit or loss
Any financial assets that are not held in one of the two business models mentioned (collecting contractual cash flows and selling financial assets) are measured at fair value through profit or loss. Any Change in market value is taken to the income statement as either a gain or deficit.

NB: Old Classification was as follows:
i) Financial assets through profit and loss
ii) Held to maturity
iii) Loans and Receivables
iv) Available for Sale Financial

November 2018 Question One (a)
a) Limitations of Financial Reporting in the context of reporting on the social and environmental impacts of corporate activity
(i) Problems of measurability – reasonable accuracy is not possible for many social and environmental impacts
(ii) Accounting is narrowly defined and corporate organizations are seen as being accountable only to shareholders
(iii) Financial accounting focusses on the information needs of suppliers of capital and those making resource allocation decisions
(iv) Business entity assumption – if a transaction is not affecting the business, it is ignored
(v) Financial reporting only focuses on single economic bottom line and social and environmental bottom line are not given enough focus
(vi) There is no specific format for making disclosures for social and environmental information which makes it difficult for comparison purposes
(vii) The reporting entity may concentrate only on positive aspects and ignore the negative aspects. this biasness may mislead users of the social and environmental reports

b) With regard to IPSAS 4 “The effects of changes in Foreign Exchange Rates” explain the accounting treatment of explain the differences arising on translation of both monetary and non-monetary items in the financial statements of apublic sector entity.
(i) Any exchange difference(gain/loss) arising in the translation of monetary items is recognized in the statement ofchanges in net assets (surplus or deficit) for the period
(ii) Any exchange difference(gain/loss) arising in the translation of non-monetary items is recognized in the statement of net assets/Accumulated fund

d) Hedge accounting effectiveness requirements under IFRS 9 “Financial Instruments”
Hedge effectiveness is defined as the extent to which changes in the fair value or cash flows of the hedging instrument offset changes in the fair value or cash flows of the hedged item.
(i) Economic Relationship – There must be an economic relationship between the hedged item and the hedging instrument i.e., They move in opposite direction. Eg the price of a hedged item falls, the price of the hedging instrument must rise the same proportion Eg If the price of the hedged item falls, the credit rating of the hedging instrument may fall substantially.
(ii) Credit Risk – The effect of credit risk must not dominate the value changes associated with the hedged risk; otherwise, the level of offset might become erratic/inconsistent.
(iii) Hedging Ratio – The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument the entity actually uses to hedge that quantity of the hedged item
(iv) Rebalancing – This refers to adjustments to the designated quantities of either the hedged item or the hedging instrument of an existing hedging relationship for the purpose of maintaining a hedge ratio that complies with the hedge effectiveness requirements. This allows entities to respond to changes that arise from the underlying or risk variables.

November 2018 Three (a)
Areas where the SMEs Standards differ s from the IFRSs and IASs adopted public limited companies
(i) Research and development expenditures are always expensed
(ii) No revaluation model for intangible assets
(iii) Borrowing costs are not capitalized, instead they are expensed in the income statement
(iv) Goodwill is amortized over its useful life. If no economic/useful life is available, management uses the best estimatewhich does not exceed 10 years
(v) Non-Controlling Interest can only be measured using proportionate method fair value method is not allowed.
(vi) When a foreign subsidiary is disposed, the exchange difference (gain/loss) is reported to other comprehensive income i.e., statement of changes in equity

November 2018 Question Five
a) Usefulness of related party disclosures when analyzing the financial position and financial performance of a business organization
(i) Valuation of related party transactions (receivables and payables) may have an impact on the financial performance and position
(ii) The company performance may be influenced intercompany sales and other transactions i.e. helps in understanding the entity’s performance better
(iii) When transactions do not occur in arm’s length transactions, the reported financial information may not give a true picture because reported transactions do not reflect real transactions
(iv) It is useful in subsequent events which are related party transactions e guarantees issued for a subsidiary company

b) Significance of the EPS figure in the analysis of the performance of companies
(i) It allows one to calculate how much the company earned on your behalf
(ii) It is a fundamental tool used in valuing a company
(iii) It is used as a measure of profitability
(iv) It gives a view of the comparative earnings per share when compared with EPS of other companies

