Advanced Accounting Notes

Contents
CHAPTER ONE........................................................................................................................2
CONCEPTUAL FRAME WORK.............................................................................................2
CHAPTER TWO.....................................................................................................................12
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR SMALL...................12
AND MEDIUM ENTREPRISES ( IFRS FOR SMES)...........................................................12
CHAPTER THREE.................................................................................................................16
PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS......................16
CHAPTER FOUR...................................................................................................................37
CONSOLIDATED FINANCIAL STATEMENTS.................................................................37
CHAPTER FOUR...................................................................................................................72
IFRS 11: JOINT ARRANGEMENTS.....................................................................................72
CHAPTER FIVE.....................................................................................................................75
RECONSTRUCTION, AMALGAMATION AND ABSORPTION......................................75
CHAPTER SIX........................................................................................................................87
BANKRUPTCY ACCOUNTING (LIQUIDATION AND RECEIVERSHIP)......................87
CHAPTER SEVEN...............................................................................................................100
NON – CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
...............................................................................................................................................100
CHAPTER EIGHT................................................................................................................105
IAS 24: RELATED PARTY DISCLOSURES......................................................................105
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CHAPTER ONE
CONCEPTUAL FRAME WORK
LEARNING OBJECTIVES:
At the end of the chapter, students should be able to:
(i) Explain the purpose of the conceptual framework

(ii) Discuss the accounting conventions and concepts.
(iii) Explain the users of accounting information.
(iv) Identify the qualitative characteristics of useful financial information.
(v) Discuss the elements of financial information.
Introduction
This first chapter looks at the objective of and principles contained within the IASB’s
Conceptual frame work for financial reporting.
Financial statements are prepared and presented for external users by many entities around
the world. Although financial statements appear similar from country to country, which are
caused by the differences in social, economic and legal factors leading to setting national
requirements.
These different factors lead to the use of a variety of definitions of the elements of financial
statements: for example, assets, liabilities, equity, income and expenses. They have also
resulted in the use of different criteria for the recognition of items in the financial statements
and the disclosures made in them have also been affected.
The IASB is committed to narrowing these differences by seeking to harmonize regulation,

accounting standards and procedures relating to the preparation and presentation of financial
statements.
The conceptual framework sets out the concepts that underpin the preparation and
presentation of financial statements for external users. The purpose of the conceptual
Framework is as follows:
(i) To assist the IASB in the development of future IFRS’s and in its review of
existing IFRS’s.
(ii) To assist the IASB in promoting harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by IFRS’s.
(iii) To assist national standard- setting bodies in developing national standards.
(iv) To assist preparers of financial statements in applying IFRS’s and in dealing with
topics that have yet to form the subject of an IFRS.
(v) To assist auditors in forming an opinion on whether financial statements comply
with IFRS’s.
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(vi) To assist users of financial statements in interpreting and information contained in
financial statements prepared in compliance with IFRS’s.
(vii) To provide those who are interested in the work of the IASB with information
about its approach to the formation of IFRS’s
The following general steps are usually followed in formulating accounting standards.
First and foremost for the accounting standards to be accorded any respect they have to be
issued by a competent authority ie a recognized accounting body - ICPAU. The steps
described herein are what are followed by ICPAU but other institutes and associations more
or less follow the same format.
The steps are:
1. Select a subject (s) for detailed study by the Accounting and Auditing Standards
Committee (AASC). Either because it it’s a controversial area some form of
standardization is preferred.
2. Prepare and Exposure Draft for consideration by council. The Exposure Draft will
specify the way the subject matter will be treated and the proposed standard format.
3. If approved by council, the Exposure Draft will be circulated to members of

ICPAU, government, securities market and their agencies and other interested
parties.
4. Enough time is allowed for comments to be received from the above groups on
the Exposure Draft.
5. Comments and suggestions are received by AASC and the Exposure Draft is
revised where necessary.
6. If revised, the Exposure Draft is approved by council, it is issued as a Uganda

Accounting Standard and becomes operative from a date stated in the standard.
A discussion paper could be issued by council on a topic of interest. It does not have to end
up in an accounting standard.
GENERALLY ACCEPTED ACCOUNTING STANDARDS (GAAP)

These are rules from whichever source that govern accounting. In individual countries this is
seen primarily as a combination of:
 National law
 National accounting standards
 Local stock exchange requirements
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Although those sources are the basis for the GAAP of individual countries, the concept also
includes the effects of non-mandatory sources like IAS and statutory requirements.
GAAP is a dynamic concept, which requires constant review, adaptation and reaction to
changing conditions. Generally accepted does not mean generally adopted or used. It
instead refers to what is permissible by the accounting profession. Any accounting practice
which is legitimate in the circumstances under which it has been applied should be regarded
as GAAP. The decision as to whether or not a particular practice is permissible or legitimate
would depend on or more of the following factors:
 Is the practice addressed either in the accounting standards, statute or other official
pronouncements?
 If the practice is not addressed in national standards, is it dealt with in International
Accounting Standards, or the standards of other countries?
Is the practice consistent with the needs of users and the objectives of financial reporting?
 Does the practice have authoritative support in the accounting literature?
 Are other companies in similar situation applying the practice?
 Is the practice consistent with the fundamental concept on “true and fair (presented
fairly is all material respects)?
REVIEW OF KEY ACCOUNTING CONCEPTS

Going concern
The enterprise is normally viewed as continuing in operation for the foreseeable future. It is
assumed that the enterprise has neither the intention nor the necessity of liquidation or
curtailing materially the scale of its operations.
When those responsible for the preparation of the financial statements are aware, in making
their assessment, of material uncertainties related to events or conditions that may cast
significant doubt upon the entity’s ability to continue as a going concern, those uncertainties
shall be disclosed.
When financial statements are not prepared on a going concern basis, the fact shall be
disclosed, together with the basis on which the financial statements are prepared and the
reason why the entity is not regarded as a going concern.
Accrual basis of accounting
The effects of transactions and other events are recognized when they occur
(and not as when cash or its equivalent is received or paid) and they are recorded in the
accounting records and reported in the financial statements of the periods to which they
relate. Consequently, in computing profit revenue earned must be matched against the
expenditure incurred in earning it.
Consistency of presentation
To maintain consistency, the presentation and classification of items in the financial
statements should stay the same from one period to the next except:
a. Where there is a significant change in the nature of the operations or a review of the
financial statements presentation indicates a more appropriate presentation.
b. A change in presentation is required by an accounting standard (IFRS)
Materiality and aggregation

All material items should be disclosed in the financial statements.
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Amounts which are immaterial can be aggregated with amounts of a similar nature or
function and need not be presented separately.
Prudence/ conservatism
The inclusion of a degree of caution in the exercise of the judgments needed in making the
estimates required under conditions on uncertainty, such that assets or income are not
overstated and liabilities or expenses are not understated.
For example; prudence requires that sale revenue and profits should not be included in the
financial statements until a sale has been completed. It also requires accountants to be
cautious regarding future problems and costs so that they are provided for in the account s
when it is probable that they will occur. If a customer has defaulted in paying a loan, the
bank should immediately provide for its non-payment.
1. Busirness Entity Convention: The convention states that financial accounting

convention is concerned with the activities of the business entity and not those of the
owners i.e only transactions relating to the business entity are recorded in the
financial statements.
This definition is however not clear-cut as it is difficult to separate the affairs

of a small business and those of the owners e.g a car used by a shopkeeper, it is
difficult to define what business or private travel. Moreover for decision making
purposes it may not be wise to separate the affairs on an owner of an enterprise from
his/her own affaires because the two often times determine and influence each other
e.g ill health of Managing Director, poor relations between Managers, Workers.
2. Money Measurement convention
This convention limits the recognition to only the activities that can be
expressed in monetary terms. Again here not all-useful information may be
expressed in monetary terms.
3. Going Concern Convention
It is assumed that the business entity will continue in its present form into the
foreseeable future and that it is not on the verge of cessation.
The assumption has implications on the valuation of assets of an entity; assets

of a continuing business are valued higher than those of a business about to close.
4. Historical Cost convention
The basis of valuation used in the financial statements is the historic cost,
unless stated otherwise; assets are valued at historical costs. A more accurate basis
would probably be the discount of the expected future benefits.
The historic cost convention originated from the stewardship function era.
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5. Realization Convention
This convention states that profit is recognized as and when a sale is made i.e
not in the period when revenue is realized. E.g a car is bought for shs. 3,000,000
million in period 1, stored in period 2 and sold for shs. 5,000,000 in period 3. Profit
would be recognized in period 3.
6. Accruals Convention:
This convention distinguishes between receipt of cash and the right to receive
cash, payment of cash and the legal obligation to pay cash, e.g accrued rent, is rent
due but not yet paid, it it recorded as a debt. Similarly accrued wages are wages due
but not yet paid; they are recorded as debt owned by the business entity,
7. Matching Convention
In this convention revenue is matched with the expenses that go into the
production of that revenue.
This convention is difficult to enforce because certain costs cannot be isolated

and associated with the relevant revenue e.g in allocation of costs between product
line and vary products.
The combination of this principle and the realization principle gives rise to the
accruals system of accounting i.e profit recognized at the point of sale (cash may be
received later) expense say of using electricity is recognized at the time the
electricity is used and not when the bill is paid.
8. Periodicity Convention
This convention assumes that the continuity of the business entity can be
subdivided into descriptive periods and accounts draw up for each of these periods.
This convention has been enshrined into law-Companies Act. This seemingly
harmless convention has causes a lot of controversy e.g with depreciation if this
convention was not there it would not matter how it was changed because all of it
would be changed in one year but with the requirement differences arise form the
method used e.g straight line an declining balance method.
9. Consistency Convention
This convention states that like items should be treated in the same manner
over time. This convention enhances comparability.
10. Conservation Convention
This convention requires that accountants should not anticipate profits but
should provide for all losses.
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11. Materiality Convention
The convention requires that the way an item is treated in the accounts will
depend on its materiality/relevance.
12. Duality Convention
This is associated with the double entry system of bookkeeping, the accountant
expected to record both aspects of a transaction i.e. every debit must have a credit.
This facilitates the balancing of the books of account.
13. Substance over form convention
This convention requires that transactions be recorded in accordance with their

substance and financial reality mainly in rather than their legal form e.g. hire purchase, legal
title does not pass until final installment is received.
Conventions have been criticized for three major reasons:
1. They do not necessarily lead to more useful information. They are more convenient
to the accountants than the users of the information.
2. They do not create conformity. This is because they allow for a number of methods
of accounting e.g depreciation, stock valuation which inform affect the reported
income.
3. Conventions generally prevent change.
CHARACTERISITCS OF COPORATE/COMPANY REPORTS
Studies have been carried out to find out what constitutes a good corporate financial
report. It is generally agreed that a good financial report would have the following
characteristics.
a. Relevance:
The financial statements should as much as possible strive to assist the user in
making his decisions. Data that has no bearing on decision-making is irrelevant; it
is a waste of time and resources. Out of date data will be irrelevant. This is the
most important characteristic that accounting data should have.
b. Understandability
For data to be useful it should be understandable, it should not be so detailed as to

confuse the users. If it is prepared for the non-sophisticated users, it should be as
simple as possible.
c. Reliability:
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The data presented ought to be accepted by the users as being credible; they should
have confidence in it. Reliability is enhanced by independence verification.
d. Completeness
In order not to mislead the users, financial statements should be complete, they
should include all relevant information regrind a business entity. Materiality
connection is used to assist here.
e. Objectivity
The data in the financial statements should be unbiased for this will waken their
utility. The statements should not be prepares to favour a particular user group.
f. Timeliness
Data/financial statements should be prepared regularly and soon after the stipulated
period (normally one year) if they are to be useful to their users.
g. Comparability
Utility of the financial statements will be enhanced if they are comparable over time
and between entities. This will encourage conformity in reporting.
h. Quantifiability
Quantifiable data usually conveys more information than qualitative data but the
latter should not be completely ignored as it can also provide useful information.
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i. Verifiability
Verifiable data is more dependable and reliable. Verifiability happens when

qualified individuals working independently develop similar measures on
conclusions from the examination of the same evidence.
Qualitative characteristics of useful financial information
Fundamental qualitative characteristics

Relevance and faithful representation are the fundamental qualitative characteristics of useful
financial information.
Relevance
Relevance financial information is capable of making a difference in the decisions made by
users. Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value or both. Materiality is an entity-specific aspect of relevance based
on the nature or magnitude (or both) of the items to which the information relates in the
context of an individual entity’s financial report.
Faithful representation
General purpose financial reports represent economic phenomena in words and numbers, to
be useful, financial information must not only be relevant, it must also represent faithfully the
phenomena it purports to represent. This fundamental characteristic seeks to maximize the
underlying characteristics of completeness, neutrality and free from errors.
Enhancing qualitative characteristics.

