FINANCIAL REPORTING AND
ANAYLSIS
CPA ERICK MOMANYI 0729224223
, FINANCIAL REPORTING AND ANALYSIS
ACCOUNTING FOR ASSETS AND LIABILITIES
INVESTMENT PROPERTY (IAS 40)
These are assets held to earn rentals or for capital appreciation or both rather than for use in the production, supply,
administration or for sale in the ordinary course of business.eg Land and building.
Examples of investment property include:
(a) Land held for long term capital appreciation rather than short term sale in the ordinary course of business.
(b) Land held for predetermined future use.
(c) A building owned by the entity or held under a finance lease by the entity ad leased out.
(d) A building which is vacant but is held to be leased out under one or more operating lease.
(e) Property that is being constructed for future use as an investment property.
Property which are not considered as investment property.
a) Land held for ordinary use by the entity.
b) Building held for use rather than capital appreciation or to earn rentals.
c) Asset held for normal use of production of goods or services.
Measurement of investment property.
1. Initial measurement-investment property shall be measured at cost. Cost shall include the purchase price and any other direc
attributable cost incurred on acquisition of investment property.
2. Subsequent measurement-an entity shall choose either the use of:
Cost model. -this requires asset to be measured at cost less accumulated depreciation and any impairment loss in accordance
with IAS 16. An entity that will adopt cost model shall disclose the fair value of its investment property in the notes to the
financial statements
Fair value model. -under fair value model, investment property is re-measured at the end of each reporting period. Any fair
value gain or loss shall be disclosed and reported to profit and loss account during the period they arose.
Recognition criteria for investment property.
Investment property should be recognized as an asset when:
1. It’s probable that future economic benefit will flow from that asset to the entity.
2. The cost/fair value of the investment property can be measured reliably.
3. The entity controls the investment property.
They are measured at cost or fair value.
CPA ERICK MOMANYI 0729224223 pg. 1
, PROPERTY, PLANT AND EQUIPMENT (PPE) IAS 16
IAS 16 PPE outlines the accounting treatment of most types of ppe items. It further stipulated the principles for recognizing
property, plant and equipment as assets, measuring their carrying amount and the depreciation and impairment losses to be
recognized in relation to them.
PPE are initially measured at its cost, subsequently measured either at cost or revaluation model.
Disclosure requirements for PPE
. The following information should be presented in respect of item of PPE:
1. Basis of measuring carrying amount.
2. Depreciation method used and its rates.
3. Useful life of the asset.
4. The gross carrying amount, accumulated depreciation and impairment losses at the beginning and end of period.
5. A reconciliation of the carrying amount at the beginning and end of the period showing:
Additions
Disposal
Asset classified as held for sale.
Impairment losses and reserves of impairment.
NB: De-recognition of an item of PPE is done on disposal or when no further benefits are expected from the use or disposal.
Disclosure requirement for PPE stated at revalued amount.
The carrying amount of the PPE.
Changes in revaluation surplus/ loss for Ppe recognizes under other comprehensive income.
Disclosure of specific accounting policies and effective date of revaluation and whether an independent valuer was involved.
A reconciliation between the carrying amount of revaluation surplus at the beginning and at the end of the period i.e.,
indicating the movement balances.
FINANCIAL INSTRUMENTS-IFRS 9
RECOGNITION AND MEASUREMENT
A financial instrument is a contract that gives rise to a financial asset to one party and a financial liability to another party e.g.,
cash, bank balance, commercial papers, loan, bond, debt, equity.
classification of financial instruments
1.financial assets
2.financial liability
3.Derivatives
4. Equity instruments
CPA ERICK MOMANYI 0729224223 pg. 2
, Financial assets.
classified into 4 categories which include:
1. Financial asset at fair value through other income-These are short term investments e.g., treasury bills. Recognized to p& l
2. Financial asset at fair value through other comprehensive incomes-These are long term e.g., bonds, debentures, shares etc.
Recognized under OCI
3. Financial assets at amortized cost (applicable to debt instruments only) long term e.g., debentures. Recognized under OCI
Provisions governing initial measurement and subsequent measurement of financial instruments.