May 2018 Question One
a) Social Indicators that might be reported under social dimension
b) With regard to IPSAS 22 “Disclosures of Financial Information about the General Government Sector”, highlight the characteristics of a government business enterprise (GBE)
(i) An entity with the power to contract in its own name
(ii) It is controlled a public sector entity
(iii) Sells goods and services in the normal course of business at a profit or full cost recovery
(iv) It is not reliant on continuing government funding to be a going concern
(v) It is assigned the financial and operational authority to carry on a business

c) Challenges encountered in the practical application of IAS framework for the preparation and presentation of financial statements
(i) A single conceptual framework cannot suit the needs of the users since the financial statements are intended for variety of users.
(ii) Since different users have different needs, different standards have to be produced to meet the needs
(iii) The preparation of the financial statements may be much harder if full implementation has to be adopted.

d) Disclosures that an entity that has not elected to comply with an accounting standard must make in-order to explain the circumstances of the non-compliance.
(i) Title of the IFRS departed from
(ii) Reasons why the treatment would be misleading
(iii) Nature of the departure
(iv) Treatment the IFRS would require
(v) The Financial statements present fairly the entity’s financial position, performance and cash flows
(vi) The departure makes the entity to achieve fair presentation of the financial statements

May 2018 Question Two
a) Terms used in IAS 33 “Earnings Per Share”
(i) Contingently issuable ordinary shares – Shares issuable for little or no consideration upon satisfaction of specified conditions in a contingent share agreement

(ii) Dilution – Reduction in EPS or increase in Loss per share from the assumption that convertible instruments are converted and that options or warrants are exercised

December 2017 Question One (a)
Benefits of Integrated Reporting to both an organization and the users of the financial statements
(i) More integrated thinking and management.
(ii) Greater clarity on business issues and performance. The report highlights that “management teams are finding that provides greater insights into factors driving business performance”.
(iii) Improved corporate reputation and stakeholder relationships.
(iv) More efficient reporting for both users and preparers of reports.
(v) Employee engagement.
(vi) Improved gross margins although it was highlighted that any financial benefits of adopting may take time to realize.

December 2017 Question Two (a)
With reference to IPSAS 21 “Impairment of Non-Cash Generating Assets”, explain matters in respect of which an entity should disclose each material impairment loss recognized or reversed during the reporting period.
(i) The events and circumstances that led to the recognition or reversal of the impairment loss
(ii) The amount of the impairment loss recognized or reversed
(iii) The nature of the asset
(iv) Whether the recoverable service amount of the asset is its fair value less cost to sell or its value in use
(v) If the recoverable service amount is its fair value less cost to sell, the basis used to determine the fair value less cost to sell with reference to an active market
(vi) The approach used to determine value in use if the recoverable service amount is used

December 2017 Question Three (a)
Explain the rationale behind the inclusion of an environmental report in an entity’s annual report
(i) Honoring stakeholders’ rights of information;
(ii) Balancing corporate power with corporate responsibility;
(iii) Increasing transparency of corporal
(iv) Identifying social and environmental costs of economic success

December 2017 Question Four (a)
Three levels of Fair Value hierarchy under IFRS 3 “Fair Value Measurement”
(iv) Level 1 inputs – quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.
(v) Level 2 inputs – Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include:
 quoted prices for similar assets or liabilities in active markets
 quoted prices for identical or similar assets or liabilities in markets that are not active
 inputs other than quoted prices that are observable for the asset or liability, for example
 interest rates and yield curves observable at commonly quoted intervals
 inputs that are derived principally from or corroborated observable market data by correlation or other means (‘market-corroborated inputs’).
(vi) Level 3 input – unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereallowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.

December 2017 Question Five (a)
a) Examples of Unethical behavior the management of business entities which professional accountants should report about.
(i) Looting – Misappropriation of company’s assets
(ii) Insider trading – using companies’ non-public information for financial benefit
AFRA Past Paper Theory Solutions: Prepared Mr. Maxwell: FA/FRA/AFRA; Page 13 of 19