Comparability: Information about a reporting entity is more useful if it can be compared
with similar information about other entities and with similar information about the same
entity for another period or another date.
Verifiability; means that different knowledge and independent observes could reach
consensus, although not necessarily complete agreement, that a particular depiction is a
faithful representation.
Timeliness means that information is available to decision- makers in time to be capable of
influencing their decisions.
Understandability; classifying, characterizing and presenting information clearly and
concisely make it understandable.
USER GROUPS
Historically, financial statements have been regarded as primarily fulfilling the stewardship
function, i.e reporting to the owners (the shareholders) on the changes in, and uses of, funds
employed in the business. However, there are other stakeholders having a reasonable right to
information and whose needs ought to be recognized incorporate reports.
The IASB believes that financial statements prepared for this purposes meet the common
needs of most users. This is because nearly all users are making economic decisions, for
example:
 To assess the stewardship or accountability of management.
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 To decide when to buy, hold or sell an equity investment.
 To assess the ability of the entity to pay and provide other benefits to its employees.
 To determine taxation policies
 To assess the security for amounts lent to the entity.
USERS OF ACCOUNTING INFORMATION AND THEIR INFORMATION NEEDS
USERS MAIN INFORMATION NEEDS

Management  Asses profitability of the whole business, branch, product etc.
 Control the business e.g by comparing the budget with actual
results.
 Plan for the future e.g budgets, cash requirements etc.
Lenders  The cash position and solvency of the business to establish
whether the loans and interest will be covered.
Investors  Profitability of the firm by examining past and future performance.
 Security of their investments e.g the financial strength shown by
the statement of financial position.
Supplies  Ability to pay debts by examining the financial position
Customers  Want to know whether the business will continue to supply them
goods in the future
 Concerns with going concerns, sales growth, new product
development investment in the business e.g production capacity.
Competitors  Performance of others companies in order to make strategic plans
Employees  Secure employment
 Possible pay rises by looking at the profitability of the business
 Salaries and benefits enjoyed by senior management
 Maintenance of pension funding & retirement benefits.
Government  Tax authorities use financial statements for tax assessment
 Regulation of competition, takeovers, grants
 Environment issues
The public  Provision of local employment by examining profitability and
expansion plans
 Corporate social responsibility programs
 Product or service quality issues
 Environmental issues
The IFRS frame work notes that general purpose financial reports cannot provide all the
information that users may need to make economic decisions. They will need to consider
pertinent information from other sources as well.
The elements of financial statements

The elements directly related to Statement of financial position (Balance sheets) are;
(a) Asset: An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
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(b) Liability: A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
(c) Equity: Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
Definitions of elements in the statements of comprehensive income

(performance)
(a) Income: Income is increases in economic benefits during the

accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
(b) Expense: Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.
Recognition of the elements of Financial statements
Recognition is the process of incorporating in the statement of financial position or statement
of comprehensive income an item that meets the definition of an element and satisfies the
following criteria for recognition.
 It is probable that any future economic benefit associated with the item will flow to or
from the entity; and
 The item’s cost or value can be measured with reliability
Based on these general criteria;
 An Asset is recognized in the statement of financial position when it is probable that
the future economic benefits will flow to the entity and the asset has a cost or value
that can be measured reliably.
 A liability is recognized in the statement of financial position when it is probable that
an outflow of resources embodying economic benefits will result from the settlement
of the present obligation and the amount at which the settlement will take place can
be measured reliably.
 Income is recognized in the statement of comprehensive income when increase in
future economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with recognition of increases in assets or decreases in
liabilities.
 Expenses are recognized when decrease in future economic benefits related to a
decrease in an asset or an increase of a liability has a risen that can be measured
reliably. This mean, in effect, that recognition of expenses occurs simultaneously
with the recognition of an increase in liabilities or a decrease in assets (for example,
the accrual of employee entitlements or the depreciation of equipment).
Measurement of the elements of financial statements

The IFRS Framework acknowledges that a variety of measurement bases are used
today to different degrees and in varying combinations in financial statements.
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Measurement; is the process of determining the monetary amounts at which the
elements of the financial statements are to be recognized and carried in the financial
statements. These measurement bases include;
 Historical cost
 Fair value or Current cost
 Net realizable (settlement) Value
 Economic value or Present Value (discounted)
 Replacement cost
Historical cost:
Transactions are recorded at their original historical monetary cost. For example,
assets are recorded at their cot, less any amount written off like depreciation.
Liabilities are recorded at the amount of proceeds received in exchange for an
obligation.
Fair value/ current cost
This is the amount at which an asset or liability could be exchanged in an arms
lengths transaction between informed and willing parties, other than in a forced or
liquidation sale. For example, shares are included at fair value.
Replacement cost:
This is the cost to the business of replacing the asset. Non-current assets may be
measured at replacement cost.
Economic Value
This is the present value of the future cash flows from using an asset in the business.
The expected cash flows are discounted.
Net realizable Value
This is the estimated sales proceeds less any costs involved in selling the asset.
Inventory is measured at the lower of historical cost and net realizable value (NRV).
For example, inventory is included in the statement of financial position at Net
realizable value.
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CHAPTER TWO
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR SMALL

AND MEDIUM ENTREPRISES ( IFRS FOR SMES).
(i) To define small and medium sized entity

(ii) Identify the different between IFRS for SMEs and Full IFRS.
(iii) Explain the benefits and challenges of adopting IFRS for SMEs in
Uganda
Introduction:
The IFRS for SMES is intended for use by small and medium sized entities. The institute
has developed the definition of an SME in Uganda below to facilitate adaption of the
standard.
DEFINITION OF SMEs
A small and medium sized entity is defined as an entity;
(a) That does not have public accountability
(b) That publishes general purpose financial statements for external users. These
external users include owners not involved in day to day management,
lenders, suppliers, customers etc.
(c) Whose debt and equity instrument is not traded in a public market (a domestic
or foreign stock exchange or an over-the-counter market, including local and
regional markets), or is NOT in the process of issuing such instruments for
trading in a public market.
(d) That does NOT hold funds in a fiduciary capacity for a broad group of
outsiders as one of the primary businesses such as banks, credit unions,
insurance companies, securities brokers/dears, mutual funds and investment
banks.
PUBLIC ACCOUNTABILITY
The institute has designed certain entities as being publicly accountable.
These entities SHALL NOT use the IFRS for SMES as a framework for financial reporting.
Public accountable entities include, but are not limited to;
(a) Entities whose debt or equity instruments are traded in a public market or are in the
process of issuing such instruments for trading in a public market.
(b) Entities that hold assets in a fiduciary capacity for a broad group of outsiders as one
of its primary businesses. In Uganda, these include, but not limited to;
(iv) Banks, credit institutions, micro- finance deposit institutions, and related
financial institutions. These include commercial banks, post office saving
banks, merchant banks, mortgage banks, building societies etc.
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(v) Non-regulated micro finance institution and SACCOs.
(vi) Insurance and re-insurance companies
(vii) Mutual funds and collective investment schemes
(viii) Security brokers / dears.
(ix) Pension and retirement Benefit Schemes.
(c) Public organizations, in which the state owns the whole or part of the propriety
interest or which is otherwise controlled directly or indirectly by the state, including
parastatals, state enterprises, commissions and authorities.
(d) Private organizations in which the state has non-controlling equity interest
SMEs may differ from those under the full IFRSs, so the financial results may have to be
restated for group reporting purposes. In such cases, it may be more efficient for the
subsidiary to continue to prepare its statutory financial statements under the full IFRSs.
IFRS for SMEs is a self –contained standard, incorporating accounting principles based
on existing IFRS, which have been simplified to suit the entities that fall within its scope.
They are number of accounting practices and disclosures that may not provide useful
information for the users of SME financial statements. As a result, the standard does
NOT address the following topics;
1. Earnings per share
2. Interim financial reporting
3. Segment reporting
4. Insurance (because entities that issue insurance contracts are not eligible for the
standard)
5. Assets held for sale
BENEFITS OF ADOPTING IFRS FOR SMEs IN UGANDA

1. Meeting the needs of equity investors; Adopting international financial reporting
standards enables SMEs to meet the needs of equity investors in the capital markets
2. Strong national financial market structure; it facilities the SMEs to have a strong
national financial infrastructure to cope with both national and international
systematic risk.
3. Comparability of reports; SMEs create greater comparability of reports leading to
better access to international capital markets and lower the cost of capital.
4. Resilient international financial system; the standard is a prerequisite to the
establishment of a more resilient internal financial system within which a transparent
financial system can operate more efficiently.
5. Cost benefit; the standard has appropriate modifications based on the needs of the
users of SMEs financial statements and cost benefit considerations.
6. Uniformity of financial reports; the standard enable SMEs to prepare comparable
financial results from reporting entities in different countries. The financial reporting
standards board assumes that the critical reason for adopting international standards is
international comparability of statements that requires uniform acceptance.
7. Production of less erroneous reports; the standards enable the production of less
erroneous reports and ensures a coherent system among SMEs.
8. Enhance global competitiveness; the standards enhance global competitiveness of
SMEs leading to economic growth.
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9. Timely disclosure of reliable information; adapting the SMEs standard creates a
framework intended to encourage timely disclosure of reliable information which
meet users’ needs at a minimum cost.
10. Eases auditing; adapting IFRs for SMEs eases the auditing exercise and raises the
standards of auditing for such enterprises.
National foreign exchange; according to Hon.Lianne Dalziel (2005), adapting international
financial reporting standards enables SMEs to have stronger national foreign exchange
capital markets with less sensitivity
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CHAPTER THREE
PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS.
Introduction:
The main purpose of this chapter is to explain the requirements of international standards
IAS1 presentation of financial statements. The objective of IAS 1 is to specify the overall
structure and content of general purpose financial statements and ensure that an entity’s
financial statements for a reporting period are comparable with those of other periods and
with those of other entities.
 Identify the components of a complete set of financial statement

 Explain the general features of a set of financial statements
 Explain the structure and content of each component of a set of financial statements.
 Distinguish between current and non-current assets and between current and non-
current liabilities.
 Prepare a statement of financial position, a statement of comprehensive income and a
statement of changes in equity, in accordance with the requirements of IAS 1.
 Outline the main requirements of international standards IAS 8 and IAS 10.
PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS.

