INTEGRATED REPORTING (I.

R)

I.R is a concise communication about how an organizations strategy, performance and prospects lead to
the creation of value over short term, medium term and long term.

OBJECTIVES OF I.R

1 To enhance accountability and stewardship for the broad base of capitals (Financials,
manufactured, intellectual, human , Naturals and social relationships)
2 Support integrated thinking, decision making and actions that focus on creation of value over
short, medium and long term.
3 To provide the quality of information available to providers of financial capital, to enable
more efficient and productive capital allocation.
4 Provide more cohesive and efficient approach to corporate reporting that draws on different
reporting strategies and communicates the full range of factors that materially affect the
ability of the organizations to create value over time.
5 Promote understanding of their interdependencies.
There are three fundamental concepts underpinning I.R
1 Capitals: Financial, manufactured, intellectual, Human, Natural and social relationship.
2 Value creation for the organization and others.
3 Value creation process.
COMPONENTS OF AN INTEGRATED REPORT.
1 ) Financial statement; this should be prepared in accordance with IFRS and audited to
provide reasonable assurance.
2) Sustainability report; this covers a combination of environmental, social and governance
matters. This is prepared in accordance with recognized framework such as (GRI) Global
reporting initiative.
3) Governance report; This should be tailored along the guidelines offered by an accepted
governance code.
Guiding principles underpinning the preparation of I.R
1 Strategic focus
I.R provides insight into the organizations strategic objectives and how those objectives relate
to its ability to create and sustain value over time.

2 Connectivity of information.
 I.R shows the connections between the different components of the organizations business
model , external factors that affect the organization and various resources and relationships on which the
organization and its performance depend.

3 Future orientation

An I.R includes management expectation about the future as well as other information to help
report users understand and assess the organizations prospects and uncertainties it faces.

4 Responsiveness and stakeholder inclusiveness.

5 Conciseness , reliability and materiality.
An I.R provides concise, reliable information that is material to assessing the organizations
ability to create and sustain value over time.
CONTENTS OF AN I.R

1 Organizational overview and external environment.

What does the organization do and what are the circumstances under which it operates.

2 Governance

Hoe does the organizations governance structure support its ability to create value in the short, medium
and long term.

3 Business model

What is the organization business model?

4 Risk and opportunities

What are the specific risks and opportunities that affect the organizations ability to create value over
short, medium and long term?

5 Strategy and resource allocation

Where does the organization want to go and how does it intend to get there.

6 Performance.

To what extend has the organization achieved its strategic objectives for the period and what are its
outcomes in terms of effects on the capitals.
 7 Out look

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.

8 Basis of presentation

How does the organization determine what matters to include in the integrated report and how are such
matters quantified or evaluated?

BENEFITS OF I.R

1 Helps the organization to think in an integrated way.

2 Clear articulation of strategy and business model.
3 Single report that is easy to access clear and concise.
4 Creating value for stakeholders through identification and measurement of non-financial factors.

GLOBAL REPORTING INITIATIVE (GRI)

GRI is an international independent organization that helps business, governments and organizations
understand and communicate the impact of business on critical sustainability issues such as climate
change, corruption and many others.

- GRI is a provider of the worlds most widely used standard for sustainability reporting.
Reporting principles for defining report content.

There are four principles.

1 Stakeholder: This means that stakeholder must be consulted while developing the report. Examples ,
employees, shareholders, suppliers, local community, government e.t.c.

2 sustainability context ; where it is expected that report presents the organizations performance in
relation to broader context of sustainability which involves examining its performance in terms of limits
and demands placed on economic, environmental or social resources e.t.c.

3 Materiality ; means that the report must include issues and topics which are material in that particular
organization.
 4 Completeness; Which means inclusion of all material topic in the report as well as its applicable
to practice of collecting information and presentation of data is appropriate.
Principles of defining report quality

1 Accuracy – data should be accurate as possible

2 Balance- There should be balance on coverage of different indicators so that unbiased picture of
organizations performance could be brought to light.

3 clarity of information.

4 comparability

5 reliability
6 timeliness

GRI has a set of 2 standards.

1 General or Universal

2 Topic specific.

General standard has 3 series.

A) GRI 101 - General principles on how to develop the std.

B) GRI 102 – To report contextual information about the organization.
C) GRI 103 – To report the management approach on each material topic.

Topic specific standards.

A) GRI 200 – Economic disclosures

This includes different indicators which should be disclosed to stakeholder in terms of performance
parameters.

1 Economic performance

2 market presence

3indirect economic impacts

4 Procurement practices.
 5Anti- corruption
6 Anticompetitive behavior.
B) GRI 300-Environmental disclosures
1 Material – Total weight/ volume of materials that are used to produce and package the
organizations primary products.
2 Energy – energy consumption within the organization, outside the organization or the energy
intensity.
3 Water – water withdrawal by source, total volume, water consumption e.t.c
4 Emissions – Green house gas emissions, GHG emission intensity e.t.c
5 Environmental compliance – environmental safty.
C) GRI 400 -Social disclosures.
1 Employment – new employee hire and employee turnover.
2 Labor and management relations – minimum notice period regarding operational changes.
3 Occupational health and safety - workers representation in formal joint management , workers
health and safety committees.
4 Training and education – Average hours of training per year per employee.
6 Diversity and equal opportunity – diversity of governance bodies and employees.
7 Child labour.

IMPAIREMENT OF ASSETS IAS 36

Impairment is defined as a fall in the value of the asset so that its recoverable amount is less than
its carrying amount in the statement of financial position.
Carrying amount; this is the amount of which the asset recognized after deducting accumulated
depreciation i.e the net book value of the asset .
- If the assets C.A is higher than its recoverable amount the asset is said to have suffered a n
impairment loss and therefore be reduced in value by the amount on impairment.
- The amount of impairment loss is an expense and therefore should be written off against profits
in the p&l.
Recoverable amount.
R.A of an asset is the amount that is higher of;
a) The assets fair value less cost to sell (NRV)
b) The value in use / present value of the asset.
 The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms length
transaction between knowledgeable willing parties.
- Value in use of an asset is the present value of the estimated future cash flows expected to be
derived from the asset.
- The estimate of future cash flows should include the following.
a) Projection of future cash flows from the estimated use of the asset.
b) Projection of cash out flows necessarily incurred to generate cash inflows from the estimated
use of the asset.
c) Any cash flow received or paid on disposal of the asset at the end of its useful life.
- The cash flow to be discounted should pre- tax cash flows.
- IAS 36 requires that cash flow projections should be based on the reasonable assumptions.
- Projections of cash flows normally up to 5 years should be based on the most recent budget of the
financial forecast.
Identifying a potentially impaired asset.
The indicators of impairment are the factors suggesting that the asset has reduced in value .
There are two sources of information.
a) External source.
b) Internal source.
External source of information
1) A fall in the assets market value.
2) Significant unfavorable change in the technological, legal and market environment in
which the asset is employed.
3) Increase in the interest rate or market rate of return on investment likely to affect the
discount rate used in computing the value in use of the asset thereby decreasing the assets
recoverable amount materially.
4) Decrease in market capitalization of the company because of decrease in price per share
of the company.
Internal source of information
1) evidence is available of obsolescence or physical damage of an asset.