(iii) Excess remuneration – too much directors’ compensation without shareholders’ knowledge
(iv) Excessive risk taking – making huge capital investments without the shareholders’ knowledge
(v) Rewarding “Golden handshake” underperforming managers
(vi) Planning and implementing decisions without question the outcome
(vii) Setting incentives for employees which is against the company’s interest
(viii) Stakeholders of the companies putting their interest before the public interest for honest reporting

b) Disclosure requirements for reportable segments under IFRS 8 “Operating Segments”
(i) General information about how the entity identified its operating segments and the types of products and services from which each operating segment derives its revenues
(ii) Judgements made management in applying the aggregation criteria to allow two or more operating segments to be aggregated
(iii) Information about the profit or loss for each reportable segment, including certain specified revenues and expenses such as:
 Revenue from external customers and from transactions with other segments,
 Interest revenue and expense,
 Depreciation and amortization,
 Income tax expense or income and material non-cash items
(iv) A measure of total assets and total liabilities for each reportable segment, and the amount of investments in associates and joint ventures and the amounts of additions to certain non-current assets (‘capital expenditure’)
(v) An explanation of the measurements of segment profit or loss, segment assets and segment liabilities
(vi) Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities
(vii) Analyses of revenues and certain non-current assets geographical area
(viii) Information about transactions with major customers

May 2017 Question Two
a) Explain the accounting treatment of embedded derivatives under IFRS 9 “Financial Instruments”
Embedded Derivatives
This is a component of a hybrid instrument contract that contains both an embedded derivative and a host contract. The host contract and the embedded derivative are recorded separately
If the embedded derivative must be separated from the host contract, then the embedded derivative should be recorded separately on the balance sheet at fair value, with any changes in fair value immediately recorded in earnings
If the underlying of the embedded derivative is “clearly and closely related” to the host contract, then separation is prohibited i.e., we account for the entire hybrid instrument as one instrument.

b) Differences between Fair Value Hedge and Cash flow Hedge and their accounting treatment
Hedging is a risk reduction technique wherean entity uses a derivative or similar instrument to offset future changes in the fair value or cash flows of an asset or liability.
Types of hedges and their accounting treatment
(i) Fair value hedge – A hedge of the exposure to changes in fair value of a recognized asset or liability that is attributable to a particular risk. Any changes reported to profit or loss for the year.
(ii) Cash flow hedge – A hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability. Any changes reported to other comprehensive income
(iii) Hedge of a net investment in a foreign operation – A hedge that is used to eliminate or reduce the foreign currency exposure that arises from an entity’s foreign Operation. Any changes reported to other comprehensive income

May 2017 Question Four (a)
Contents of Management Commentary in an entity’s financial statements
(i) The nature of the business – the knowledge of the business engaged in and the external environment where the business operates
(ii) Management objectives and strategies – helps in determining the doubted strategies that might hinder the achieved of the objectives
(iii) Key resources, risks and relationships – The ability to obtain sustainable net inflow allocating resources carefully and considering the risk return trade off
(iv) Results and prospects – is the objective achieved according to what was expected
(v) Its performance measures and indicators – ability to focus on critical areas such as: Market share, customers’ satisfaction,technology, leadership and governance, reputation and brand etc.
(vi) Contractual obligations – helps in understanding the contracts entered into the entity and how they are settled
(vii) General outlook – helps to under the business better in terms of what it does, key drivers, where it operates, visions and missions etc.

May 2017 Question Five
a) Reasons for developing a conceptual framework for the preparation and presentation of financial statements
(i) To set accounting standards
(ii) A basis for resolving accounting disputes
(iii) promotes harmonization of preparing financial statements
(iv) It provides fundamental principles that assists in preparing financial statements
(v) promotes regulation of standards and procedures

b) Differentiate between a service segment and a geographical segment
(i) Service Segment – A distinguishable component of an entity that is engaged in providing services that is different from other service segments
(ii) Geographical Segment – A distinguishable component of an entity that is engaged in providing products and services within a particular economic environment

c) Types of Employee Benefits with a brief description of the accounting treatment for each
(i) Short-term employment benefits – Benefits that falls due within 12 months after the employees have rendered the services e.g. salaries and wages. They are expensed in the income stamen in the period in which they relate
(ii) Long term benefits – Benefits not settled within 12 months. Actuarial gains and losses are recognized immediately in other comprehensive income. All past service costs are recognized in the income statement
(iii) Post-employment benefits – These defined contribution plans and defined benefit plans. contributions to the scheme are expensed when the employee has rendered the service
(iv) Termination benefits – Voluntary or compulsory redundancy benefits. Only recognized when an entity has demonstrated to terminate the employee’s services