The preparation and presentation of financial statements is made with the main aim of
conveying information to interested users. The preparation of such statements follows the
application of International Accounting Standards 1 (IAS1).
Requirements of IAS 1:
 Financial statements should be clearly identified and distinguished from other
information in the same published document.
 Each component of the financial statements should be clearly identified. In addition, the
following information should be prominently displayed and repeated if necessary for the
proper understanding of the information presented.
(i) The name of the reporting enterprise or other means of identification;
(ii) Whether the financial statements cover the individual enterprise or a group of
enterprises
(iii) The balance sheet date or the period covered by the financial statements,
whichever is appropriate to the related component of the financial statements.
(iv) The reporting currency
(iv) The level of precision used in the presentation of figures in the financial
statements;
 In connection with the reporting period, financial statements should at least be presented
annually. In case of any changes, then the enterprise should disclose, in addition to the
period covered by the financial statements.
 The reason for a period other than one year being used.
 The fact that comparative amounts for the income statement, changes in equity, cash
flows, and related notes are not comparable.
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The usefulness of financial statements is impaired (distorted) if they are not made available
to users within a reasonable period after the balance sheet date. The enterprise should be in a
position to issue its financial statements within six months of the balance sheet date.
Components of Financial Statements:

A complete set of financial statements includes the following components: -
 Statement of Financial Position (Balance sheet
 Statement of comprensive income (Income statement)
 Statement cash flows
 Statement showing either;
(a) all changes in equity; or

(b) changes in equity other than arising from capital transaction with owners and
distributions to owners.
 Accounting policies and explanatory notes.
STATEMENT OF FINANCIAL POSITION

IAS 1 provides guidance on the classification of assets and liabilities appearing in the balance
sheet.
Assets are classified as non-current and current assets. A current asset is one that is expected
to be held for sale, consumption or realized in the normal course of the enterprise’s operating
cycle.
While non-current assets include tangible, intangible, operating and financial assets of the
long-term nature. Assets expected to be used in generating revenue.
While a liability should be classified as a current liability when it is expected to be settled in

the normal course of the enterprise’s operating cycle or due to be settled within 12 months of
the balance sheet date.
All other liabilities to be classified as non-current liability.
The balance sheet format should be as under:-
ABC STATEMENT OF FINANCIAL POSITION

AS AT DECEMBER 2009 (in thousand of currency units).
2009 2008
ASSETS:
Non-Current Assets:
Plant and equipment x x
Goodwill x x
Manufacturing licenses x x
Investment in associates x x
Other financial assets x xx x xx
Current Assets:
Inventories x x
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Trade & other receivables x x
Prepayments x x
Cash & cash equivalents x xx x xx
Total Assets xxx xxx
Equity & Liabilities:
Capital and Reserves:
Issued capital x x
Reserves x x
Accumulated profits (R.E) x xx x xx
Minority interest xx xx
Non-current liabilities:
Interest bearing on long-term loans x x
Deferred tax x x
Retirement benefit objections x xx x xx
Current liabilities:
Trade & other payables x x
Short-term borrowings x x
Warranty provisions x xx x xx
Total equity & liabilities xxx xxx
Information to be presented at the face of the Balance sheet.

As a minimum, the face of the Statement of Financial position should include line items,
which present the following amounts:
Property, plant and equipment
Intangible assets
Financial assets
Investments accounted for under equity method
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Tax liabilities
Provisions
Non-current interest bearing liabilities
Minority interest
Issued capital and reserves.
Disclosure relating to share capital
For each class of share capital, the following should be disclosed either on the face of the
balance sheet or in the notes.
The number of shares authorized, issued and fully paid, issued and not fully paid, par value, a
reconciliation of shares at the beginning and end of the period, rights and preferences of each
class, shares in the enterprise held by the enterprise itself or by the subsidiary or associate
companies, share reserved for issuance by options and sales contracts.
Description of the nature, and purpose of each reserve within equity.
The amount of any cumulative preference dividends not recognized and proposed dividends
are treated under IAS. 10.
18
STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT):
IAS.1 provides for two formats of classifying cost, i.e. classification by function (cost sales
method), and classification by nature. The functional classification is preferred but nature of
expense method may be ideal for manufacturing organizations.
The Statement of comprehensive income is usually prepared to show the firm’s level of
performance and the following format should be applied as per IAS 1.
Classification of expense by function.
XYZ LTD STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2018.
2017 2018
Revenue x x
Cost of sales (x) (x)
Gross profit x x
Add: other operating incomes x x
Distribution costs (x) (x)
Administrative expenses (x) (x)
Profit from operations x x
Finance costs (x) (x)
Income from associates x x
Profit before tax x x
Income tax expense (x) (x)
Profit after tax x x
Minority interest (x) (x)
Net profit from ordinary activities x x
Extra-ordinary terms x x
Net profit for the period (xx) (xx)
19
STATEMENT OF CHANGES IN EQUITY.
This usually shows the movements during the period in all capital and reserve headings
which in total make up equity of the enterprise. Statement follows the format below:
XYZ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR TO 31/12/2018

Share Retained Revaluation Total
capital earnings Reserve equity
Shs.
Shs. "000" Shs. "000" Shs. "000" "000"
Bal. at 31/12/2016 xxx Xxx Xxx xxx
Changes in equity for
2017
Total comprehensive
income Xxx xxx
Dividends (xxx) (xxx)

Changes in equity for
2018
Changes in accounitng
policy Xxx xxx
Restated balance xxx Xxx Xxx xxx
issue of share capital xxx Xxx Xxx xxx
Total comprehensive
Income Xxx Xxx xxx
Dividends (xxx) (xxx)
Note: The statement covers two years, so that comparative figures can be available. The
adjustments to the opening figures for changes in accounting policy appear first. The
correction of a fundamental error would appear in the same position.
NB:
The company changed an accounting policy in the year to 31 st /12/2018 and this necessitated
an adjustment to retained earnings brought forward.
Other changes in equity during 2018 were as follows:
(i) Share capital increased because of the share issue during the year
(ii) Retained earnings were increased by the profit for the year but were reduced by dividends
paid to shareholders.
(iii) the revaluation reserve increased because there was a revaluation gain during the year.
This gain would have been presented in the statement of comprehensive income as “other
comprehensive income”.
An alternative method of presenting changes in equity:
20
IAS 1 also includes an alternative method of presenting changes in equity by preparing the
statement recognized gains and losses. The format is shown below: -
XYZ STATEMENT OF RECOGNISED GAINS

AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2018
2018 2017
Surplus (deficit) on revaluation of properties (x) x
Surplus / deficit on revaluation of investments x (x)
Exchange differences on translation of other
financial statements of foreign entities. (x) (x)
Net gains not recognized in the income stat. x x
Net profit for the year/period x x
Total recognized gains & losses x x
The above illustrates an approach which presents those changes in equity that represent gains
and losses in a separate component of financial statements.
The statement of recognized gains and losses represents gains and losses which are
incorporated in the income statement for the period.
This statement is in some ways is more useful to users than the statement of changes in
equity, because it focuses on the performance of the period.
IAS 8: ACCCOUNTING POLICIES, ACCOUNITING ESTIMATES AND ERRORS.

IAS 8 defines accounting policies as “the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements” the use of
the word “policies” suggests that entities are allowed to choose between alternative
accounting treatments. However, some of an entity’s accounting policies will be dictated by
an international standard which permits no choice of treatment.
Selection of accounting policies

IAS 8 provides the following guidance on the selection of accounting policies:
(a) If an international standard specifically applies to an item, the accounting policy
which is applied to that item should be determined by applying the relevant standard.
(b) If there is no international standard or interpretation which specifically applies to the
item concerned, management should use its judgement in selecting an accounting
policy that results in relevant and reliable information.
Changes in accounting policies
IAS 8 allows an entity to change one of its accounting policies only if the change:
(a) Is required by an international standard or interpretation.
(b) Results in the financial statements providing reliable and relevant information than
would be the case if the accounting policy is not changed.
Accounting for a change in accounting policy
If a change in accounting policy results from the initial application of an international
standard, the change should be accounted for in accordance with the transitional provisions
(if any) which are provided in the standard or interpretation. However, if there is no
transitional provisions or if the change in policy has been made voluntarily so as to improve
the relevance of the financial statements, IAS 8requires that the change should be accounted
for retrospectively. This means that comparative figures of the previous periods must be
adjusted and presented.
21
Disclosure of a change in accounting policy
If an entity changes any of its accounting policies, IAS requires that certain disclosures
should be made in the notes to the financial statements. The main disclosures are:
(a) For a change in accounting policy which has been caused by the initial application of
international standards.
-the title of the standard or interpretation
-if applicable, the fact that the change has been accounted for in accordance with
transitional provisions specified in the relevant standard or interpretation and a
description of those provisions.
(b) For a voluntary change in accounting policy; - state the reasons which suggest that
application of the new policy will provide reliable and more relevant information.
(c) For all changes in accounting policy:
-The nature of the change, for the current and for each prior period presented, the
amount of the adjustment made to each affected item in the financial statements and
the amount of any adjustment to the entity’s earning per share.
Changes in Accounting Estimates.
IAS 8: states that “many items in financial statements cannot be measured with precision but
can only be estimated”. Estimates may be required in relation to items such as bad and
doubtful receivables, the useful lives of depreciable non-current assets, the net realizable
value of inventories and so forth. IAS 8 also states that “the use of reasonable estimates is
an essential part of the preparation of financial statements and does not undermine their
reliability.
Accounting figures are mostly estimates that are subject to change with the availabity of the
new information. To incorporate the change in the financial statements without any
explanation may be misleading.
N.B These are neither extraordinary items nor fundamental errors.
Disclosure:
Effect of the change should be included in the Statement of comprehensive income (SOC) in
the period of the change and in subsequent periods if affected.
The effect of the change should be included in the income statement classification as the
original item was.
If the effect of the change is material, its nature and amount must be disclosed.
Fundamental errors:
Financial statements do not comply with international standards if they contain material
errors. Potential errors may be discovered before the financial statements are finalized, in
which case they can be corrected before the statements are authorized for issue. However, it
22
is possible that an error may be detected until a subsequent accounting period. Such an error
is referred as a Prior period error.
This deals with the correction in the current period of fundamental mistakes, mistakes in
applying policies, misinterpretation of fact, frauds or oversights. IAS 8 requires that material
prior period errors should be corrected retrospectively.
It has the benchmark and allowed alternative treatments.
Changes in Accounting policies.

For comparability, accounting policies should not be changed except if;
Required by the statute or accounting standard setting body, or
The change will result in a more appropriate presentation of events or transactions.
The benchmark treatment is to adjust the opening balance of retained earnings in the
statement of changes in equity as a prior period adjustment. Comparative information
should be adjusted. If the prior period adjustment cannot be isolated, include the item in the
current period income statement.
Post balance sheet events IAS 10(events after the balance sheet date)
Are those events favorable and unfavorable that occur between the balance sheet date and the
date financial statements are authorized for issue. The date referred to is that the directors’
formally approve financial statements.
The events can be adjusting or non- adjusting events.