2) Evidence is available from internal reporting that indicates that the economic
performance of the asset will be worse than expected.
3) Decision to halt construction of an asset before completion.
IMPAIREMENT OF NON CASH GENERATING ASSETS IPSAS 21.
A cash generating asset /unit is;
 a) An asset that generates a commercial return
b) A group of identifiable assets which;
- Are used together;
- Generate cash flows that are independent from cash flows generated by other assets or group of
assets.
Value in use under non cash generating assets.
The standard defines the value in use of a non cash generating asset as the present value of the
assets remaining service potential. The present value of the remaining service potential of an asset
is determined using any of the following approaches.
1) Depreciated replacement cost approach.
Under this approach the present value of the remaining service potential of the asset is
determined as the depreciated replacement cost of the asset. The replacement cost is the cost
to replace the assets gross service potential. This cost is depreciated to reflect the asset in its
used condition.
2) Restoration cost approach
The present value of the remaining service potential of the asset is determined by subtracting
the estimated restoration cost of the asset from the current cost of replacing the remaining
service potential of the asset before impairment.
3) Service unit approach
The present value of the remaining service potential of the asset is determined by reducing
the current cost of the remaining service potential of the asset before impairment to conform
with the reduced number of service units expected from the asset in its impaired state.
Application of the approaches.
IPSAS 21 the choice of the most appropriate approach to determining the value in use
depends on the availability of data and the nature of impairment.
a) Impairments identified from significant long term changes in technological, legal and
government policy environment are generally measurable using service unit or depreciated
replacement approach.
b) Impairments identified from physical damage are generally measurable using restoration
approach.
c) Impairments identified from cessation or near cessation of demand are measurable using
service unit approach.
Reversal of impairment loss.

An entity shall assess at the end of each reporting period whether there is
any indication that an impairment loss recognised in prior periods for an
asset other than goodwill may no longer exist or may have decreased. If any
such indication exists, the entity shall estimate the recoverable amount of
that asset.
In assessing whether there is any indication that an impairment loss
recognised in prior periods for an asset other than goodwill may no longer
exist or may have decreased, an entity shall consider, as a minimum, the
following indications:
External sources of information
(a) there are observable indications that the asset’s value has increased
significantly during the period.
(b) significant changes with a favourable effect on the entity have taken
place during the period, or will take place in the near future, in the
technological, market, economic or legal environment in which the
entity operates or in the market to which the asset is dedicated

c) market interest rates or other market rates of return on

investments have decreased during the period, and those decreases
are likely to affect the discount rate used in calculating the asset’s
value in use and increase the asset’s recoverable amount materially
disclosure requirements

An entity shall disclose the following for each class of assets:

(a) the amount of impairment losses recognised in profit or loss during
the period and the line item(s) of the statement of comprehensive
income in which those impairment losses are included.
(b) the amount of reversals of impairment losses recognised in profit or
loss during the period and the line item(s) of the statement of
comprehensive income in which those impairment losses are
reversed.
(c) the amount of impairment losses on revalued assets recognised in
other comprehensive income during the period.
(d) the amount of reversals of impairment losses on revalued assets
recognised in other comprehensive income during the period.
- An entity shall disclose the following for an individual asset (including
goodwill) or a cash-generating unit, for which an impairment loss has been
recognised or reversed during the period:
(a) the events and circumstances that led to the recognition or reversal
of the impairment loss.
(b) the amount of the impairment loss recognised or reversed.
(c) for an individual asset:
(i) the nature of the asset; and
(ii) if the entity reports segment information in accordance with
IFRS 8, the reportable segment to which the asset belongs.
(d) for a cash-generating unit:
(i) a description of the cash-generating unit (such as whether it
is a product line, a plant, a business operation, a
geographical area, or a reportable segment as defined in
IFRS 8).