d) With Comparison to conventional financial reporting and social responsibility reporting, explain two practical challenges peculiar to social responsibility accounting.
i) Interaction of business with society at large – Business only contributes fully to the society if it is profitable and socially responsible
ii) Environment and package of financial statements – Emphasis of preparing financial statements for owners only has shifted to all stakeholders.
iii) Transparency and Accountability – The management is concerned with the responsibility of supplying information and the right to receive it.
iv) Environmental issues and auditing practices – there is growing need for auditors to include environmental reports in their attestation of the financial statement.
v) Accounting Education: – More research is still needed in the field of accounting education in general and social and environmental in particular since accountants themselves do not have accounting knowledge and -practice particularly in environmental accounting
vi) Stock Markets and Social or Environmental Disclosures – In most of the developed countries social and environmental disclosures in annual reports do play very crucial role in quoting the market price of shares.

November 2016 Question Four (a)
Examples of related party relationships with regard to IAS 24 “Related Parties”
 A related party is a person or entity that is related to the entity that is preparing its financial statements referred to as the ‘reporting entity’
a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i) Has control or joint control over the reporting entity;
(ii) Has significant influence over the reporting entity; or
(iii) Is a member of the key management personnel of the reporting entity or of a parent of the reporting entity?

b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity

The following are deemed not to be related
(i) Two entities simply because they have a director or key manager in common
(ii) Two ventures who share joint control over a joint venture
(iii) Providers of finance, trade unions, public utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply virtue of their normal dealings with an entity
(iv) A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant volume of business merely virtue of the resulting economic dependence
Examples of related party transactions that may lead to disclosures a reporting entity:
(i) Purchases or transfers/sales of goods (finished or unfinished);
(ii) Purchases or transfers/sales of property and other assets;
(iii) Rendering or receiving of services;
(iv) Agency arrangements;

(v) Leases;
(vi) Transfers of research and development;
(vii) Transfers under license agreements;
(viii) Transfers under finance arrangements (including loans and equity contributions);
(ix) Provision of guarantees or collateral

November 2016 Question Five
a) Functions of International Financial Reporting Interpretations Committee (IFRIC)
(i) Interpret the application of IFRSs and provide timely guidance on financial reporting issues not specifically addressed in IFRSs
(ii) To bring about convergence of national accounting standards and IFRSs to high quality solutions
(iii) Publish after clearance the IASB draft Interpretations for public comment and consider comments made within a reasonable period before finalizing an Interpretation
(iv) Report to the IASB and obtain the approval for final Interpretations

b) Social Responsibility Accounting
The process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large. It is also known as social accounting and auditing, social accountability, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting or accounting
Areas of Social Accounting – social accounting will cover an organization’s relationship with the natural environment, its employees, and ethical issues concentrating upon consumers and products, as well as local and international communities. Other issues include corporate action on questions of ethnicity and gender.

c) Advantages of Social Responsibility Accounting
(i) A firm fulfills its social obligations and informs its members, the government and the general public to enables everybody to form correct opinion.
(ii) It counters the adverse publicity or criticism leveled hostile media and voluntary social organizations.
(iii) It assists management in formulating appropriate policies and programs.
(iv) Through social accounting the firm proves that it is not socially unethical in view of moral cultures and environmental degradation.
(v) It acts as evidence of social commitment.
(vi) It improves employee motivation.
(vii) Social accounting is necessary from the view point of public interest groups, social organizations investors and government.
(viii) It improves the image of the firm.
(ix) Through social accounting, the management gets feedback on its policies aimed at the welfare of the society.
(x) It helps in marketing through greater customer support.
(xi) It improves the confidence of the shareholders of the firm

May 2016 Question Four
a) With reference to IAS 36 “Impairment of Assets” discuss the accounting treatment of impairment losses.
 An impairment loss is recognized whenever recoverable amount is below the carrying amount.
 The impairment loss is recognized as an expense unless it relates to a revalued asset where the impairment loss is treatedas a revaluation decrease
 The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:
 first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units);
 then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis. The carrying amount of an asset should not be reduced below the highest of:
 its fair value less costs of disposal (if measurable)
 its value in use (if measurable)
 zero.
If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the unit (group of units).