Adjusting events existed on the balance sheet date and are therefore have to be adjusted in
the financial statements.
The example of such events are; allowances for inventories and bad debts, discovery of fraud
or error, and amounts receivable in respect of insurance claims which were being negotiated
on the balance sheet date.
Non-adjusting events occurred after the balance sheet date and should be disclosed in the
notes if material. The disclosure should give the nature of the event and an estimate of its
effect to financial statements. The examples include, business combination, destruction of the
major production plant by fire, large change in asset prices or foreign exchange rates and
proposed dividends.
Proposed dividends should be disclosed by note or included in the face of the income
statement.
llustration 1:
The following income statement for the year to 31 March 20X8 has been prepared for the
management of Ople:
$’000 $’000
Opening inventory 500 Sales revenue 8,000
Purchases 4,400 Closing inventory 700
Gross profit c/d 4,300 _____
23
9,200 9,200
Auditor’s remuneration 50 Gross profit b/d 4,300
Depreciation: Dividends received 240
Delivery vans 40
Office furniture 20
Plant & machinery 85
Director’s salaries 95
Distribution salaries 425
Distribution expenses 970
Hire of plant & machinery 15
Office expenses 190
Legal expenses 35
Rent (warehouse) 65
Wages and salaries 1,200
Net profit c/d 1,350 _____
4,540 4,540
Provision for tax 380 Net profit b/d 1,350
Over-provision of
Net profit after tax c/d 1,000 previous year’s tax 30
1,380 1,380
Additional Information:
Wages and salaries (other than those for directors) are to be apportioned as follows:-
Distribution 80%
Office expenses 20%
You are required, insofar as the information permits, to prepare Ople’s income statement
for the year to 31 March 20X8 in accordance with the requirements of International
Accounting Standards, using the function of expenditure method.
Solution:
Income statement for the year ended 31 March 20X8
$’000 $’000
Sales revenue 8,500
Cost of sales (working) (5,270)
Gross profit 3,230

Distribution costs (working) (1,490)
Administration expenses (working) (630)
Operating profit 1,110

Income from investments 240
Profit before tax 1,350

Tax: based on profit of year 380
Over-provision for previous year (30)
-
(350)
Profit for year 1,000
________________________________________________________________________
Working:
24
Analysis of costs
Cost of sales Distribution Admin.
$’000 $’000 $’000
Purchases (500 + 4,400 – 700) 4,200
Audit 50
Depreciation 85 40 20
Salaries 95
Distribution 425
Factory expenses 970
Hire 15
Office expenses 190
Legal expenses 35
Warehouse rent 65
Wages 0:80: 20 _____ 960 240
5,270 1,490 630
Illustration 3:
CHANCE (U) LTD. is a quoted company with authorized share capital of 250,000 ordinary
shares of Shs.1, 000 each. The company prepares its accounts as on 31 st March every year.
And the trial balance before adjustments extracted on 31st March 2008 is shown below:-
Shs. Shs.
‘000 ‘000
Equity share K. issued & fully paid. 200,000
Accumulated profits on 1st April 2007 61,000
6% loan notes / secured
……… 60,000
Lease hold factory (cost at the beginning of the year 200,000
Accumulated depr. at the beginning of the year 76,000
Plant and machinery 80,000
Accumulated depreciation for plant & machinery 30,000
Addition; plant & machinery in the year 10,000
Payables and accrued expenses 170,000
Inventory as on March 2008. 160,000
Receivables 100,000
Pre-payments 80,000
Balance at bank 90,000
Profit for the year (subject to any items in
the following notes). 111,000
Sales proceeds of plant _______ 12,000
Totals 720,000 720,000
You ascertain that;

1. The loan notes were re-payable at par by six equal annual drawings starting on
31st Dec.2008.
25
2. The lease of the factory has 30 years remaining as at 31st March 2008.
3. Annual depreciation is calculated as;
 Lease hold factory 2% on cost
 Plant and machinery – 20% reducing balance on net book value as at 31 st
December 2008 plus additions less disposals in the year.
4. Plant disposed off original cost 16,000,000, accumulated depreciation Shs.3.2m.
5. Inventory has been valued consistently at the lower of cost and net realizable value.
6. A dividend of 20% is proposed.
Required:
Prepare in a form suitable for publication and in conformity with the provisions of IAS 1
(revised), the balance sheet as at 31st March 2008 together with their company notes.
CHANCE (U) LTD BALANCE SHEET AS AT 3/3/08
Assets: Shs.’000 Shs.’000

Non-current Assets:
Property, plant & equipment Note 2 157,760
Current Assets:
Inventories 160,000
Receivables 100,000
Pre-payments 80,000
Balance at bank 90,000 430,000
Total Assets
587,760
Equity and Liabilities:
Capital and reserves:
Issued capital Note 3 200,000
Accumulated profit W3 157,760
Non-current Liabilities:
6% loan note 50,000
Current Liabilities
Trade payables 170,000
Accrued expenses
Current portion of 6% loan note 10,000 180,000
587,760
STATEMENT OF CHANGES IN EQUITY.

Shs’000 Shs;000 Shs’000
Share Accum. Total
Capital profits
Bal. 1/4/2007 200,000 61,000 261,000
Net profit for the period (W3) ______ 96,760 96,760
26
200,000 157,760 357,760
Notes to the Balance Sheet.

1. Statement of accounting policies:
A. Financial statements have been prepared in accordance with International
Accounting Standards (IAS).
B. Depreciation:
(i) Leasehold factory – 2% on cost
(ii) Plant and machinery – Depreciation is calculated on reducing
balance method at the rate of 20% per annum. Assets acquired
during the year are charged with full years depreciation.
C. Inventory: Inventory has been valued at lower of cost and net

realizable value.
2. Tangible Assets (Assets Schedule)
Cost Leasehold Plant and Total ‘000

Property ‘000 machinery ‘000
Cost 1/4/2007 200,000 80,000 280,000

Additions 10,000 10,000
Disposal _______ (16,000) (16,000)
Cost 31/3/2008 200,000 74,000 274,000
Accumulated Depreciation
1/4/2007 76,000 30,000 106,000
Disposal (Eliminated) (3,200) (3,200)
Depreciation charge
to the year (W1) 4,000 9,440 13,440
Acc. Depr. 31/3/2008 80,000 36,240 116,240
NBV 1/4/2007 124,000 50,000 174,000
NBV 31/3/2008 120,000 37,760 157,760
Workings:
W1
Depreciation:
 Leasehold property 2% of 200,000,000. = 4,000,000 4,000,000
 Plant & machinery
NBV (Cost – Acc) 50,000,000
 Additional plant & machinery 10,000,000
Disposal (16m – 3.2m) (12,800,000)
Depreciation 20% of 47,200,000 = 9,440,000
13,440,000
From notes:
Note 3: The authorized share capital consists of 250,000 shares of Shs.1,000 each.
27
200,000,000 = 200,000
100
of which 200,000 shares are issued and fully paid. The company proposes a dividend of 20%
(200,000) paid fully for the year.
W2 :
Disposal Account
Asset (cost) 16,000,000 Acc. Depr. 3,200,000

Bank 12,000,000
_________ Loss on disposal 800,000
16,000,000 16,000,000
Asset Acc. depreciation
Cost 16,000,000 Disposal 16,000,000 Bal. b/f 3,200,000

Disposal 3.2m
Bank
Disposal 12,000,000
W3 : Profit for the year 111,000,000

Less depn. For the year (W2) (13,440,000)
Loss on disposal (W2) (800,000)
Profit for the year 96,760,000

+ Acc. Profits on 1st April 2002 61,000,000
157,760,000
W4 :
Tutorial note: as some of the loan notes are payable within one year of the balance sheet
date, that part of the liability has been shown under current liabilities.
Illustration 4:
BAF 111 Ltd deals in General merchandise. On 31/3/2002, the following trial balance was
extracted from the ledger. The authorized share capital 15,000 ordinary shares of Shs.10,
000 @. You are required to prepare an Income Statement and Balance Sheet together with
notes in accordance with IAS 1 and other relevant standards.
Shs’000 Shs’000
Ordinary share capital 10,000
28
6% preference shares 50,000
Land 50,000
Buildings (cost) 60,000
Motor vehicle (cost) 30,000
Accumulated depreciation:
Buildings 12,000
Motor vehicle 5,000
Patents Note 8. 30,000
Debtors and creditors 7,000-200 1,500
Cash 4,600
Bank 1,280
Stock (1/4/2001) 5,200
Goodwill Note 8 550
Insurance 1,400
Travel and subsistence 450
Rent Note 5. 1,200 3,300
Provision for bad debts 1/4/2001 400
7% debentures 10,000
Purchases 120,000
Carriage inwards 1,700
Carriage outwards 1,300
Salaries 4,000
Discounts 120 240
Bad debts 100
Returns 1,500 700
Sales 200,000
License fine 10,000
Retained earnings 1/4/98 20,000
General reserve 200
Pension scheme. ______ 14,500
329,120 329,120
The following is also provided: -

Stock was valued on 31/3/2002 at 7,500,000 using Last in First out basis.
Included in the respective figures is input VAT of 14,000,000 and output VAT of Shs.12,
000,000.
Depreciation is charged using the reducing balance method at the following rates;
Buildings 5%
Motor vehicle 10%
March salaries 2002 amounting to 1,000,000 were paid on 3/4/2002.
The rent expense was paid for a period up to 30/9/2002.
Direct write off of bad debts of 200,000 should be made while a provision for doubtful debts
should be 5% of debtors.
The directors proposed to pay preference dividend and an ordinary dividend of Shs.10 per
share.
Good will and patents should be amortized over a period of 4 years counting from the
1/4/2001.
29
The pension fund is in respect of an in-house pension scheme operated by the company for
the employees.
The company is involved in environmental projects countrywide aimed at conserving the
environment and it offers equal employment opportunities to men and women.
Debenture interest is outstanding.
30% of the 7% debentures is repayable in the next 12 months.
The company was fined for delaying to license the operations of the company as per the
regulations.
Solution:
BAF 111 INCOME STATEMENT FOR THE YEAR ENDED 31/3/2002.
Shs’000
Reserves (W1) 186,500
Cost of sales (W2) (117,238)
Gross profit 69,262
Other operating income (W3) 3,600
License fine / exceptional item (10,000)
Distribution costs (W2) (1,300)
Administrative cost (W2) (7,620)
Other operating expenses (450)
Profit from operations 53,492
Finance costs (700)
Interest on debt 700
Income tax (30%) (15,838)
Net profit for the period. 36,954
BAF 111 BALANCE SHEET AS AT 31/3/2002
NON-CURRENT ASSETS. Shs’000 Shs’000

Property plant & equip. Note 2 118,100
Good will (W7) 412
Patents license (W7) 22,500
141,012
CURRENT ASSETS
Inventory Note 3 7,500
Trade & other receivables (W5) 8,460
Prepaid rents 400
Cash & cash equivalents 4,600 20,960
TOTAL ASSETS. 161,972
EQUITY & LIABILITIES:

Share Capital & Reserves
Issued share capital – ordinary 10,000
Preference share capital 50,000
30
Reserves:
Accumulated profits 56,954
General reserve 200 57,154
117,154
NON-CURRENT LIABILITIES:
7% debenture 7,000
Retirement benefit (obligation) 14,500 21,500
CURRENT LIABILITIES:
Trade & other payables 20,318
7% debenture 3,000 23,318
161,972
WORKINGS:
W1
Reserve
Sales 200,000
Less: Returns inwards (1,500)
Less: Output VAT (12,000)
186,500
W2 : CLASSIFICATION OF EXPENSES:
Cost of Distribution Admin. Other
Insurance 1,400
Travel & sales 450
Rent 800
Purchases 120,000
Input VAT (14,000)
Carriage in 1,700
Carriage out 1,300
Salaries 5,000
Discount allowed 120
Bad debts 300
Returns out (700)
Depreciation Building 2,400
Motor vehicles 2,500
Opening stock 5,200
Closing stock (7,500)
Goodwill 138
Patents 7,500 _____ ____ ____
117,238 1,300 7,620 450
Notes To Income Statement and Balance Sheet:

The company had authorized share capital of 15,000 ordinary shares of 10,000 each.
Depreciation is charged using reducing balance method at the following rates;
Buildings 5%
31
Motor vehicle 10%
Closing stock is valued using first in first out method.
Good will and patents are authorized over a period of 4 years.
30% of the 7% debentures is repayable in the next 12 months.
Sales exclude trade discounts, returns inwards and output VAT.
Exceptional items: These occur during the course of the operation of the business but
arises due to negligence but are not extra-ordinary.
W3 : Other Incomes
Discount received 240

Rent received 3,300
Rent in provision for bad debts 60
3,600
W4 : Trade and Other Payables:

Creditors 1,500
Taxation payable 15,838
Debenture interest 700
(7% x 10,000)
Accrued salaries 1,000
20,318
W5 : Trade and other receivables
Debtors 7,000
Less: debtors written off 200
6,800
Less : provision for bad debts 6,800 x 5% 340
6,460
Input VAT 14,000
Output VAT 12,000
VAT credit 2,000
8,460
W6 : Tangible Asset Schedule:

Shs’000 Shs’000 Shs’000 Total
Land Buildings M/V
Cost 1/04/2001 50,000 60,000 30,000 140,000

Cost 31/03/2003 50,000 60,000 30,000 140,000
Agg. Accum. Deprn.
1/4/2002 - 12,000 5,000 17,000
Deprn. for the year - 2,400 2,500 4,900
NBV 1.4.2001 50,000 48,000 25,000 123,000
NBV 31/4/2001 50,000 45,600 22,500 118,100
32
W7 ; Intangible Assets:
Goodwill Patents Licence
Bal. 1/4/2001 550 30,000
Amortization (138) (7,500)
Bal. 31/3/2002 412 22,500
Exercise.
EXERCISES
Question One:
The following trial balance has been extracted from the books of Wava company as at
31/March /2018
Dr. Cr.
shs."000" shs."000"
Land at cost 120
Building at cost 250
Equipment at cost 196
Goodwill at cost 284
Accumulated depreciation at 1 April 2017 300
Buildings 90
Equipment 76
Vehicles 132
Inventory at 1 April 2013 107
Trade receivables and payables 183 117
Allowance for allowances 8
Bank balance 57
Corporation tax 6
Ordinary shares of 1/= each0 200
Retained earnings at 1 April 2017 503
Sales 1432
Purchases 488
Directors' fees 150
Wages and salaries 276
General distribution costs 101
General administrative expenses 186
Dividend paid 20
Dividend received 30
Disposal of vehicle 10
2,661 2,661
33
The following information is also available:
1. The company’s non-depreciable land was valued at 300,000/- on 31March 2018
and this valuation is to be incorporated into the accounts for the year to 31 March
2018.
2. The company’s depreciation policy is as follows:
Buildings – 4% P.a straight line
Equipment 40% P.a reducing balance
Vehicles 25% P.a straight line
In all cases, a full year’s depreciation is charged in the year of acquisition and no
depreciation is charged in the year of disposal. None of the assets had been fully
depreciated by 31/March /2017.
3. On 1st February 2018, a vehicle used entirely for administrative purposes was sold
for 10,000/=. The sale proceeds were banked and credited to a disposal account
but no other entries were made in relation to this disposal. The vehicle had cost
44,000/= in august 2014. This was the only disposal of a non-current asset made
during the year to 31 March 2018.
4. Depreciation is apportioned as follows:
Distribution costs administrative expenses
Buildings 50% 50%
Equipment 25% 75%
Vehicles 70% 30%
5. The company’s inventory at 31 March 2014 is value at 119,000.

6. Trade receivables include a debt of 8,000/= which is to be written off. The
allowance for receivables is to be adjusted to 4% of the receivables which remain
after this debt has been written off.
7. Corporation tax for the year to 31March 2017 was over estimated by 6,000/=.
The corporation tax liability for the year to 31 March 2018 is estimated to be
30,000/=
8. One- quarter of wages and salaries were paid to distribution staff and the
remaining three –quarters were to administrative staff.
9. General administrative expenses include bank overdraft interest of 9000/=
10. A dividend of 10% per ordinary share was paid on 31 December 2017. No further
dividends are proposed for the year to 31 March 2018.
Required;
Prepare the following financial statements for Wava company in accordance with
the requirements of international standards.
(a) A statement of comprehensive income for the year to 31 March 2018
(b) A statement of financial position as at 31 march 2018
(c) Statement of changes in equity for the year 31 March 2018
34
Question Two
EXCEL PLC TRIAL BALANCE AT 30TH JUNE 2003.
(UG.SHS ‘000)
DR CR
10% preference share capital 20,000
Goodwill 155,000
Building at cost 95,000
Equipment at cost 8,000
Motor vehicles at cost 17,200
Provision for depr. Equipment 2400
Motor vehicle 5160
Interim ordinary dividends 3,500
Account receivable 18,610
Debenture interest 1,500
Stock -finished goods 22,690
WIP 8,500
Materials 11,400
Carriage inwards 1,620
Wages 5,000
Sales 107,200
Salaries (note 1) 4240
Directors remuneration 6,300
Delivery van expenses 8,120
General expenses (note 2) 3,000
Rate & insurance (note3) 560
Creditors -Nile bank 11,370
- Stanbic 1200
Interest on bank overdraft 2,000
Royalties 50
General reserves 400
Share premium 5,000
Profit &loss 14,000
Bad debts provision 17,940
Purchases of materials 52,110
Rent income 100
284,900 284,900
Additional information
i) Salary includes sales men commission of 2200/=
ii) General expenses to be shared 20% production, 30% distribution and 50%
administration.
iii) Rates and insurance were in respect of factory,
iv) Accrue debenture interest for the year and provide corporation tax of 5,000/=,
40% of debentures are redeemable in the following year.
v) Good will of 3000/= to be written off, and provide for preference dividends
and final ordinary dividend of 10%.
35
vi) Building costing 15,000/= was destroyed by earthquake, and a tax allowance
of 2,500/= was granted, the balance of building to be revalued at 100,000/=.
vii) Stocks are valued using FIFO, but both opening and closing stocks of finished
goods had been valued using FIFO. The corresponding amounts using FIFO
are 22,300/= and 21,000 respectively. Closing stock of materials 1,850/= WIP
11,700/=, finished goods 19,500.
viii) Authorized share capital consists of 20,000preference shares of 1,000/= @
and 100,000 ordinary shares of 1,000/=.
ix) Transfer 2,000/= from retained earnings to general reserves.
x) Equipment and motor vehicle to be depreciated at 10% on cost. Equipment is
used in production and motor vehicle is used equally between distribution and
administration.
xi) Provide for bad debts at 150/=.
Required:
Prepare in a form suitable for publication and in conformity with the provisions of IAS 1
(revised), the balance sheet as at 31st March 2003 together with their company notes.
36
CHAPTER FOUR
CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The purpose of this chapter is to introduce the concept of a ‘group’ of companies and to
explain how a group statement of financial position and statement of comprehensive income
and other related matters are prepared.
A group of companies consists of a parent company together with one or more subsidiary
companies which are controlled by the parent company. Control over a subsidiary is usually
achieved by acquiring over 50% of its ordinary shares. The shareholders of a parent
company have an indirect interest in the net assets and in the profits or losses of the
company’s subsidiaries. Accordingly, parent companies are required to prepare and present a
set of accounts for the group as whole, in recognition of the fact a parent company and its
subsidiaries are in effect, a single economic unit.
The main international standards which apply to the preparation of group accounts:
IFRS 10 – Consolidated Financial statements
IFRS 3 – Business combinations
IAS 27 – Consolidated financial statements & accounting for investments in subsidiaries.
IAS 22 – Business combinations
IAS 28 – Accounting for investments in associates
IAS 31 – Financial reporting of interests in joint ventures
Objectives
By the end of this chapter, the reader should be able to:
 Explain what is meant by a set of consolidated financial statements.
 Define the terms ‘parent’, ‘subsidiary and control’ in accordance with
international standard IFRS 10.
 Prepare a group statement of financial position both at the date of acquisition
subsequent to acquisition, accounting correctly for goodwill.
 Prepare a group statement of comprehensive income
 Eliminate intra-group balances and unrealized profits arising on the transfer of
assets between group companies at more than cost
Although every company is a separate entity from the legal point of view, from the economic
point of view several companies may not be separate at all. This happens especially where
one company owns majority ordinary shares and directors in another company hence exerting
the controlling influence.
This degree of control enables the first company (majority shares) to manage the trading
activities as if it were merely a department of the first company.
The first company referred to above is the parent and the second is called a subsidiary.
The IAS give the shallowest definition for the parent or holding company as that company
which has a controlling interest in other companies. The controlling interest is acquired after
37
the company (holding) has acquired more than 50% of the ordinary shares of another
company (subsidiary).
Therefore, the term Group refers to the parent company with its subsidiaries and associates
Key Definitions
Business combination: This is the bringing together of separate entities or businesses into one
reporting entity. The result of nearly all business combinations is that one entity, the acquirer
obtains control of one or more other businesses, the acquiree.
Acquisition: A business combination in which one of the enterprises, the acquirer, obtains
control over the net assets and operations of another enterprise, the acquiree, in exchange for
the transfer of assets, incurrence of a liability or issue of equity.
Uniting of interests: A business combination in which the shareholders of the combining

enterprises combine control over the whole, or effectively the whole, of their net assets and
operations to achieve a continuing mutual sharing in the risks and benefits attaching to the
combined entity such that neither party can be identified as the acquirer. Also called a
pooling of interests.
Control: The power to govern the financial and operating policies of an enterprise so as to
obtain benefits from its activities. If one enterprise controls another, the controlling enterprise
is called the parent and the controlled enterprise is called the subsidiary.
Consolidated financial statements: The financial statements of a group presented as those of a

single economic entity.
Subsidiary: An entity, including an unincorporated entity such as a partnership, that is

controlled by another entity (known as the parent).
A subsidiary company is an undertaking, which is either controlled by another undertaking

(co) or where that other undertaking exercises a dominating influence over it.
Associate company is company in which the parent company has a substantial interest but
not a controlling interest.
Parent: An entity that has one or more subsidiaries.
Minority interest: That part of the net results of operations and of net assets of a subsidiary
attributable to interests which are not owned, directly or indirectly through subsidiaries, by
the parent.
Associate: An enterprise in which an investor has significant influence and which is neither a
subsidiary nor a joint venture.
Significant influence: is the power to participate in the financial and operating policy
decisions of an economic activity but has no control over those policies.
38
Joint venture: a contractual arrangement whereby two or more parties undertake an economic
activity which is subject to joint control.
Group investments and their treatment

INVESTMENT CRITERIA REQUIRED TREATMENT
IN GROUP ACCOUNTS
Subsidiary Control (> 50% rule) Full consolidation
Associate Significant influence (20% Equity accounting
+ rule)
Joint venture Contractual Benchmark: proportionate
consolidation
Alternative: equity
accounting
Investment which in none Asset held for accretion of As for single company
of the above wealth accounts.
Preparation of consolidated Financial Statements

IFRS 10 requires that a parent prepares consolidated financial statements using uniform
accounting policies for transactions and other events in similar circumstances.
However, a parent need not present consolidated financial statements if it meets all of
the following conditions:
 It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated financial
statements.
 Its debt or equity instruments are not traded in a public market ( a domestic or foreign
stock exchange or an over-the-counter market, including local and regional markets).
 It did not file, nor is it in the process of filling its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market.
 Its ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with IFRS.
How to determine the control interest?