All financial instruments are initially measured at fair value.
Subsequently, all financial instruments are measured at either amortized cost or fair value.
FAIR VALUE HERARCHY OF INPUT MEASUREMENT.
Fair value hierarchy categorizes the input used in valuation techniques into 3 levels.
1. Level 1 input (Quoted prices)
Level 1 input are quoted prices in the active market for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
2. Level 2 input.
Level 2 input are inputs other than quoted market prices included within level 1 that are observable for an asset or liability eithe
directly or indirectly. They include quoted prices for similar assets or liabilities (but not identical0 in an active market and quote
prices for assets or liabilities in markets that are not active.
3 Level 3 input.
Level 3 input are unobservable inputs for the asset or liability. Unobservable inputs should be used to measure fair value to the
extent that observable inputs are not available and where there is very little market activity for the assets or liability at the
measurement date.
Requirement for de-recognition of financial instruments.
De-recognition is the removal of a previously recognized financial instrument from an entity balance sheet. A financial
instrument should be derecognized if either the entity’s contractual rights or the asset’s cash flows have expired, or the asset ha
been transferred to a third party along with the risks of ownership.
If the risks and reward of ownership have not passed to the buyer, then the selling entity must still recognize the entire financi
instrument and treat any consideration received as a liability.
Impact of IFRS 9 on the tax expenses of commercial banks. (may 2018 Q5b)
IFRS 9 encompasses the accounting for financial instruments and their impairment.
The objective of IFRS 9 is to recognize a whole year and lifetime expected credit losses for all financial instruments for which
there has been a significant increase in credit risk.
There is a high likelihood that the only incurred credit losses recognized on nonperforming loans and advances under IFRS 9 w
be allowed as tax- deductible.
The major issue with the adoption of IFRS 9 for banks is the effect of bigger and more volatile impairment losses on capital
ratios. From tax perspective, it may also mean significantly lower profits but higher scrutiny of specific impairment loses, a apart
CPA ERICK MOMANYI 0729224223 pg. 3
ANAYLSIS
CPA ERICK MOMANYI 0729224223
, FINANCIAL REPORTING AND ANALYSIS
ACCOUNTING FOR ASSETS AND LIABILITIES
INVESTMENT PROPERTY (IAS 40)
These are assets held to earn rentals or for capital appreciation or both rather than for use in the production, supply,
administration or for sale in the ordinary course of business.eg Land and building.
Examples of investment property include:
(a) Land held for long term capital appreciation rather than short term sale in the ordinary course of business.
(b) Land held for predetermined future use.
(c) A building owned by the entity or held under a finance lease by the entity ad leased out.
(d) A building which is vacant but is held to be leased out under one or more operating lease.
(e) Property that is being constructed for future use as an investment property.
Property which are not considered as investment property.
a) Land held for ordinary use by the entity.
b) Building held for use rather than capital appreciation or to earn rentals.
c) Asset held for normal use of production of goods or services.
Measurement of investment property.
1. Initial measurement-investment property shall be measured at cost. Cost shall include the purchase price and any other direc
attributable cost incurred on acquisition of investment property.
2. Subsequent measurement-an entity shall choose either the use of:
Cost model. -this requires asset to be measured at cost less accumulated depreciation and any impairment loss in accordance
with IAS 16. An entity that will adopt cost model shall disclose the fair value of its investment property in the notes to the
financial statements
Fair value model. -under fair value model, investment property is re-measured at the end of each reporting period. Any fair
value gain or loss shall be disclosed and reported to profit and loss account during the period they arose.
Recognition criteria for investment property.
Investment property should be recognized as an asset when:
1. It’s probable that future economic benefit will flow from that asset to the entity.
2. The cost/fair value of the investment property can be measured reliably.
3. The entity controls the investment property.
They are measured at cost or fair value.
CPA ERICK MOMANYI 0729224223 pg. 1
, PROPERTY, PLANT AND EQUIPMENT (PPE) IAS 16
IAS 16 PPE outlines the accounting treatment of most types of ppe items. It further stipulated the principles for recognizing
property, plant and equipment as assets, measuring their carrying amount and the depreciation and impairment losses to be
recognized in relation to them.