b) Procedure adopted when translating the financial performance and financial position functional currency into a presentation currency
 A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction
 At each subsequent balance sheet date:
 Foreign currency monetary amounts should be reported using the closing rate
 Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction
 Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined
 Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognized or in previous financial statements are reported in profit or loss in the period
 Exchange differences arising on monetary items that form part of the reporting entity’s net investment in a foreign operation are recognized in other comprehensive income

May 2016 Question Five
a) Rationale for regulatory framework in financial reporting
(i) To ensure that the needs of the users of financial statements are met with at least a basic minimum of information.
(ii) To ensure that all the information provided in the relevant economic arena is both comparable and consistent. Given the growth in multinational companies and global investment this arena is an increasing international one.
(iii) To increase users’ confidence in the financial reporting process.
(iv) To regulate the behavior of companies and directors towards their investors

b) Steps followed IASB in the development and publication of an exposure draft
(i) Research program – This step involves the analysis of possible financial reporting problems collecting evidence on the nature and extent of the perceived shortcoming and assessing potential ways to improve financial reporting or to remedy a deficiency.
(ii) Developing a proposal for publication – The exposure draft is issued for public consultation and the IASB may also undertake additional outreach activities such as meetings, discussion forums, webcasts and podcasts and roundtable meetings.
(iii) Deliberations and finalization – Once deliberations have been finalized, the IASB’s technical staff will prepare the final standard for balloting and voting on the Board. The process may also include the issue of a ‘review draft’ of the final pronouncement prior to it being finalized.
(iv) Post-implementation review – This process commences around 2.5-3 years after the effective date of the pronouncement, but may be deferred in some cases. The post-implementation review process can also be initiated in other circumstances such as regulatory changes or concerns raised other parties.

c) Reasons why Social accounting and reporting has gained prominence
The concept of ‘Social Accounting’ has gained importance as a result of high-level industrialization which has brought prosperity as well as many problems to the society – (Benefits of Social Accounting)

November 2015 Question One (a)
How Non-Controlling Interest is measured in the context of IFRS 3 “Business Combinations”
(i) Fair value (sometimes called the full goodwill method)
(ii) The NCI’s proportionate share of net assets of the acquired (Partial Goodwill)

November 2015 Question Two (a)
Integrated Report – A concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term
Content elements that an integrated report should contain
(i) Organizational overview and the external environment under which it operates
(ii) Governance structure and how this supports its ability to create value
(iii) Business model
(iv) Risks and opportunities and how they are dealing with them and how they affect the company’s ability to create value
(v) Strategy and resource allocation
(vi) Performance and achievement of strategic objectives for the period and outcomes
(vii) Outlook and challenges facing the company and their implications
(viii) The basis of presentation needs to be determined, including what matters are to be included in the integrated report and how the elements are quantified or evaluated.

Guiding Principles of Integrated Report
(i) Strategic focus and future orientation – An Integrated Report should provide insight into the organization’s strategy, how it relates to the organization’s ability to create value in the short, medium and long term, and to its use of and effectson the capitals.
(ii) Connectivity of information – An Integrated Report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time.
(iii) Stakeholder relationships – An Integrated Report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests.
(iv) Materiality – An Integrated Report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term.
(v) Conciseness – An Integrated Report should be concise.
(vi) Reliability and Completeness – An Integrated Report should include all material matters, both positive and negative, in a balanced way and without material error.
(vii) Consistency and comparability – The information in an Integrated Report should be presented on a basis that is consistent over time; and in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time.

Six Capitals in Integrated Reporting
(i) Financial Capital – The pool of funds that is available to an organization for use in the production of goods or the provision of services obtained through financing, such as debt, equity or grants, or generated through operations or investments.

(ii) Manufactured Capital – Manufactured physical objects that are available to an organization for use in the production of goods or the provision of services
(iii) Intellectual Capital – Organizational, knowledge-based intangibles, including intellectual property, such as patents, copyrights, software, rights, and licenses
(iv) Human Capital – People’s competencies, capabilities and experience, and their motivations to innovate
(v) Social and Relationship Capital – The institutions and the relationships within and between communities, groups of stakeholders and other networks, and the ability to share information to enhance individual and collective well-being.
(vi) Natural Capital – All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization. It includes: air, water, land, minerals and forests biodiversity and eco-system health.