International Financial Reporting Standard 2

Share-based Payment
Objective
The objective of this IFRS is to specify the financial reporting by an entity
when it undertakes a share-based payment transaction. In particular, it requires
an entity to reflect in its profit or loss and financial position the effects of
share-based payment transactions, including expenses associated with
transactions in which share options are granted to employees.
TYPES OF SHARE BASED TRANSACTIONS.
(a) equity-settled share-based payment transactions,
this is where an entity acquires goods or services in exchange for equity instruments including
ordinary shares.
(b) cash-settled share-based payment transactions
in this transaction an entity acquires goods or services and the consideration being made in cash,
the cash should be based on the fair value of company shares,and
(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether the entity
settles the transaction in cash (or other assets) or by issuing equity
instruments,(Choice settlement).
Recognition
An entity shall recognise the goods or services received or acquired in a
share-based payment transaction when it obtains the goods or as the
services are received. The entity shall recognise a corresponding increase in
equity if the goods or services were received in an equity-settled
share-based payment transaction, or a liability if the goods or services were
acquired in a cash-settled share-based payment transaction.
When the goods or services received or acquired in a share-based payment
transaction do not qualify for recognition as assets, they shall be recognized as expenses.
Equity-settled share-based payment transactions
Overview
For equity-settled share-based payment transactions, the entity shall
measure the goods or services received, and the corresponding increase in
equity, directly, at the fair value of the goods or services received, unless
that fair value cannot be estimated reliably. If the entity cannot estimate
reliably the fair value of the goods or services received, the entity shall
measure their value, and the corresponding increase in equity, indirectly,
by reference to2 the fair value of the equity instruments granted.
To apply the requirements of paragraph 10 to transactions with employees and
others providing similar services,3 the entity shall measure the fair value of the
services received by reference to the fair value of the equity instruments
granted, because typically it is not possible to estimate reliably the fair value
of the services received, The fair value of those
equity instruments shall be measured at grant date.
Typically, shares, share options or other equity instruments are granted to
employees as part of their remuneration package, in addition to a cash salary
and other employment benefits. Usually, it is not possible to measure directly
the services received for particular components of the employee’s
remuneration package. It might also not be possible to measure the fair value
of the total remuneration package independently, without measuring directly
the fair value of the equity instruments granted. Furthermore, shares or share
options are sometimes granted as part of a bonus arrangement, rather than as
a part of basic remuneration, eg as an incentive to the employees to remain in
the entity’s employ or to reward them for their efforts in improving the
entity’s performance. By granting shares or share options, in addition to other
remuneration, the entity is paying additional remuneration to obtain additional benefits. Estimating the
fair value of those additional benefits is likely to be difficult. Because of the difficulty of measuring
directly the fair
value of the services received, the entity shall measure the fair value of the
employee services received by reference to the fair value of the equity
instruments granted.
Cash-settled share-based payment transactions
For cash-settled share-based payment transactions, the entity shall measure
the goods or services acquired and the liability incurred at the fair value of
the liability, Until the
liability is settled, the entity shall remeasure the fair value of the liability at
the end of each reporting period and at the date of settlement, with any
changes in fair value recognised in profit or loss for the period.
For example, an entity might grant share appreciation rights to employees as
part of their remuneration package, whereby the employees will become
entitled to a future cash payment (rather than an equity instrument), based on
the increase in the entity’s share price from a specified level over a specified
period of time. Alternatively, an entity might grant to its employees a right to
receive a future cash payment by granting to them a right to shares (including shares to be issued upon the
exercise of share options) that are redeemable,
either mandatorily (for example, upon cessation of employment) or at the
employee’s option.
Treatment of vesting and non-vesting conditions
A cash-settled share-based payment transaction might be conditional upon
satisfying specified vesting conditions. There might be performance conditions
that must be satisfied, such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price. Vesting conditions, other
than market conditions, shall not be taken into account when estimating the
fair value of the cash-settled share-based payment at the measurement date.
Instead, vesting conditions, other than market conditions, shall be taken into
account by adjusting the number of awards included in the measurement of
the liability arising from the transaction.
To apply these requirements, the entity shall recognize an
amount for the goods or services received during the vesting period. That
amount shall be based on the best available estimate of the number of awards
that are expected to vest. The entity shall revise that estimate, if necessary, if
subsequent information indicates that the number of awards that are
expected to vest differs from previous estimates. On the vesting date, the
entity shall revise the estimate to equal the number of awards that ultimately
vested.
Disclosure requirements
a) type of share based transaction
b) average exercise price of each share options
c) total expenses recognized for the period with regard to the share based
d) the liability arising from share based transaction
e) the fair value of the options during the vesting period.

International Accounting Standard 19

Employee Benefits
Objective
The objective of this Standard is to prescribe the accounting and disclosure for
employee benefits. The Standard requires an entity to recognize:
(a) a liability when an employee has provided service in exchange for
employee benefits to be paid in the future; and
(b) an expense when the entity consumes the economic benefit arising
from service provided by an employee in exchange for employee
benefits.
Employee benefits are all forms of consideration given or promised by an entity in exchange for services
rendered by the employees. These benefits include salary related benefits such as wages, profit sharing,
bonuses e.t.c and also post employment benefits such as retirement benefits.
Types of benefits
1) short term benefits
these are benefits which fall due within 12 month after providing services. Such benefits are
taxable on employees and are expensed by the employer in the profit or loss statement for the
period the service was rendered e.g salaries.
2) Other long term benefits.
These are benefits accruing for a period of 12 month after providing service . they are treated as
lump sum on employees and are amortized over the period concerned by the employer e.g
sabbatical leave, long service pay e.t.c.
3) Termination benefits.
These are benefits paid as a result of company decision to terminate the employees contract
before normal retirement or on the employee decision to accept an early voluntary retirement in
exchange of benefits.
4) Post employment benefits
 These are benefits that accrue to an employee after the normal retirement date e.g pensions and
post employment medical covers.

Pension schemes
There are two types of pension schemes
1) Defined contribution plan
In this plan the employer agrees to contribute a certain fixed or defined sum each year to the
funding agent but the benefit the employees get is not fixed, the amount to be paid as benefit
would depend on the performance of the investment in the fund. If the the investment performs
well the fund would be able to pay high benefits. Under this plan the risk and liability lies on the
employees.
2) Defined benefit plan
In this plan the benefits the employees get is defined i.e determined in advance, but the
contribution are not fixed. The amount of contribution is set such that an amount that is expected
would yield the desired results so that it earns the beneficiary the amount that was predetermined
in advance. If it becomes apparent that the assets in the fund are not sufficient , the employer will
be required to make additional contribution to make up the deficit.

Multi-employer plans; are defined contribution plans (other than state plans)
or defined benefit plans (other than state plans) that:
(a) pool the assets contributed by various entities that are not under
common control; and
(b) use those assets to provide benefits to employees of more than one
entity, on the basis that contribution and benefit levels are
determined without regard to the identity of the entity that
employs the employees.
Definitions relating to the net defined benefit liability (asset)
The present value of a defined benefit obligation is the present value, without
deducting any plan assets, of expected future payments required to settle
the obligation resulting from employee service in the current and prior
periods.
Plan assets comprise:
(a) assets held by a long-term employee benefit fund; and
(b) qualifying insurance policies.
Assets held by a long-term employee benefit fund are assets (other than
non-transferable financial instruments issued by the reporting entity) that:
(a) are held by an entity (a fund) that is legally separate from the
reporting entity and exists solely to pay or fund employee benefits;
and
(b) are available to be used only to pay or fund employee benefits, are
not available to the reporting entity’s own creditors (even in
bankruptcy), and cannot be returned to the reporting entity, unless
either:
(i) the remaining assets of the fund are sufficient to meet all the
related employee benefit obligations of the plan or the
reporting entity; or
(ii) the assets are returned to the reporting entity to reimburse
it for employee benefits already paid.
A qualifying insurance policy is an insurance policy1 issued by an insurer that
is not a related party (as defined in IAS 24 Related Party Disclosures) of the
reporting entity, if the proceeds of the policy:
(a) can be used only to pay or fund employee benefits under a defined
benefit plan; and
(b) are not available to the reporting entity’s own creditors (even in
bankruptcy) and cannot be paid to the reporting entity, unless
either:
(i) the proceeds represent surplus assets that are not needed for
the policy to meet all the related employee benefit
obligations; or
(ii) the proceeds are returned to the reporting entity to
reimburse it for employee benefits already paid.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. (See IFRS 13 Fair Value Measurement.)

Definitions relating to defined benefit cost (Expenses).