Control interest arises when a company has the ability to influence the activities of another
company in order to gain economic benefit from such control.
i) By use of the voting rights which must be more than 50% of the voting rights of
that other company.
It is agreed that ordinary shares should be used instead of preference shares
because the former has voting rights. E.g. a company buys 30,000 of the 50,000
ordinary shares in Bltd and 10,000 of the 20,000 preference shares.
Determine the controlling interest.
A ltd’s controlling interest in B = 30,000 x 100 = 60%
50,000
The 40% is referred to as the minority interest.
ii) If a company has an exclusive right to appoint the board of directors of .
39
another company then, it has a controlling interest or power to govern the
financial and operating policies of the other entity under statute or agreement.
ii) If the company has power to cast the majority votes at meetings of the board of
directors or equivalent governing body of the other entity.
In circumstances where it is difficult to identify the acquirer, there are usually indications
that one exists. For example:
 If the fair value of one of the combining entities is significantly greater than that
of the other combining entity, the entity with the greater fair value is likely to be
the acquirer.
 If the business combination is effected through an exchange of voting ordinary
equity instruments for cash or other assets, the entity giving up cash or other
assets is likely to be the acquirer.
 If the business combination results in the management of one on the combining
entity being able to dominate the selection of the management team of the
resulting combined entity, the entity whose management is likely to so dominate
is to be the acquirer.
For the moment it is it is sufficient to note that the essential feature of the group is that one
company controls all the others.
International accounting standards recognize that this state of affairs often arises and require
a parent company to produce consolidated financial statements showing the position and
results of the whole group.
Main features of IFRS 3
a. Requires all business combinations within its scope to be accounted for by applying
the purchase method.
b. Requires an acquirer to be identified for every business combination within its scope.
The acquirer is the combining entity that obtains control of the other combining
entities of businesses.
c. The acquirer should measure the cost of a business as the aggregate of: the fair
values, at the exchange date, of assets given, liabilities incurred or assumed, and
equity instruments issued by the acquirer, in exchange for control of the acquiree;
plus any costs directly attributable to the combination.
d. The acquirer recognizes separately, at the acquisition date, the acquiree’s identifiable
assets, liabilities and contingent liabilities that satisfy the following recognition
criteria at that date, regardless of whether they have been previously recognized in the
acquiree’s financial statements:
i. In case of tangible assets, it is probable that any associated future economic
benefits will flow to the acquirer and its fair value can be measured reliably;
ii. In case of liability other than a contingent liability, it is probable that an
outflow of resources embodying economic benefits will be required to settle
the obligation, and its fair value can be measured reliably; and
iii. In case on an intangible asset or liability, its fair value can be measured
reliably.
e. Assets, liabilities, and contingent liabilities be measured initially at fair values at the
date of acquisition.
40
f. Goodwill be recognized by the acquirer as an asset from the date of acquisition,
initially measured as the excess of the cost of the business combination over the
acquirer’s interest in the net fair value of the acquirer’s identifiable assets, liabilities
and contingent liabilities. After initial recognition, the acquirer shall measure
goodwill acquired at cost less any accumulated impairment losses.
g. Prohibits amortization of good will acquired in a business combination and instead
requires the goodwill to be tested for impairment annually.
h. Requires disclosure of information that enables users of an entity’s financial
statements to evaluate the nature and financial effect of:
i. Business combinations that were effected during the period;
ii. Business combinations that were effected after the balance sheet date, but
before the financial statements are authorized for issue; and
iii. Some business combinations that were effected in previous periods.
Method of accounting
All business combinations shall be accounted for by applying the purchase method.
Applying this method involves:
i. Identifying the acquirer;
ii. Measuring the cost of the business combination; and
iii. Allocating, at the acquisition date, the cost of the business combination to the assets
acquired and liabilities and contingent liabilities assumed.
Cost of a combination
The acquirer shall measure the cost of a combination as the aggregate of:
 The fair values, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the acquirer, in exchange for control of the
acquiree; plus
 Any costs directly attributable to the business combination
The acquisition date is the date on which the acquirer obtains control of the acquiree. When
this is achieved through a single exchange transaction, the date of exchange coincides with
the acquisition date.
When a business combination agreement provides for an adjustment to the cost of the
combination contingent on future events, the acquirer shall include the amount of that
adjustment on the cost of the combination at the acquisition date if the adjustment is probable
and can be measured reliably.
Group financial statements could be prepared in various ways, but in normal circumstances
the best way of showing the results of the group is to imagine that all the transactions of the
group had been carried out by a single equivalent company and to prepare a balance sheet,
Income statement and (if required) Cash flow statement.
GROUP STRUCTURE
This can involve direct and indirect interest
PREPARATION OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION.
41
Each company in the group prepares its accounting records and annual financial statements
in the usual way. From the individual companies’ statements of financial position, the
holding company prepares a consolidated statement of financial position for the group.
Example One.
Statement of financial position as at 31st Dec.2014.
H LTD S LTD
Non-current assets 120,000 80,000

Current assets
Cash 180,000 80,000
Accts receivable 40,000 220,000 30,000 110,000
Total Assets 340,000 190,000
SHARE CAPITAL &LIABILITIES.
Ordinary share capital 280,000 100,000

Profit & loss 30,000 -------
Current liabilities 30,000 90,000
340,000
190,000
H ltd acquired all the shares in S ltd on 31st Dec.2014 for the cost of shs.100, 000.
Required. Update the balance sheets and prepare the consolidated Balance sheet for the
group.
Solution: The updated Balance is as below.
Updated statement of financial position as at 31st Dec.2014.

H LTD S LTD

Investments in S at cost 100,000
Current assets
Cash 80,000 80,000
Accts receivable 40,000 120,000 30,000 110,000
Total Assets 340,000 190,000
SHARE CAPITAL &LIABILITIES.

Profit & loss 30,000 -------
340,000
190,000
Balance sheet consolidation procedure:
42
In consolidating the balance sheet, related items should be added together apart from the
share capital balances.
The cost of the investment in the subsidiary is effectively cancelled with the ordinary share
capital and reserves of the subsidiary in calculations known as consolidation schedules. It can
be seen that the relevant figures are equal and opposite, and therefore cancel directly.
This leaves the balance sheet showing:
i) the net assets of the group (A+S)
ii) the share capital of the group which is solely the share capital of the parent (H
only)
Therefore, by cross casting the net assets of each company, and taking care of the investment
in S and the share capital of S ltd we arrive at the consolidated Balance sheet given in the
solution below.
H CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31ST DEC.2009.

SHS.
Non- current assets (120,000 +80) 200,000
Current assets:
Account receivable (40,000+30,000) 70,000
Cash (80,000 +80,000) 160,000
430,000
Share capital and liabilities.
Profit& loss 30,000
Current liabilities 120,000
430,000
Note: Under no circumstances will any share capital of any subsidiary company be
included in the figure of share capital on the consolidated balance sheet.
EXAMPLE Two
Statement of Financial Position at 31/12/2015
P S
UGX. ‘000’ UGX. ‘000’
Non-current assets 60 50
Investment in S at cost 50
Current assets 40 40
150 90
Ordinary capital (1/= share) 100 40
Retained earnings 30 10
Current liabilities 20 40
150 90
P acquired all the shares in S on 31st Dec 2015 for a cost of 50,000/=
Prepare the consolidated statement of financial position as ar 31st Dec 2015.
Solution
P consolidated statement of Financial Position as at 13/12/2014
UGX.'000'
Non -current assets (60,000+50,000) 110
43
current assets (40,000+40,000) 80
190
share capital ( 1/= @ share) 100
Retained earnings 30
Current Liabilities (20,000+40,000) 60
190
Goodwill on consolidation IFRS 3.

The acquirer shall, at the acquisition date:
a. recognize goodwill acquired in a business combination as an asset; and
b. Initially measure that goodwill at its cost, being the excess of the cost of the business
combination over the acquirer’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities.
After the initial recognition, the acquirer shall measure goodwill acquired in a business
combination at cost less any accumulated impairment losses.
Example3. Assuming in the previous example one, acquired the shares in S at shs. 120,000.
In this case the cost of the shares in S exceeds S’s share capital by shs.20, 000. This is
goodwill on consolidation or premium on acquisition. It represents the excess of the purchase
consolidation over the fair value of the net assets acquired. The calculation is set in
consolidation schedule as under.
Cost of investment 120,000

Less: Share of net assets acquired (at fair value)
Acc.profits (pre- acquisition profits) ------
100,000
Group share 100% 100,000
Goodwill on consolidation 20,000
The consolidated statement of financial position should be as below.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31ST DEC.2009.

SHS.
Non- current assets (120 +80) 200,000
Goodwill 20,000
Current assets:
Account receivable (40,000+30,000) 70,000
Cash (60,000 +80,000) 140,000
430,000
Share capital and liabilities.
Profit& loss 30,000
430,000
RESERVES:
44
The previous shareholders interest consisted only ordinary share capital. Usually,
shareholders’ interest also includes accumulated profits. An additional point is that H ltd may
have acquired the controlling interest in S ltd part way through the year. If S ltd was acquired
during the course of the year, then the distinction must be made between;
a) those reserves of S ltd which existed at the date of ACQUISITION BY H ltd (per-
acquisition reserves) and
b) the increase in the reserves of S ltd, which arose after acquisition by H ltd (post-
acquisition reserves)
Example:
Statement of financial position at 31st Dec 2017.
H LTD S LTD
Investments in S ltd 70,000 -------
Current assets 30,000 40,000
150,000 80,000
Ordinary share capital (sh.1) 100,000 50,000

Accumulated profits 30,000 20,000
150,000 80,000
You are further informed that H acquired all the shares in S at 30 th June 2017 when the
accumulated profits of S ltd amounted to shs.15, 000.
Required: Prepare the consolidated balance sheet.
Solution:
Calculate Goodwill on consolidation.
Less: Share of net assets acquired:
Accumulated profits (pre-acquisition profits) 15,000
65,000 x 100% 65,000
Goodwill on consolidation 5,000
In addition, a new consolidation schedule, a consolidated accumulated profits schedule, is

required. The objective of this is to show the distributable profit of the group at the balance
sheet date. Profits made by S ltd prior to acquisition by H ltd (pre-acquisition profits) are not
regarded as those of the group whereas profits of S after acquisition (post- acquisition profits)
are regarded as group profits. Allocate the reserves of S ltd at the balance sheet date between
pre-acquisition and post- acquisition reserves. Pre-acquisition reserves are effectively
capitalized whereas post acquisition reserves together with the present balance on H ltd
reserves are transferred to consolidate profit and loss account reserve.
The consolidated accumulated profits schedule is set out as follows:
H ltd (all) 30,000
S ltd(only post acquisition) ( 20,000 – 15,000)x100% 5,000
35,000
H Ltd Consolidated Balance sheet at 31st Dec.2017
Non- current assets 90,000
Intangible assets (Goodwill) 5,000
Current assets 70,000
45
165,000
165,000
Minority interests.
What happens if H owns only 80% of the ordinary of S ltd.? In this case there is said to be a
minority interest of 20%. What problems do this present?
The main decision to make on accounting principles is whether to consolidate all the net
assets of S, or merely to consolidate the proportion of the net assets represented by the shares
held and the proportion of the reserves, which apply to those shares i.e. Consolidate only
80% of the net assets of S.
The dominant principle is that the directors are preparing accounts of their custody of all the
assets under their control, even though there are owners other than the parent company.
Therefore, the generally accepted solution is to consolidate all the subsidiary’s net assets and
then bring in a counterbalancing liability on the consolidated balance sheet to represent that
part of the assets controlled but not owned. This liability is presented quite separately in the
consolidated balance sheet. It is not part of the shareholders’ funds. It is referred to as
minority interest.
Example:
Balance sheets at 31st Dec 2017.
H LTD S LTD
Investments in S ltd 70,000 -------
150,000 80,000
Ordinary share capital (sh.1) 100,000 50,000

150,000 80,000
H acquired 40,000, 1/= shares in S on 30th June 2016 for 70,000/=, when the accumulated
profits of S ltd amounted to shs.15, 000.
Required: Prepare the consolidated statement of financial position.
Solution:
A third consolidation schedule is required to calculate the minority interest in the net assets
of the subsidiary.
Minority interest
Net assets of S at the balance sheet date
Share capital 50,000
70,000 x 20%
Minority interest 14,000.
46
Goodwill on consolidation
Less: Share of net assets acquired:
Accumulated reserves 15,000
65,000
Group share x 80% (52,000)
18,000
Goodwill will be held at cost and periodically tested for impairment.