November 2015 Question Two (a)
Compare and contrast the relative merits of the direct and the Indirect method of presentation of the statement of cash flows
 The main difference between the direct method and the indirect method of presenting the statement of cash flows (SCF) involves the cash flows from operating activities. There are no differences in the cash flows from investing activities and/or the cash flows from financing activities.
 The differences will arise due to non-cash transactions such as depreciation, impairment of goodwill etc. and incorrectly classified transactions such as investment incomes

November 2015 Question Four
a) In the context of IAS 38 “Intangible Assets”, discuss the accounting treatment of brands in an entity’s book of accounts Brands are internally generated Intangible Assets
Acquired brands
 Acquired brands are initially measured and recognized at cost
 Subsequent measurement can either be at cost or revalued amounts (fair values) where the use of revaluation requires an active market
 Amortization is based on the useful life or non-amortization could be adopted if the useful life is indefinite
b) Potential problems an investor might encounter when placing undue emphasis on the EPS figure
(i) EPS figure deals with financial analysis rather than financial reporting
(ii) EPS cannot be compared from one company to another due to differing accounting policies adopted different companies
(iii) If undue importance is placed on the EPS figure, it is possible that it may lead to misleading interpretations of financial performance
(iv) The level of taxation suffered different companies brings EPS problems if EPS figure is used for investment purposes

November 2015 Question Five
a) Difference between exchange transactions and non-exchange transactions with reference to IPSAS 9 “Revenue fromexchange Transaction”
 Exchange transactions – transactions in which one entity receives assets or services or has liabilities extinguished and directly gives approximately equal value to another entity in exchange.
Examples – sale of goods, rendering of services, interests, royalties and dividends
 Non-exchange transactions – transaction where 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.
Examples – Taxes, debt waivers, fines, bequest, gifts and donations
 Revenue should be measured at the fair value of the consideration received or receivable.
Revenue recognition:
 From sale of goods – when significant risks and rewards have been transferred to purchaser
 From rendering of services – reference to the stage of completion of the transaction at the reporting date,
 For interest, royalties, and dividends – Recognized when it is probable that economic benefits or service potential will flow to the entity, and the amount of the revenue can be measured reliably.
• Interest – on a time proportion basis that takes into account the effective yield on the asset.
• Royalties – as they are earned in accordance with the substance of the relevant agreement.
• Dividends or their equivalents – when the shareholder’s or the entity’s right to receive payment is established.

b) Information to Be Included in The Directors’ Report
Directors Report – A document produced the board of directors which details the state of the company and its compliance with a set of financial, accounting and corporate social responsibility standards
Components of the directors’ report
(i) The names of each director who served during the reporting year;
(ii) A summary of the company’s trading activities;
(iii) A summary of future prospects;
(iv) The principal activities of the company and, if relevant, the principal activities of its subsidiaries;
(v) Recommendations for dividends for the reporting year;
(vi) Any financial events that occurred after the date on the balance sheet, if these events could affect the company’s finances;
(vii) Significant changes to the company’s fixed assets.

c) Factors a country should consider in deciding whether it would be in its best interest to develop its own accounting standard
(i) Measurability – will the accounting standard measure things/events that do not have a monetary value.
(ii) No Future Assessment – The dynamic nature of the business environment, a lot can change between such dates.
(iii) Historical Costs – Accounting often uses historical costs to measure the values. This fails to take into consideration factors such as inflation, price changes, etc.
(iv) Estimates – Sometimes in accounting estimation may be required as it is not possible to establish exact amounts. And estimates are extremely subjective in nature.
(v) Verifiability – An audit of the financial statements does not guarantee the correctness of such statements.
(vi) Errors and Frauds – Accounting is done humans, so there will always be the scope of human errors.