Service cost comprises:
(a) current service cost, which is the increase in the present value of the
defined benefit obligation resulting from employee service in the
current period;
b) past service cost, which is the change in the present value of the
defined benefit obligation for employee service in prior periods,
resulting from a plan amendment (the introduction or withdrawal
of, or changes to, a defined benefit plan) or a curtailment (a
significant reduction by the entity in the number of employees
covered by a plan);
c Interest cost; the annual interest accumulated on the unpaid balance of the projected benefit obligation
as an employee’s service time increases.

Actuarial gains and losses

Actuarial gains and losses can result from increases or decreases in the present value liabilities or
increases or decreases in the fair value of plan assets, causes include
- Early retirement
- Salary increases
- Changes in discount rates
- Un expected employee turnover.
Recognizing actuarial gains/losses
- Actuarial gains are based on assumptions
- Actuarial g/l arise because of actual outturn does not match the original estimates and experience
adjustment are needed.
- Actuarial assumptions may also be changed in the light of events such increasing life expectancy.
- Actuarial gains and losses are recognized directly in other comprehensive income.

Asset ceiling
Sometimes the deduction of plan assets from the pension obligation results in an asset. The
standard states that pension plan asset surpluses are measured at the lower of;
a) The amount calculated as per the plan asset.
b) The present value of any economic benefits available in the form of refunds from the plan or
reduction in future contributions to the plan.
- Applying “asset ceiling” means that a surplus can only be recognized to the extent that it will be
recoverable in the form of refunds or reduced contributions in future.
International Accounting Standard 12
Income Taxes

Objective
The objective of this Standard is to prescribe the accounting treatment for income taxes.
The principal issue in accounting for income taxes is how to account for the current and
future tax consequences of:
(a) the future recovery (settlement) of the carrying amount of assets (liabilities) that
are recognised in an entity’s statement of financial position; and
(b) transactions and other events of the current period that are recognised in an
entity’s financial statements.

Definitions
The following terms are used in this Standard with the meanings specified:
Accounting profit is profit or loss for a period before deducting tax expense.
Taxable profit (tax loss) is the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities, upon
which income taxes are payable (recoverable).
The following are the reasons why the two profits may differ.
1) Permanent differences; These are those items reflected in the profit or loss account but which are
disallowable for tax purposes e.g depreciation and donations.
2) Timing differences ; These are those items reflected in the p&L account in a period different from
the period in which they are reflected for tax purposes e.g capital allowances verses depreciation,
loan interest considered on cash basis for tax purposes but on accrual basis in the financial
statement.
- Deferred tax arise because of the existence of timing differences, These differences originate in
one period and are capable of reversing in one or subsequent periods.
Tax expense (tax income) is the aggregate amount included in the
determination of profit or loss for the period in respect of current tax and
deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect
of the taxable profit (tax loss) for a period.
Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable temporary differences.
Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.

Unused tax losses and unused tax credits

A deferred tax asset shall be recognised for the carryforward of unused tax
losses and unused tax credits to the extent that it is probable that future
taxable profit will be available against which the unused tax losses and
unused tax credits can be utilised.
The criteria for recognising deferred tax assets arising from the carryforward
of unused tax losses and tax credits are the same as the criteria for recognising
deferred tax assets arising from deductible temporary differences. However,
the existence of unused tax losses is strong evidence that future taxable profit
may not be available. Therefore, when an entity has a history of recent losses,
the entity recognises a deferred tax asset arising from unused tax losses or tax
credits only to the extent that the entity has sufficient taxable temporary
differences or there is convincing other evidence that sufficient taxable profit
will be available against which the unused tax losses or unused tax credits can
be utilised by the entity.

An entity considers the following criteria in assessing the probability that

taxable profit will be available against which the unused tax losses or unused
tax credits can be utilised:
(a) whether the entity has sufficient taxable temporary differences
relating to the same taxation authority and the same taxable entity,
which will result in taxable amounts against which the unused tax
losses or unused tax credits can be utilised before they expire;
(b) whether it is probable that the entity will have taxable profits before
the unused tax losses or unused tax credits expire;
(c) whether the unused tax losses result from identifiable causes which
are unlikely to recur; and
(d) whether tax planning opportunities (see paragraph 30) are available to
the entity that will create taxable profit in the period in which the
unused tax losses or unused tax credits can be utilised

Temporary differences are differences between the carrying amount of an

asset or liability in the statement of financial position and its tax base.
Temporary differences may be either:
(a) taxable temporary differences, which are 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; or
(b) deductible temporary differences, which are 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.
The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes.
Tax expense (tax income) comprises current tax expense (current tax income)
and deferred tax expense (deferred tax income).
Tax base
The tax base of an asset is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to an entity when it
recovers the carrying amount of the asset. If those economic benefits will not
be taxable, the tax base of the asset is equal to its carrying amount.

Investments in subsidiaries, branches and associates and

interests in joint arrangements
Temporary differences arise when the carrying amount of investments in
subsidiaries, branches and associates or interests in joint arrangements
(namely the parent or investor’s share of the net assets of the subsidiary,
branch, associate or investee, including the carrying amount of goodwill)
becomes different from the tax base (which is often cost) of the investment or
interest. Such differences may arise in a number of different circumstances,
for example:
(a) the existence of undistributed profits of subsidiaries, branches,
associates and joint arrangements;
(b) changes in foreign exchange rates when a parent and its subsidiary are
based in different countries; and
(c) a reduction in the carrying amount of an investment in an associate to
its recoverable amount.
In consolidated financial statements, the temporary difference may be
different from the temporary difference associated with that investment in
the parent’s separate financial statements if the parent carries the investment
in its separate financial statements at cost or revalued amount.

An entity shall recognise a deferred tax liability for all taxable temporary
differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements, except to the extent that
both of the following conditions are satisfied:
(a) the parent, investor, joint venturer or joint operator is able to
control the timing of the reversal of the temporary difference; and
(b) it is probable that the temporary difference will not reverse in the
foreseeable future.

Current and deferred tax arising from share-based

payment transactions
In some tax jurisdictions, an entity receives a tax deduction (ie an amount that
is deductible in determining taxable profit) that relates to remuneration paid
in shares, share options or other equity instruments of the entity. The amount
of that tax deduction may differ from the related cumulative remuneration
expense, and may arise in a later accounting period. For example, in some
jurisdictions, an entity may recognise an expense for the consumption of
employee services received as consideration for share options granted, in
accordance with IFRS 2 Share-based Payment, and not receive a tax deduction
until the share options are exercised, with the measurement of the tax
deduction based on the entity’s share price at the date of exercise.