Accumulated reserves.
H (all) 30,000
S (H’s share of S’s post acquisition profits)
80%( 20,000 – 15,000) 4,000
34,000
Minority interest:
Net assets of S ltd at the balance sheet date,
Profit & loss account 20,000
Minority interest 70,000 x 20% = 14,000
H, Consolidated Balance sheet as at 31st Dec. 2017.

Non- current assets 90,000
Intangible assets:
Goodwill 18,000 108,000
178, 000

Minority interest 14,000
178,000
Minority interest and fair value adjustments.
In calculating goodwill, it is often necessary to first to revalue non- current assets to fair
value. This done by debiting the asset concerned and crediting revaluation reserve. The
revaluation reserve is then considered in the calculation of goodwill along with other pre-
acquisition reserves.
If there is minority interest to consider, the benchmark treatment in IAS 22 is to revalue only
to the extent of the group’s interest in the assets. In short the minority does not receive its
share of the revaluation reserve created to effect the revaluation. This is stated to be because
the minority’s proportion has not been part of the exchange transaction at the acquisition.
Exercise:
The summarized draft balance sheets of a group at 31st Dec.2017 were
47
B Ltd Kltd B Ltd K ltd
Non- current assets 106,000 34,500 Share capital 100,000 20,000
Investment in Kltd 27,000 -------- P & Loss 22,000 6,500
Creditors 11,000 8,000
133,000 34,500 133,000 34,500
Prepare the consolidated balance sheets for each of the following alternatives.
a) B ltd acquired all the shares in K ltd on 1 st Jan. 2017, when K ltd had P&L a/c reserve
of SHS. 6,000.
b) Facts as in (a) above, except that only 16,000 Ordinary shares in K ltd were
purchased for shs. 27,000.
c) Facts as in (a) above, except that only 16,000 ordinary shares in K were purchased
for sh.27, 000 on 1st Jan.2017. Property, which was not depreciated, was estimated by
the directors of B to be sh. 5,000 on 1st Jan. 2017. No adjustment has been made in
the books of K ltd.
INTER COMPANY ITEMS.

The individual Statement of financial position (balance sheet) of the parent and subsidiary
companies are likely to include inter-company items i.e. Amount owing between two group
companies. These inter-company items must be eliminated when the consolidated balance
sheet is prepared, in order to show the proper position of the economic unit, the group.
Current accounts.
At the end of the year current accounts may not agree. Owing to the existence of in transit
items such as goods or cash. The usual rules are,
a) If the goods or cash are in transit between the parent and the subsidiary, make the
adjusting entry to the balance sheet of the parent, irrespective of the direction of
transfer i.e. Dr cash in transit
Cr. Current account with the subsidiary.
b) If the goods or cash are in transit between subsidiaries, then adjust in the books of the
ultimate recipient.
c) Once in agreement, the current accounts may be contra’d and cancelled as part of the
process of cross casting the upper half of the balance sheet.
INTER COMPANY INDEBTDNESS FOR TRANSACTIONS.

1. Inter-company debtors and creditors.
2. Inter-company bills of exchange or notes payable.
3. Inter-company debentures
4. Inter-company debenture interest payable.
These 4 do not affect the overall structure of the group.
5. Inter-company unrealizable profits.
From the group point of view, transfers from one member of the group to another
merely constitute an internal transfer and not a sale. Therefore, the profit element
should be eliminated on consolidation from the profits of the seller and the stock of
the buyer or assets. However, where internally transferred items are subsequently
sold to parties outside the group, the profit on them i.e. any transfer profit plus any
further profit added by the transferee undertaking when selling externally, can
legitimately be regarded as having been realized.
48
E.g.
P sold goods to S for 2,000, which represented cost plus 25% at the balance sheet date
goods valued at the transfer price of 1,200 were still unsold and included in S’s stock.
Calculate the amount of unrealized profit included in the closing stock valuation for
the group.
P sold 2,000 to S ltd.
25 x 1,200 = 240 profit, which should be reduced from the closing stock of S.
125
Or
x + 25%x = 1,200
x +25% of x = 1,200
x = 1,200 = 960
1.25
Profit element = 1,200 – 960 = 240.

Dr. P&L 240
Cr. Stock 240
UNREALIZED PROFITS OF FIXED ASSETS.

A member can sale fixed asset to another at a profit, such a transaction has a two-fold effect
at a group level. First, the transferer undertaking has made unrealized profits vis-à-vis the
group, but secondly this profit must be abated (reduced) by the additional depreciation which
has been automatically been calculated by the transferee undertaking on the enhanced input
cost of the fixed asset. With these circumstances, group unrealized profits are the net of the
two calculations.
E.g.
P sold machinery which it had manufactured at a cost of 70,000 to S for 100,000, S
depreciated plant and machinery at a rate of 10% per annum (charging a full year’s
depreciation from the year of acquisition) on straight-line basis assuming no residual value,
calculate the unrealized profit figure in the closing figure of fixed asset.
Gross provision for unrealized profit (100,000 – 70,000) 30,000 less excess provision for
depreciation (30,000 x 10% = (3,000)
Net provision 27,000
The accounting for such unrealized profits is such that group fixed assets are reduced in total
and for the class of assets concerned.
1. At cost stage by gross provision.

2. At the accumulated depreciation stage by the excess depreciation
3. At the net (written down value stage) by the net provision.
Adjustments are also needed in order to show Y statement as of would be if the transfer had
not taken place.
49
 Any profit/loss arising from the transfer is eliminated.
 The depreciation charge is adjusted so that it’s based on the cost of the asset to the group.
Example:
P. Sold a non-current asset to S for 25,000, the asset originally cost 20,000 and at the date of
transfer, it had a net book value of 15,000, both companies depreciate non-current asset at
20% on cost per annum. P. Owns 75% of S.
Solution:
Unrealized profit
On sale (25,000 – 15,000)
= 10,000 profit element.
This must be eliminated in the consolidated Y. statement. The depreciation charge for the
year in the books of S is Shs.5, 000.
(25,000 x 20% = Shs.5, 000).
If the transfer had not taken place, the depreciation charge in the books of P would have been
Shs.4, 000 the depreciation charge must be reduced by Shs.1,000.
Dr. Profit on sale of non-current asset 10,000

Cr. Depreciation expenses 1,000
Cr. Non-current assets 9,000
(Net book value 20,000 – (10,000 + 1,000)
The minority interest must be adjusted for the minority’s share of the reduction in
depreciation as this was recorded in S’s books.
Dr. Minority of interest (I.S) 25% x 1,000 = 250

Cr. Minority interest (B.S) = 250
INTER-COMPANY DIVIDENDS.
PRE-ACQUISITION DIVIDENDS.
It’s right to consider the pre-acquisition of dividends i.e. the calculation of goodwill. They
are treated in the same way as pre-acquisition reserves. The subsequent receipt of pre-
acquisition dividends is usually regarded as a reduction in the capital cost of acquiring the
investment, otherwise treat the dividends as realized profits in the hands of the parent so long
as the subsequent receipts of the dividend does not cause a permanent diminution in the value
of the investment.
POST-ACQUISITION DIVIDENDS.
They are divided into two: -
(a) Ordinary dividends. If the dividends were declared and paid, then there is no
problem. If, however, the dividends have been declared but not yet paid, we must
know whether the holding company had recognized them or not. If recognized on
consolidation, then cancel out the receivable against a payable in the books of the
parent company and against a payable in the books of the subsidiary. If unrecognized
by the parent company, then recognize the dividend income in the holding
company/parent company, that
50
Dr. Dividends receivable
Cr. The income statement.
Then cancel out the payable against a receivable.
If a provision has not been made but needs to be made, here provide the dividends in
the books of the subsidiary company.
Dr. P&L
Cr. Dividends proposed / payable
Also, in the books of a parent.

Dr. Dividends receivable
Cr. P&L
Then cancel out a receivable against a payable.
(b) Preference Dividends: Treatment is similar to (a). Only that the adjustments are
done first. The preference share holding may differ from ordinary share holding. For
example, if controlling interest is 80% and PA is 100,000. If there is no preference
dividends, then minority interest.
MI = 100,000 X 20% = 20,000

Suppose preference dividends are 20,000 of which 2,000 is attributable to the parent
company, the minority interest can be got by:
MI = PAT = 100,000
Less: Pref. Dividend 20,000
able ordinary shareholders 80,000
Minority Interest 20% x 80,000 = 16,000

Total MI = 16,000 + (20,000 – 2,000)
= 16,000 + 18,000
= 34,000
ACCOUNTING FOR INVESTMENTS IN ASSOCIATES (IAS28)

An associate is an enterprise in which the investor has significant influence and which is
neither a subsidiary nor joint venture but not control. In this case, a significance influence
means the power to participate in the financial and operating policy decisions of an enterprise
in which an investment is held, but is not control over these policies. A holding of 20% or
more of the voting power is presumed to give significance influence, unless it can be clearly
demonstrated that this is not the case. However, it is presumed that a holding of less than
20% does not give significant influence, unless such influence can be clearly demonstrated.
Equity Method of Accounting:
51
Equity basis account is defined in IAS28 as the method of accounting whereby the investment
is initially recorded at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of net assets of the associate.
The equity method is used for associate except for:
 An investment in an associate held by a venture capital organization or a mutual fund

