Financial Reporting and Analysis cheat sheet

Key terms

Cost model

Investment property is carried at cost less accumulated depreciation and impairment, exactly like PPE under IAS 16, with fair value disclosed in the notes.

Fair value model

Investment property is carried at fair value, with movements recognised in profit or loss each period, and no depreciation charged at all.

Kenyan example

A Nairobi-based holding company owns an office block it fully rents out to unrelated tenants: that block is investment property. A retail chain's own supermarket premises are not, they are PPE, used in the entity's own operations.

Exploration and evaluation expenditure

Costs incurred in searching for mineral resources and determining the technical feasibility and commercial viability of extracting them, before a decision to develop the resource has been made.

Recognition

May be capitalised as an exploration and evaluation asset under the entity's chosen accounting policy, then classified as tangible or intangible according to the nature of the assets acquired.

Impairment trigger

A specific indicator, such as an exploration licence expiring without renewal, or a decision to discontinue exploration in a specific area, requires an impairment test under IAS 36 (Impairment of Assets).

Classification criteria

An asset (or disposal group) is classified as held for sale when its carrying amount will be recovered principally through sale rather than continuing use, it is available for immediate sale in its present condition, and the sale is highly probable within one year.

Measurement

Once classified as held for sale, the asset is measured at the lower of its carrying amount and fair value less costs to sell, and depreciation stops.

Initial recognition

A financial asset or liability is recognised when the entity becomes party to the contract; initially measured at fair value, plus transaction costs unless the instrument is measured at fair value through profit or loss.

Amortised cost classification

Applies where the asset is held within a business model to collect contractual cash flows, and those cash flows are solely payments of principal and interest, for example a fixed-rate corporate bond a Kenyan pension scheme holds to maturity.

Fair value through other comprehensive income (FVOCI)

Applies where the asset is held both to collect contractual cash flows and to sell, common for a treasury bond portfolio a bank holds for liquidity management.

Fair value through profit or loss (FVTPL)

The default classification for anything not meeting the amortised cost or FVOCI conditions, such as NSE-listed equity shares held for trading.

Reclassification

Financial assets are reclassified only when the entity changes its business model for managing them, expected to be rare; financial liabilities are never reclassified.

De-recognition

A financial asset is de-recognised when the contractual rights to its cash flows expire, or substantially all the risks and rewards of ownership are transferred, for example when a receivable is genuinely sold (factored without recourse) rather than merely used as loan security.

Right-of-use asset

Initially measured at the amount of the lease liability, plus any lease payments made at or before commencement, initial direct costs, and estimated restoration costs, then depreciated over the lease term (or the asset's useful life if shorter).

Lease liability

Initially measured at the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, where that cannot be readily determined, the lessee's incremental borrowing rate.

Short-term and low-value exemptions

A lease of 12 months or less, or of an asset of low value when new (a laptop, office furniture), may be expensed on a straight-line basis instead, avoiding the full right-of-use treatment.

Taxable temporary difference

Gives rise to a deferred tax liability, for example where accounting depreciation on plant is slower than KRA's wear-and-tear capital allowances, so the tax base is lower than the carrying amount.

Deductible temporary difference

Gives rise to a deferred tax asset, recognised only to the extent future taxable profit is probable against which it can be utilised, for example a tax loss carried forward under the Income Tax Act.

Grants related to income

Recognised in profit or loss over the period necessary to match them with the costs they are intended to compensate, for example a county government wage subsidy matched against the payroll periods it covers.

Grants related to assets

Either presented as deferred income released to profit or loss over the asset's useful life, or deducted from the asset's carrying amount, reducing the depreciation charge over its life, for example a development-partner grant funding water infrastructure equipment for a county water utility.

Repayable grants

Where a grant becomes repayable (a condition is breached), the repayment is accounted for as a change in accounting estimate (see the chapter on published financial statements).