International Financial Reporting Standard 13

Fair Value Measurement
Objective
This IFRS:
(a) defines fair value;
(b) sets out in a single IFRS a framework for measuring fair value; and
(c) requires disclosures about fair value measurements.
Fair value is a market-based measurement, not an entity-specific
measurement. For some assets and liabilities, observable market transactions
or market information might be available. For other assets and liabilities,
observable market transactions and market information might not be
available. However, the objective of a fair value measurement in both cases is
the same—to estimate the price at which an orderly transaction to sell the asset
or to transfer the liability would take place between market participants at the
measurement date under current market conditions (ie an exit price at the
measurement date from the perspective of a market participant that holds the
asset or owes the liability).
When a price for an identical asset or liability is not observable, an entity
measures fair value using another valuation technique that maximises the use
of relevant observable inputs and minimises the use of unobservable inputs.
Because fair value is a market-based measurement, it is measured using the
assumptions that market participants would use when pricing the asset or
liability, including assumptions about risk. As a result, an entity’s intention to
hold an asset or to settle or otherwise fulfil a liability is not relevant when
measuring fair value.
The definition of fair value focuses on assets and liabilities because they are a
primary subject of accounting measurement. In addition, this IFRS shall be
applied to an entity’s own equity instruments measured at fair value.
Scope
This IFRS applies when another IFRS requires or permits fair value
measurements or disclosures about fair value measurements (and
measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements).
The measurement and disclosure requirements of this IFRS do not apply to the
following:
(a) share-based payment transactions within the scope of IFRS 2
Share-based Payment;
(b)leasing transactions accounted for in accordance with IFRS 16 Leases;
(c) measurements that have some similarities to fair value but are not fair
value, such as net realisable value in IAS 2 Inventories or value in use in
IAS 36 Impairment of Assets.
Definition of fair value
This IFRS defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

The transaction
A fair value measurement assumes that the asset or liability is exchanged
in an orderly transaction between market participants to sell the asset or
transfer the liability at the measurement date under current market
conditions.
A fair value measurement assumes that the transaction to sell the asset or
transfer the liability takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most advantageous market
for the asset or liability.

Market participants
An entity shall measure the fair value of an asset or a liability using the
assumptions that market participants would use when pricing the asset or
liability, assuming that market participants act in their economic best
interest.
In developing those assumptions, an entity need not identify specific market
participants. Rather, the entity shall identify characteristics that distinguish
market participants generally, considering factors specific to all the following:
(a) the asset or liability;
(b) the principal (or most advantageous) market for the asset or liability;
and
(c) market participants with whom the entity would enter into a
transaction in that market.

The price
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction in the principal (or most
advantageous) market at the measurement date under current market
conditions (ie an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique.
The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability shall not be adjusted for transaction costs.
Transaction costs shall be accounted for in accordance with other IFRSs.
Transaction costs are not a characteristic of an asset or a liability; rather, they
are specific to a transaction and will differ depending on how an entity enters
into a transaction for the asset or liability.
Transaction costs do not include transport costs. If location is a characteristic of
the asset (as might be the case, for example, for a commodity), the price in the
principal (or most advantageous) market shall be adjusted for the costs, if any,
that would be incurred to transport the asset from its current location to that
market.

Fair value at initial recognition

When an asset is acquired or a liability is assumed in an exchange transaction
for that asset or liability, the transaction price is the price paid to acquire the
asset or received to assume the liability (an entry price). In contrast, the fair
value of the asset or liability is the price that would be received to sell the
asset or paid to transfer the liability (an exit price). Entities do not necessarily
sell assets at the prices paid to acquire them. Similarly, entities do not
necessarily transfer liabilities at the prices received to assume them.

In many cases the transaction price will equal the fair value (eg that might be
the case when on the transaction date the transaction to buy an asset takes
place in the market in which the asset would be sold).

Valuation techniques
An entity shall use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
value, maximising the use of relevant observable inputs and minimizing the
use of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which
an orderly transaction to sell the asset or to transfer the liability would take
place between market participants at the measurement date under current
market conditions. Three widely used valuation techniques are the market
approach, the cost approach and the income approach. The main aspects of
those approaches are summarised in paragraphs B5–B11. An entity shall use
valuation techniques consistent with one or more of those approaches to
measure fair value.

Inputs to valuation techniques

General principles
Valuation techniques used to measure fair value shall maximise the use of
relevant observable inputs and minimise the use of unobservable inputs.
Examples of markets in which inputs might be observable for some assets and
liabilities (eg financial instruments) include exchange markets, dealer
markets, brokered markets and principal-to-principal markets

Fair value hierarchy

To increase consistency and comparability in fair value measurements and
related disclosures, this IFRS establishes a fair value hierarchy that categorises
into three levels (see below) the inputs to valuation techniques
used to measure fair value. The fair value hierarchy gives the highest priority
to quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Level 1 inputs
Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date.

A quoted price in an active market provides the most reliable evidence of fair
value and shall be used without adjustment to measure fair value whenever
available.
Example is ordinary shares in a listed company.

Level 2 inputs
Level 2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly.

If the asset or liability has a specified (contractual) term, a Level 2 input must
be observable for substantially the full term of the asset or liability. Level 2
inputs include the following:

(a) quoted prices for similar assets or liabilities in active markets.

(b) quoted prices for identical or similar assets or liabilities in markets
that are not active.
(c) inputs other than quoted prices that are observable for the asset or
liability,
for example: Similar building held and used in similar location.

Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability.
Unobservable inputs shall be used to measure fair value to the extent that
relevant observable inputs are not available, thereby allowing for situations in
which there is little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective remains
the same, ie an exit price at the measurement date from the perspective of a
market participant that holds the asset or owes the liability. Therefore,
unobservable inputs shall reflect the assumptions that market participants
would use when pricing the asset or liability, including assumptions about
risk.
Example is cash generating unit.

International Financial Reporting Standard 9

Financial Instruments
Chapter 1 Objective
The objective of this Standard is to establish principles for the financial
reporting of financial assets and financial liabilities that will present relevant and
useful information to users of financial statements for their assessment of the
amounts, timing and uncertainty of an entity’s future cash flows.

Financial instruments
This is a contract that gives rise to a financial asset of one business entity and a financial liability to
another entity or equity instrument .
Financial asset;
- Cash,
- Contractual right to receive cash or another financial asset from another entity.
- An equity instrument of another entity.
Financial liability;
- Contractual obligation to deliver cash or another financial asset to another entity or to exchange
financial asset or liability with another entity under conditions that are potentially unfavorable to
the entity.