FINAL ACCOUNTS FOR INSURANCE COMPANIES
1. Revenue Accounts
2. General Income Statement
3. Statement of Financial Position
1. Revenue Accounts – This Account ascertains the net profit/Loss for the period for each class of business. A separate revenue account must be prepared for each class of business, i.e. fire, marine, accidents, etc.
Format for revenue accounts: XYZ Insurance Company
Revenue Account
For the year ended 31/December/20XX
Marine Fire Accident
Incomes:
Net Premiums (Wks. 1) XX XX XXX
Add: Unearned Premiums b/d XX XX XX
Additional Reserves b/d (if any) XX XX XX
Less: Unearned Premiums c/d (XX) (XX) (XX)
Additional Reserves c/d (if any) (XX) (XX) (XX)
Net earned premiums XX XX XX
Add: Reinsurance Commission ceded XX XX X
Total Incomes XX XX XX
Expenses:
Net Claims (Wks. 2) (XX) (XX) (XX)
Reinsurance Commission accepted (XX) (XX) (XX)
Management expenses (XX) (XX) (XX)
Bad debts (XX) (XX) (XX)
Legal Costs (XX) (XX) (XX)
Profit(loss) XX XX XX
Workings
1. Determination of net Premiums, Un-earned Premiums c/d and Commission Ceded and Accepted
Marine Fire Accident
Direct Premiums Received XX XX XX
Add: Reinsurance Premiums Received/Accepted XX XX XX
Premiums balance c/d XX XX XX
Less: Reinsurance premiums paid/Ceded (XX) (XX) (XX)
Premiums Balance b/d (XX) (XX) (XX)
Net Premiums XX XX XX
Provisions for Unexpired risk 100% 50% 50%
Commission Ceded – % of Reinsurance premiums paid xx xx xx
Commission Accepted – % of Reinsurance premiums Received xx xx xx
Notes (NB):
1) The reserve for unexpired risk is also referred to as “provision for unexpired risk or un-earned premiums” or “fund balance B/D and fund balance C/D”. The provision must be maintained to meet claims that may arise under policies issued throughout the year and there may be some risk associated with them.
2) The provision should be maintained at 100% of net premiums for marine insurance, and 50% of net premiums for other types of business e.g. fire, accident, etc.
3) Additional reserves are maintained even though the provision for unexpired risk should be enough to meet claims arising on policies in force at the end of year; this is simply for prudence’ sake.
4) Reinsurance: All insurance companies must reinsure their business with a reinsurance company, e.g. Kenya Re and Africa Re. Reinsurance ceded refers to the amount of risk passed on to the reinsurer. The reinsurer will pay a commission on the premium involved. The reinsurer refers to this commission as “commission on reinsurance accepted” and records this as an expense. The original insurer will receive the commission and credit it to the revenue account as “commission on reinsurance ceded”.

2. Determination of Net Claims
Marine Fire Accident
Claims Paid XX XX XX
Add: Expenses related to claims e.g. Survey expenses XX XX XX
Claims intimated and outstanding c/d XX XX XX
Claims balance c/d XX XX XX
Less: Claims balance b/d (XX) (XX) (XX)
Net Claims XX XX XX
General Income Statement/Statement of profit or Loss – This statement is prepared to ascertains the net profit for the period for the whole company. It discloses the various sources of incomes, expenses and distribution of the profit for the year to the shareholders. It is from information not directly attributable to the various classes of business.
Format for the Income Statement
XYZ Insurance Company Income Statement
For the year ended 31/December 20XX
Incomes: Sh.
Income from: Marine XX
Fire XX
Accident XX
Other Incomes XX
Investment Incomes XX
Rental incomes XX
Total Incomes XX
Expenses:
Audit fees (XX)
Directors’ fees (XX)
Bad debts written off (XX)
Depreciation (XX)
Other operating expenses (XX)
Net profit before tax XX
Income tax expense (XX)
Profit(loss) after tax XX
Dividends paid/proposed (XX)
Retained profit for the year XX
Retained profit b/d XX
Retained profit c/d XX

3. Statement of Financial Position

XYZ Insurance Company Statement of Financial Position As at 31/December 20XX

Non-Current Assets: SH
Property Plant and Equipment XX
Investment in Securities XX
Current assets:
Accounts Receivable XX
Premiums Outstanding (Balance c/d) XX
Commission Ceded Receivable (Balance c/d) XX
Bank/Cash Balance XX
Total Assets XXX
Financed by:
Equity and Liabilities:
Ordinary Share Capital XX
Share Premium XX
Revaluation Reserves XX
Retained Profits c/d XX
Reserves for Unexpired Risks/Unearned premiums (Balance c/d) XX
Liabilities:
Accounts Payables XX
Claims outstanding (Balance c/d) XX
Commission Accepted payable (Balance c/d) XX
Current tax (Unpaid tax) XX
Dividends Payable XX
Bank Overdraft XX
Accruals XX
Total Equity and Liabilities XXX

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