Part A: Accounting and consolidation
Accounting for assets and liabilities
Key takeaways
- Every asset and liability standard from Financial Accounting and Financial Reporting and Analysis stays examinable here, now applied in more complex, often group, scenarios.
- In a genuine sale and leaseback, the seller-lessee keeps a right-of-use asset at the proportion of the old carrying amount for the rights retained, and recognises a gain or loss only on the rights transferred.
- Defined contribution costs are expensed as contributions fall due; a defined benefit plan carries a net liability or asset, with remeasurements taken to other comprehensive income.
- Equity-settled share-based payment is fixed at grant-date fair value and spread over the vesting period; cash-settled is remeasured at each reporting date until settlement.
- Recoverable amount is the higher of fair value less costs to sell and value in use, and an impairment loss in a cash-generating unit hits goodwill first, then the other assets pro-rata.
This paper's opening chapter completes the asset and liability standards begun in CPA Financial Accounting and extended in CPA Financial Reporting and Analysis, adding the areas reserved for Advanced level: employee benefits, share-based payment, the full IFRS 9 impairment and hedging model, fair value measurement, and impairment of assets.
Standards carried forward
Every standard from Financial Accounting (PPE, intangibles, inventory, basic financial instruments) and Financial Reporting and Analysis (investment property, mineral resources, held-for-sale assets, leases, deferred tax, government grants, provisions) remains fully examinable at this level, now expected to be applied in more complex, often group, scenarios.
Leases and sale and leaseback
IFRS/IAS reference
IFRS 16 (Leases) is revisited here at full depth: CPA Financial Reporting and Analysis excluded sale and leaseback and lessors in the business of leasing, both now examinable.
A vehicle dealer's finance lease to a corporate customer
Fair value of vehicle: KES 4,200,000. Present value of lease payments receivable: KES 4,200,000 (a finance lease, transferring substantially all risks and rewards).
The dealer derecognises the vehicle from inventory and recognises a lease receivable of KES 4,200,000, with interest income recognised over the lease term using the effective interest method as instalments are received.
Deferred tax in groups
IFRS/IAS reference
IAS 12's deferred tax mechanics (covered in CPA Financial Reporting and Analysis) extend to group aspects: a temporary difference can also arise on consolidation itself, most commonly from a fair value adjustment made on acquisition (see the chapter on interests in other entities) or an unrealised profit on intra-group trading eliminated on consolidation.
Deferred tax on an unrealised intra-group profit
A parent sells inventory to its subsidiary at a KES 2,000,000 mark-up; the inventory is still unsold to a third party at year end, so the profit is eliminated on consolidation.
Because the subsidiary's own tax base for that inventory is its higher, unadjusted purchase cost, a deductible temporary difference of KES 2,000,000 arises on consolidation.
Deferred tax asset recognised = 2,000,000 x 30% = KES 600,000, recognised in the consolidated financial statements only (it does not appear in either entity's own separate accounts).
Employee benefits
IFRS/IAS reference
IAS 19 (Employee Benefits) governs all forms of consideration an entity gives employees in exchange for service, covering four categories.
Share-based payments
IFRS/IAS reference
IFRS 2 (Share-based Payment) requires an entity to recognise an expense (and a corresponding increase in equity or a liability) for goods or services received in a transaction settled in shares, share options, or cash based on the entity's share price, common in executive remuneration at NSE-listed companies.
Expensing an equity-settled share option scheme
100 senior managers each granted 1,000 share options, fair value KES 40 per option at grant date, vesting after 3 years of continued service.
Total fair value at grant date = 100 x 1,000 x 40 = KES 4,000,000
Annual expense (straight-line over the vesting period, adjusted for expected forfeitures) = 4,000,000 / 3 = KES 1,333,333 per year, credited to a share option reserve within equity.
Financial instruments in depth
IFRS/IAS reference
IFRS 9's remaining elements, beyond classification and measurement (covered in CPA Financial Reporting and Analysis): the expected credit loss impairment model, hedge accounting, and embedded derivatives, plus the disclosure requirements of IFRS 7 (Financial Instruments: Disclosures).
Fair value measurement
IFRS/IAS reference
IFRS 13 (Fair Value Measurement) does not decide when fair value is used, other standards do that, but defines fair value consistently wherever it applies: 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 (an exit price).
| Level | Inputs |
|---|---|
| Level 1 | Quoted prices in active markets for identical assets or liabilities, e.g. an NSE-listed share's closing price |
| Level 2 | Observable inputs other than quoted prices, directly or indirectly, e.g. a bond priced from a comparable traded instrument's yield curve |
| Level 3 | Unobservable inputs, e.g. a discounted cash flow valuation of an unlisted subsidiary using management's own assumptions |
Impairment of assets
IFRS/IAS reference
IAS 36 (Impairment of Assets) requires an asset's carrying amount to be written down to its recoverable amount, the higher of fair value less costs to sell and value in use, whenever an indicator of impairment exists (or, for goodwill and indefinite-life intangibles, at least annually regardless of any indicator).
Exam tip
Defined benefit remeasurements and hedge accounting are the two areas in this chapter examiners most often use to test whether a candidate genuinely understands the OCI/profit-or-loss distinction, both route certain gains and losses through other comprehensive income specifically to avoid volatility in reported profit, learn the reasoning, not just the rule.
Self-check
(a) A parent sells inventory to its subsidiary at a KES 3,500,000 mark-up, still unsold at year end. The tax rate is 30%. Compute the deferred tax asset arising on consolidation. (3 marks)
(b) 80 senior managers are each granted 500 share options, fair value KES 60 per option at grant date, vesting after 4 years. Compute the total fair value at grant date and the annual expense. (4 marks)
(c) Distinguish equity-settled from cash-settled share-based payment in terms of subsequent remeasurement. (3 marks)
(d) State the recoverable amount test under IAS 36, and the order in which an impairment loss is allocated within a cash-generating unit. (3 marks)
Show worked answer
(a) Deferred tax asset = 3,500,000 x 30% = KES 1,050,000 (3 marks).
(b) Total fair value = 80 x 500 x 60 = KES 2,400,000. Annual expense = 2,400,000 / 4 = KES 600,000 (4 marks).
(c) An equity-settled award is measured at grant-date fair value and is not remeasured for later changes in fair value; a cash-settled award is measured at the fair value of the liability and is remeasured at each reporting date until settlement, with changes recognised in profit or loss (3 marks).
(d) Recoverable amount is the higher of fair value less costs to sell and value in use; an impairment loss is allocated first against any goodwill in the CGU, then pro-rata across the CGU's other assets, none written down below the highest of its own fair value less costs to sell, value in use, or zero (3 marks).