Recognition and derecognition

Initial recognition
An entity shall recognise a financial asset or a financial liability in its
statement of financial position when, and only when, the entity becomes
party to the contractual provisions of the instrument .
Derecognition of financial assets
Financial assets are derecognized when;
- The contractual right to the cash flow from financial asset expires
- When the entity transfers the financial asset or substantially transfers all the risks and rewards of
ownership of financial asset to another party.
Rules to derecognize financial liabilities;
- When it is extinguished that the liability shown in the financial statement are discharged,
cancelled or expired.
- The liability is discharged when the entity delivers cash,
- The liability is cancelled when the entity is legally released from obligation to creditor,
- The liability is expired due to passage of time.
Classification of financial assets.
Financial assets are normally classified based on the entity’s business model for managing
financial assets and the contractual cash flow characteristics of the financial asset.
 - The business model should tell you why the asset is held. The objective of business
model can either be to hold the asset in order to collect the contractual cash flows
like interest and principal or alternatively to collect the cash flow and sell the asset.
- The contractual cash flow characteristic is that, contractual terms of financial assets
gives rise on specified dates to cash flows that are solely payment of principal and
interest on the principal amount outstanding. Based on this 2, ifrs 9 classifies
financial assets into 3 categories.
1) MEASURED AT AMORTIZED COST.
A financial asset shall be measured at amortised cost if both of the
following conditions are met:
(a) the financial asset is held within a business model whose objective is
to hold financial assets in order to collect contractual cash flows
and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
2) MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE
INCOMES (OCI
A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
(a) the financial asset is held within a business model whose objective is
achieved by both collecting contractual cash flows and selling
financial assets and
(b) the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.

3) MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS

A financial asset shall be measured at fair value through profit or loss
unless it is measured at amortized cost, or at fair value through other
comprehensive income . However an entity may make an irrevocable election at
initial recognition for particular investments in equity instruments that
would otherwise be measured at fair value through profit or loss to present
subsequent changes in fair value in other comprehensive income.

Measurement
Initial measurement
Except for trade receivables, at initial recognition, an entity shall measure a financial asset
or financial liability at its fair value plus or minus, in the case of a financial asset or
financial liability not at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition or issue of the financial asset or
financial liability.
If the financial asset is measured at fair value through profit or loss, any transaction cost is
charged directly to profit or loss as an expense.
- If financial asset is measured at fair value through other comprehensive income, any
transaction cost is added directly to the instrument at initial recognition.
- In case of financial liabilities any transaction cost is subtracted from the cost of the
instrument. Financial liabilities can only be measured at fair value through profit or
loss, these are liabilities held for trading purpose, examples; interest rate swap,
futures, forward contracts e.t.c will be treated at fair value through p&l ,and at
amortized cost these will include accounts payable, notes payable, bonds payable
e.t,c.

EMBEDDED DERIVATIVES
An embedded derivative is a financial instrument that includes a host contract and a
derivative component, for example put option on an equity instrument or an equity
conversion option embedded in debt instrument.
The embedded instrument should be separated from host contract and accounted
for as a derivative. If it is impossible to separate, the entire hybrid instrument
should be treated as a financial instrument held at fair value through profit or loss.
- The embedded derivative can be separated from host contract if the following
conditions are met.
a) The economic characteristics are not closely related,
b) Separate instrument would meet the definition of a derivative and,
c) Hybrid instrument is not at fair value through profit and loss.
How to separate a compound instrument;
- Compute the present value of the instrument,
- Determine the fair value of the instrument.
- Find the difference
Equity component = fair value- present value.
Equity component should be presented as a reserve in the statement of financial
position.
The liability should be amortized to determine finance cost and liability at the end
of each reporting year.

Example;
On 1 April 2017, G Ltd issued sh 3,000,000, 6% convertible bonds at par. Each
bond could be redeemed for cash at par or converted into three ordinary shares on
31 march 2020. The interest due on the bonds was paid on 1 April 2018. The
equivalent effective interest rate on similar bonds without conversion right is 9%
per annum. The only accounting entries which had been made as at 31 march 2018
were to recognize the sh 3,000,000 cash proceeds as non current liability.
Required
Evaluate the treatment G Ltd has given the above issues and offer any correction
where necessary. (10 marks).

HEDGING
For accounting purposes, hedging means designating one or more hedging
instrument so that their change in fair value is an offset to the change in fair value
or cash flows of a hedged item.
Hedged item; This is an asset, liability or unrecognized firm commitment that
exposes the entity to risk.
There are three types of hedging relationships:

(a) Fair value hedge:

a hedge of the exposure to changes in fair value of a recognized asset or liability or an
unrecognized firm commitment, or a component of any such item, that is attributable to a
particular risk and could affect profit or loss.
(b) cash flow hedge:
a 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 (such as all or some
Future interest payments on variable-rate debt) or a highly probable forecast transaction,
and could affect profit or loss.
(c) Hedge of a net investment in a foreign operation as defined in IAS 21.
IAS 21 defines a net investment in foreign operation as the amount the reporting
entity’s interest in the net assets of that operation.
Conditions for hedge accounting.
Before a hedging relationship qualifies for hedge accounting all the following conditions
must be met.
1) The hedging relationship must be designated at its inception as a hedge based on the
entity’s risk management objective and strategy.
2) The hedge is expected to be highly effective in achieving offsetting changes in fair value
or cash flows attributable to the hedged risk.
3) The effectiveness of the hedge must be measured reliably.
4) The hedge is assessed on an ongoing basis (annually) and has been effective during the
reporting period.

IMPAIRMENT OF FINANCIAL ASSETS

Impairment rules under IFRS 9 apply to investment in debt (loan asset) that are held at
amortized cost or at fair value through other comprehensive incomes.
An expected credit loss before default occurs, and it uses 3 stage model to recognize loss
incurred.
Expected credit loss
Stage one; 12 month expected credit loss.
Initial recognition and when no subsequent, significant deterioration of credit quality
- On initial recognition the investor is required to assess the 12 month credit loss on
its investment in debt. The credit loss is the difference between the cash received
under the terms of the contract and the amount expected to be received, discounted
to present value.
Stage 2; lifetime credit loss
Significant deterioration in credit quality e.g the creditor defaults in 30 days.
Stage 3; lifetime credit loss
Objective evidence of impairment.
In stage 2&3 impairment is recognized at the present value of expected credit
shortfall (lifetime expected credit loss)
Example
G Ltd purchased 5% debentures in company B on 1 jan 2018 for sh 100,000. The
term of the debenture was 5 years and the maturity value is sh 130,525. The
effective rate of interest on debenture is 10% and the ifrs 9 conditions are satisfied
for investment to be held at amortized cost. At the end of year 2019 B Ltd went into
liquidation, all interest had been paid until that date. On 31st dec 2019 the liquidator
of B Ltd announced that no further interest would be paid and only 80% of the
maturity value would be repaid, on the original repayment date.
RQD
Show how G Ltd will account for the above debenture. (8marks).