PPE are initially measured at its cost, subsequently measured either at cost or revaluation model.
Disclosure requirements for PPE
. The following information should be presented in respect of item of PPE:
1. Basis of measuring carrying amount.
2. Depreciation method used and its rates.
3. Useful life of the asset.
4. The gross carrying amount, accumulated depreciation and impairment losses at the beginning and end of period.
5. A reconciliation of the carrying amount at the beginning and end of the period showing:
Additions
Disposal
Asset classified as held for sale.
Impairment losses and reserves of impairment.
NB: De-recognition of an item of PPE is done on disposal or when no further benefits are expected from the use or disposal.
Disclosure requirement for PPE stated at revalued amount.
The carrying amount of the PPE.
Changes in revaluation surplus/ loss for Ppe recognizes under other comprehensive income.
Disclosure of specific accounting policies and effective date of revaluation and whether an independent valuer was involved.
A reconciliation between the carrying amount of revaluation surplus at the beginning and at the end of the period i.e.,
indicating the movement balances.
FINANCIAL INSTRUMENTS-IFRS 9
RECOGNITION AND MEASUREMENT
A financial instrument is a contract that gives rise to a financial asset to one party and a financial liability to another party e.g.,
cash, bank balance, commercial papers, loan, bond, debt, equity.
classification of financial instruments
1.financial assets
2.financial liability
3.Derivatives
4. Equity instruments
CPA ERICK MOMANYI 0729224223 pg. 2
, Financial assets.
classified into 4 categories which include:
1. Financial asset at fair value through other income-These are short term investments e.g., treasury bills. Recognized to p& l
2. Financial asset at fair value through other comprehensive incomes-These are long term e.g., bonds, debentures, shares etc.
Recognized under OCI
3. Financial assets at amortized cost (applicable to debt instruments only) long term e.g., debentures. Recognized under OCI
Provisions governing initial measurement and subsequent measurement of financial instruments.
All financial instruments are initially measured at fair value.
Subsequently, all financial instruments are measured at either amortized cost or fair value.
FAIR VALUE HERARCHY OF INPUT MEASUREMENT.
Fair value hierarchy categorizes the input used in valuation techniques into 3 levels.
1. Level 1 input (Quoted prices)
Level 1 input are quoted prices in the active market for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
2. Level 2 input.
Level 2 input are inputs other than quoted market prices included within level 1 that are observable for an asset or liability eithe
directly or indirectly. They include quoted prices for similar assets or liabilities (but not identical0 in an active market and quote
prices for assets or liabilities in markets that are not active.
3 Level 3 input.
Level 3 input are unobservable inputs for the asset or liability. Unobservable inputs should be used to measure fair value to the
extent that observable inputs are not available and where there is very little market activity for the assets or liability at the
measurement date.
Requirement for de-recognition of financial instruments.
De-recognition is the removal of a previously recognized financial instrument from an entity balance sheet. A financial
instrument should be derecognized if either the entity’s contractual rights or the asset’s cash flows have expired, or the asset ha
been transferred to a third party along with the risks of ownership.
If the risks and reward of ownership have not passed to the buyer, then the selling entity must still recognize the entire financi
instrument and treat any consideration received as a liability.
Impact of IFRS 9 on the tax expenses of commercial banks. (may 2018 Q5b)
IFRS 9 encompasses the accounting for financial instruments and their impairment.
The objective of IFRS 9 is to recognize a whole year and lifetime expected credit losses for all financial instruments for which
there has been a significant increase in credit risk.
There is a high likelihood that the only incurred credit losses recognized on nonperforming loans and advances under IFRS 9 w
be allowed as tax- deductible.
The major issue with the adoption of IFRS 9 for banks is the effect of bigger and more volatile impairment losses on capital
ratios. From tax perspective, it may also mean significantly lower profits but higher scrutiny of specific impairment loses, a apart
CPA ERICK MOMANYI 0729224223 pg. 3