Other standards to consider

1) Ifrs 15 revenue from contracts with customers
2) IAS 16 accounting for ppe
3) IAS 2 accounting for inventories.
4) IAS 38 accounting for intangible assets.

CONSOLIDATION/ GROUP ACCOUNTS/ BUSINESS COMBINATION.

IFRS3-Business combination
IFRS10- Consolidation
IAS 27- Separate financial statements
IAS 28 –Accounting for associates
IFRS 11- Joint arrangements
IAS 7- Group cash flow statement.
IFRS 5- Discontinued operation
IAS 21- Foreign currency translation.
Business combination is bringing 2or more different entities under one reporting
entity. The main aim of business combination is to enable the acquirer company to
report on the financial transactions of the acquire company as if they belong under
one economic entity.
Why the parent company would be interested in the consolidation
1) To exploit tax advantages
2) Goodwill associated with large organizations
3) Exploitation of intra group trade
4) Business integration i.e group companies e.g banking, insurance, manufacturing
e.t.c
Not all parent companies qualify to prepare consolidated financial statements
1) If the parent itself is a wholly owned by another company
2) If the company’s shares are not traded on the securities exchange and it is not in
the process of listing
3) If the entity is not in the process of issuing shares on the securities exchange.

Key terms
 1) Parent company; this is the company which obtains the controlling interest in one
or more other companies i.e it is the acquirer company.
2) Subsidiary company; it is an investee company where the parent company
controls more than 50% shareholding (51-100%).
3) Associate company; its an investee company where the parent holds 20-49%
4) Joint arrangement; is an entity in which the parent controls exactly 50%
shareholding.
5) Non controlling interest; this is the portion which remains un acquired by the
parent company in the subsidiary. It is the portion attributable to minority
shareholders in the subsidiary.
- The NCI should be accounted for in the books of the parent company using either of
the following methods.
a) Fair value method;
Under this method the NCI is measured and accounted for in the consolidated
financial statement at their market value. The NCI should also be recognized with
the goodwill arising on acquisition of the subsidiary.
b) Partial method;
Under this method the NCI will be recognized at their cost without taking into
consideration the market value. Goodwill arising on acquisition of the subsidiary
will not be allocated to NCI under this method.
GOODWILL
IFRS 3 defines goodwill as future economic benefits expected from an asset and which
can’t be separately identified from the asset.
- For consolidation purpose goodwill is considered to be the difference between
purchase consideration and the share of net assets acquired in the subsidiary.

Goodwill = purchase consideration- share of net assets in the subsidiary

Net assets include;

- Ordinary share capital
- Share premium
- Revaluation reserve
- General reserve
- Preference share capital
- Pre-acquisition profit.
Methods of determining goodwill
Partial method;
Under this method, goodwill arising on acquisition is that attributable to the parent
company only. i.e NCI is not recognized with their share.
Full or Fair value method;
Under this method goodwill arising on acquisition is that attributable to both the parent
and the subsidiary.
- For fair value method to be applicable NCI must be stated at their market value at
the date of acquisition.
Consolidation adjustments for goodwill
IFRS 3 requires that positive goodwill should be capitalized and tested for an impairment
review and reflected under noncurrent asset in the consolidated statement of financial
position. However negative goodwill should be treated as income in the consolidated profit
or loss. Negative goodwill should not be subjected to impairment.

Deferred consideration
Sometimes the purchase consideration may include some deferred consideration which
doesn’t become payable until a later date. When calculating the purchase consideration
deferred payment is discounted to its present value at the date of acquisition, the difference
between the future payment and present value is treated as interest expense the profit or
loss statement.

Pre-acquisition and post acquisition profits and how it is recognized.

The retained earnings existing in the subsidiary at the date of acquisition is called pre-
acquisition profit and its not income to the parent but a return on investment therefore it
should be capitalized and used to determine goodwill in the cost of control as a net asset.
- Profit after acquisition is called post acquisition profit and its income to the parent
therefore group share should be credited to the retained earnings of the parent and
consolidated.

Example of consolidation
H Ltd acquired 75% of the shares in S Ltd on 1st jan 2019 when the retained earnings were
ksh 15,000. The market price of S’s shares at the date of acquisition was sh 1.60. H Ltd
values non controlling interest at fair value at the date of acquisition. Goodwill is not
impaired.
The statement of financial position of H Ltd and S Ltd as at 31st dec 2019 were as follows.

H Ltd S Ltd
Ksh Ksh
Property plant & equip 60,000 50,000
Shares in S Ltd 68,000 -
128,000

Current assets 52,000 35,000

180,000 85,000
Share capital 100,000 50,000
Retained earnings 70,000 25,000

Current liabilities 10,000 10,000

180,0000 85,0000

Prepare consolidated statement of financial position of H Ltd.

IAS 28 ASSOCIATES
This is an entity in which the parent owns 20-49% of the share holding. The parent has no
control over the associate company but instead they exercise significant influence over the
associate.
- Significant influence is the power to participate in the financial and operating
policies of the associate.
Indicators of significant influence
1) Provision of essential information to the associate
2) Representation to the board of directors
3) Assistance of technical management personnel to the investee company
4) Supply of key raw materials
5) Formation of key policies e.g dividend policy.
Accounting for associates in the consolidated f/s
Since associate is not a full group member the assets and liabilities should not be
consolidated by the parent company.
As per IAS 28 associates should be accounted for using equity method whereby it will be
recognized at cost and thereafter adjusted by post acquisition reserves (profit) less
impairment loss and any unrealized profit on closing inventory in associate and parent.
The investment in associate is determined as follows
Cost of investment xx
Add post acq profit xx
Less impairment loss (xx)
Less ups (xx)
Investment in associate xx
The only item to be recognized in the group balance sheet from associate is investment in
associate.

Exemptions to the use of equity method when consolidating for associates.

1) The parent company itself is partly or fully owned by another company
2) Where the entity’s equity is not traded on any public securities
3) If the market investment in associate was acquired with the aim of disposing off
within 12 month.

JOINT ARRANGEMENT IFRS 11

This is an arrangement of which 2 or more parties have a joint control.
Types of joint arrangement
Joint operation
This is a joint arrangement whereby the parties that have joint control of the arrangement
have rights to the assets and obligation for liabilities.
In a joint operation the joint operator recognizes to its interest;
a) Its assets including its share of any assets held
b) Liabilities
c) Revenue from the sale
d) Its expenses
Joint venture
Is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
 A joint venture recognizes its interest in a joint venture as an investment and shall
account for that investment using equity method in accordance with IAS 28
investments in associates and joint ventures.

- The core principle in IFRS 11 is that a party to the joint arrangement determines
the type of joint arrangement in which it is involved by assessing its rights and
obligation and accounts for those rights and obligation in accordance with that type
of joint arrangement.

CONTROL
Control means power to govern the financial and operating activities of another company.
Control can be exercised in different ways
1) Where the parent has more than 50% shareholding
2) Where the parent has more than 50% voting rights
3) The parent has power to remove majority of the B.O.D
4) The parent has power to govern the financial and operational activity by way of
statute.

Balance sheet adjustments.

1) Debentures in the subsidiary
If debentures were acquired by the parent co then the amount paid to acquire
debentures will be added to the purchase consideration used to acquire ordinary
shares. The group share of debenture capital acquired will be added to other net
assets to determine goodwill. The nci share will be recognized as a noncurrent
liability in the balance sheet.
2) Intercompany debts/Owings
A group member may owe some amounts to another group member, this is referred
to as intercompany owing. One group member will recognize the amount as
receivable while another group member will recognize the same amount as payable.
For consolidation purpose intercompany debts should be eliminated from the
receivable and payables.
Note; intercompany debts may not be equal to each other due to items in transit, the
items in transit should be adjusted by creating a cash in transit account and
subtracting the same amount from the receivables.
3) Unrealized profit on closing stock
One group member may have sold goods to another group member at a price higher
than the original cost, thus the selling company reporting a profit. This goods may
not have been sold at the end of the year by the purchasing company giving rise to
ups due to unsold goods. The ups should be determined and eliminated from the
inventory and retained profit as follows.

Downstream transaction
This is where the parent sells goods to the subsidiary; ups will be eliminated by
subtracting from the profit of the parent and from the inventory on consolidation.
Upstream transaction
 This is where the subsidiary sells goods to the parent company, ups will be
subtracted from the profit of the subsidiary before the parent takes its share and
from the inventory.
4) Fair value adjustment (revaluation adjustment)
When the subsidiary is acquired the net assets of the subsidiary may be revalued
and the company may fail to incorporate revaluation surplus or loss in the books.
Revaluation arises whenever there is a difference between the fair value of the non
current asset and its carrying amount.

With revaluation surplus - dr; ppe

Cr; revaluation reserve
With revaluation loss - dr; revaluation reserve
Cr; ppe
Transfer the revaluation reserve to the cost of control as a net asset for goodwill
computation.

Depreciation adjustment
If revaluation gain arises in the books of the subsidiary on the date of acquisition
then depreciation undercharge must be adjusted by subtracting depreciation from
the profit of the subsidiary and from ppe on consolidation.

5) Intercompany sale of fixed asset.

This arises when an item of fixed asset has been transferred to a group member at a
profit or loss. The transfer of asset between group members should not be seen as a
resale, therefore any profit or loss realized should be eliminated on consolidation i.e
Dr retained profit
Cr asset a/c.
Depreciation overcharge should also be determined an eliminated as follows
Dr asset a/c
Cr retained earnings.

DISPOSAL OF SHARES IN THE SUBSIDIARY.

The parent company may dispose off shares in the subsidiary during the year, as a
result the former subsidiary may remain a subsidiary, become associate, joint
venture, simple investment or full disposal.
The above case will be accounted as follows;
1) Where the former subsidiary remains a subsidiary after disposal
Because a subsidiary is still a subsidiary, consolidate incomes and expenses as
usual.
- Profit attributable to NCI will be determined based on 2 percentages of control i.e
before disposal and after disposal.
2) Where the former subsidiary is converted into associate or joint venture.
In this case the parent company has lost control and therefore IAS 28 will be
applied.
- In the profit or loss statement, consolidate revenues, incomes and expenses of the
former subsidiary up to the date of disposal time apportioned accordingly.
 Thereafter recognize the former subsidiary as an associate where only one item will
be reported and that is profit after tax from associate time apportioned.
- In the statement of financial position do not consolidate the former subsidiary but
instead recognize the investment in associate.
3) Full disposal
In the income statement, consolidated the subsidiary i.e revenues and expenses
up to the disposal date time apportioned. In the balance sheet do not recognize
anything from the former subsidiary.

GAIN OR LOSS ON DISPOSAL OF SHARES IN THE SUBSIDIARY

There are 2 gains or loss on disposal of shares in the subsidiary i.e the gain or
loss to reported by the parent company in its individual financial statement and
the gain to be reported in the group.
a) Gain or loss to be reported by the parent.
This is basically the difference between cash proceeds and the cost of
investment disposed.

Cash proceeds xx
Less cost of investment disposed (xx)
Gain or loss xx

Gain or loss to be reported in the group;

Cash proceeds xx
Add fair of the remaining investment
Where control was lost xx
Less group share of net assets on disposal date
Ordinary share capital xx
Share premium xx
Revaluation reserve xx
Profits up to disposal date xx ( xx)
Less unpaired goodwill (xx)
Gain or loss xx/xx

FOREIGN SUBSIDIARY (IAS 21)

Sometimes the parent company may have a subsidiary in the foreign land.
The transactions of the subsidiary would be reported using the foreign
currency which would be the functional currency of the foreign subsidiary.
This transaction need to be translated to the presentation currency using the
presentation currency method in accordance with ias 21.
Items would be translated using presentation currency method as follows;
1) All assets and liabilities would be translated using the closing exchange
rate, being the exchange rate prevailing at the balance sheet date.
2) Ordinary share capital, pre-acquisition profit and all the reserves will be
translated using the historical exchange rate i.e exchange rate prevailing
when the subsidiary was acquired.
3) Post acquisition retained earnings or reserves will be determined as the
balancing figure from the translated balance sheet. However if the post
acquisition period is exactly one year then the translated profit for the
year will be the post acquisition retained earnings.
4) Profit and loss items will be translated using the average exchange rate.
5) The exchange difference arising will be reported as a reserve in the
statement of financial position.
Note ; exchange difference is the difference arising when units of one
currency are translated to the units of another currency using different
exchange rates.