(or similar entity) and that upon initial recognition is designated as held for trading
under IAS 39. Under IAS 39, those investments are measured at fair value with fair
value changes recognized in profit or loss. [IAS 28.1]
 An investment classified as held for sale in accordance with IFRS 5. [IAS 28.13(a)]
 A parent that is exempted from preparing consolidated financial statements by
paragraph 10 of IAS 27 may prepare separate financial statements as its primary
financial statements. In those separate statements, the investment in the associate may
be accounted for by the cost method or under IAS 39. [IAS 28.13(b)]
It may be necessary to discontinue the use of the equity method if;

 the investor ceases to have significant influence even though the investment is still
held,
 severe long term restrictions impair the transference of funds to the investor.
If either of these events occurs, the investment should be restated at cost.
Identification of Associates
A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate
significant influence unless it can be clearly demonstrated otherwise. If the holding is less
than 20%, the investor will be presumed not to have significant influence unless such
influence can be clearly demonstrated. [IAS 28.6]
The existence of significant influence by an investor is usually evidenced in one or more of

the following ways: [IAS 28.7]
 representation on the board of directors or equivalent governing body of the investee

 participation in the policy-making process
 material transactions between the investor and the investee
 interchange of managerial personnel
 provision of essential technical information
Potential voting rights are a factor to be considered in deciding whether significant influence
exists. [IAS 28.9]
Applying Equity Method of Accounting:

In the case of the balance sheet, the initial cost of investment is increased each year by the
investor’s share of the associates post tax profit (or reduced if it’s a loss). The retained profit
after deducting dividends is used. Any difference between the cost and fair value of the
group’s share of the associate’s net assets is treated as goodwill
52
Implicit goodwill and fair value adjustments. On acquisition of the investment in an
associate, any difference (whether positive or negative) between the cost of acquisition and
the investor's share of the fair values of the net identifiable assets of the associate is
accounted for like goodwill in accordance with IFRS 3 Business Combinations. Appropriate
adjustments to the investor's share of the profits or losses after acquisition are made to
account for additional depreciation or amortisation of the associate's depreciable or
amortizable assets based on the excess of their fair values over their carrying amounts at the
time the investment was acquired. [IAS 28.23]
Impairment. The impairment indicators in IAS 39 Financial Instruments: Recognition

and Measurement, apply to investments in associates. [IAS 28.31] If impairment is
indicated, the amount is calculated by reference to IAS 36 Impairment of Assets. The entire
carrying amount of the investment is tested for impairment as a single asset, that is, goodwill
is not tested separately. [IAS 28.33] The recoverable amount of an investment in an associate
is assessed for each individual associate, unless the associate does not generate cash flows
independently. [IAS 28.34]
The two adjustments mean that the value of the investment at each balance sheet date is cost
plus the groups share of the associate post tax profit. Investments in associate should be
classified as non-current assets and shown separately. The investment in associated company
is determined as follows:-
Net assets x %age of control xx

Add: the premium of acquisition (goodwill) xx
Investment in associate. xx
Goodwill or premium of acquisition is determined in the same way as for subsidiaries:
Cost of investment xx
Less: %age share of ordinary shares (xx)
%age of premium acquisition reserves (xx)
Premium of acquisition xx
Example:
P acquired 25% of the ordinary share capital of A for $640,000 on 31 December 20X7 when
the accumulated profits of A stood at $720,000. Group policy is to periodically test goodwill
gor impairement. P appointed two directors to the board of A and the investment is regarded
as long term. Both companies prepare their financial statements to 31 December each year.
The summarized balance sheet of A on 31 December 20X9 is as follows:-
$’000
Sundry net assets 2,390
Capital and reserves
Share capital 800
Share premium 450
2,390
53
A has made no new issues of shares nor has there been any movement in the share premium
account since P acquired its holding.
Show at what amount the investment in A will be shown in the consolidated balance sheet of
P as on 31 December 20X9.
Solution:
$ $
Investment in associate 597,500
25% x $2,390,000 147,500
Goodwill (W1) (59,000) 88,500
686,000
This figure could also be calculated as:

Cost 640,000
Share of post-acquisition profits (25% x (1,140) – 720)) 105,000
Less : Goodwill amortized (59,000)
686,000
Workings:
$ $
(W1) Goodwill
Cost 640,000
Less: Share of net assets at acquisition
Share premium 450,000
Reserves 720,000
25% x $1,970,000 (492,500)
Goodwill $147,500
Effect on total reserves:

Total reserves in the published financial statements will be changed in two main ways
due to the equity accounting of the associate.
(i) Reserves will be increased by the group share of post acquisition reserves of
the associate.
(ii) Reserves will be decreased by any goodwill amortized.
The consolidation schedule for group reserves will include these two items in respect of
associates as shown below:
Consolidated accumulated profits
$’000
P: X
S: s% (now-acquisition) X
A: 25% (now-acquisition (1,140-720) 102
Less: Goodwill written off
S (X)
A (59)
X_
54
Illustration:
Leg acquired 90,000 $1 ordinary shares, 50,000 $1 preference shares and $10,000 loan notes
in foot on 30 June 2001.
The balances in the books of Leg and foot as at 31 December 2009 were as follows:-
LEG FOOT
$ $
Non-current assets (NBV) 380,000 225,000
90,000 ordinary shares in foot at cost 185,000 -
50,000 preference shares in foot at cost 55,000 -
$10,000 loan notes in leg 10,000 -
830,000 368,500
Ordinary shares of $1 500,000 120,000

8% non-cumulative preference share of $1 - 80,000
7% loan notes - 40,000
Revaluation reserve 50,000 30,000
Payables 130,000 32,500
830,000 368,500
You are also given the following information:-

(a) The revaluation reserve and accumulated profits of foot as at 30 June 2006 were
$12,000 and $30,500 respectively.
(b) The inventory of foot at 31 December 2009 includes $22,800 in respect of goods
purchased from Leg. Leg invoices at cost plus 20%. You are required to prepare the
consolidated balance sheet of Leg and its subsidiary foot as at 31 Dec. 2009.
Working should be shown. For the year ending December 2009, goodwill was found
to be impaired by $1,000.
Solution:
Step I: Shareholdings in foot.
Ordinary shares Preference shares
Group 75% 62.5%
Minority 25% 37.5%
100% 100%
Step II: Adjustments.

1. Unrealized profit on inventory = 20 x $22,800 = $3,800
120
OR: = 1/6 x $22,800 = $3,800
Step III: Goodwill

Cost of investment (185,000 + 55,000) 240,000
Less : Share of net assets at acquisition
 Ordinary share capital 120,000
 Revaluation reserve (pref. Acquisition) 12,000
55
 Accumulated profits (pre-acquisition) 30,500
Group share 75% x 162,500 (121, 875)
X 62.5% (50,000)
Goodwill 68,125
Less: Impairment loss 1,000
67,125
Step IV: Reserves
1. Consolidated accumulated profits.
Leg (all) 150,000
Unrealized profit on inventory (3,800)
Foot 75% (66,000 – 30,500) 26,625
Less: Impairment loss (1,000)
171,825
2. Revaluation Reserve:
Leg 50,000
Foot 75% (30,000 – 12,000) 13,500
63,500
Step V Minority Interest:

Net assets of foot:- $
Attributable to ordinary shareholdings
Revaluation reserve 30,000
216,000
Minority Interest x 25% 54,000
Attributable to ordinary shareholdings

Minority Interest x 37.5% 30,000
84,000
Step VI: Prepare the Consolidated Balance Sheet.

Consolidated Balance Sheet of Leg and its Subsidiary, Foot at 31 December 2009.
$ $
Non-Current Assets:
Tangible assets 605,000
Intangible assets:-
Goodwill 67125 672,125
1,011,825
Equity & Liabilities:

Capital and reserves:
56
Revaluation reserve 63,500
Minority Interest 84,000

Non-current liabilities:
7% loan notes 30,000
1,011,825
Illustration 2:
Dickson acquired 80% of the ordinary share capital of BAAT several years ago when
the balance on the accumulated profits of BAAT was $12,000. Their respective draft
balance sheets at 31 December 2018 are as follows: -
Dickson BAAT
$ $
Investments in BAAT 55,000 -
200,000 123,000

Preference share capital - 10,000
Proposed dividend (declared Dec.2018) 10,000
Trade payables 20,000 11,000
200,000 123,000
Dickson has not made any entry for dividend receivable from BAAT for the year. A
proposed preference dividend of $2,000 by BAAT (also declared in December 2018), has
not been accounted for by either company. Dickson purchased 30% of the preference
shares for $3,500 some years ago. Goodwill has been fully amortized.
Solution:
Step I : Shareholdings in BAAT : Ordinary shares Preference shares
% %
Group 80 30
Minority 20 70
100 100
Step II:Adjustments.
1. Proposed preference divided by BAAT.
Dr. Accumulated profits $2,000
Cr. Proposed dividend $2,000
2. Ordinary Dividends receivable by Dickson.

(i) Dr. Dividends receivable
57
(Ord: 80% x 10,000) 8,000
Cr. P & L account 8,000
(ii) Dr. Dividend receivable

(Pref. 30% x 2,000) 600
Cr. P & Loss account 600
Adjusted Balance Sheet:

Investment in BAAT 55,000 -
Dividend receivable 8,600 -
208,600 123,000
Preference share capital - 10,000
Profit & Loss account 88,600 40,000
Proposed dividends 12,000
Trade payables 20,000 11,000
208,600 123,000
Step III: Goodwill on Investment:

62,000
x 80% (49,600)
Group share x 30% (3,000)
Goodwill – fully amortized 2,400
Step IV: Reserves

Consolidated accumulated profits.
Dickson 88,600
BAAT 80% (40,000 – 12,000) 22,400
Less: Amortized Goodwill (2,400)
108,600
Step V: Minority Interest.
Net assets attributable to ord. Shareholdings
90,000
Minority share x 20% 18,000
Attributable to pref. Shareholdings:
Preference share capital 70% x 10,000 7,000
25,000
Consolidated balance sheet of Dickson and its subsidiary, BAAT as at 31 Dec.1998
58
$ $
Non-current assets 192,000
Total assets 268,000
Capital and Reserves:

Reserves – accumulated profits 108,600 208,600
Minority interests 25,000
233,600
Current liabilities:
Dividend payable to Minority shareholders 3,400 34,400
268,000
Illustration one:
Tea acquired 80% timber Ltd on 30th April 2017. At the start of the financial year, timber’s
retained earnings stood at 190,000/=. All profits and losses are deemed to accrue evenly
throughout the year. Timber has an unrecognized internally generated brand, which at the
point of acquisition was deemed to have a fair value of 90,000/= and a useful life of 25 years.
Tea wishes to measure the non-controlling interest in the subsidiary identifiable net assets.
At the reporting date the goodwill arising on acquisition was assessed as having a
recoverable amount of 76,000/=. In the post-acquisition period Tea sold goods to Timber for
180,000/= based on a margin of 40%. One third of these goods remain within timber’s
inventory at the reporting date. The revaluation reserve in Timber arose several years ago.
Statement of financial position as at 31Decemeber 2017

Tea Timber
Non-current Assets shs. shs.
Property, plant and equipment 1,030,000 588,000
Investments 785,000 0
1,815,000 588,000
Current Assets
Inventory 340,000 251,000
Receivables 300,000 320,000
Bank 65,000 35,000
2,520,000 1,194,000
Equity
ordinary Share Capital 1,100,000 550,000
Revaluation Reserve 80,000 20,000
Retained Earnings 800,000 280,000
1,980,000 850,000
Current Liabilities
Payables 400,000 273,000
Other 140,000 71,000
2,520,000 1,194,000
59
Required: Prepare the consolidated statement of financial position of the tea Group as at 31 st
December 2017
Illustration two
The statements of Financial position of TT Ltd and Unliver Ltd as at 31 st May 2018 are as
follows.
TT LTD Unliver Ltd
Non-current assets shs."millions" shs."millions"
Property, plant and equipment 6,910 1,640
Investment in Unliver Ltd 1,400
8,310 1,640
11,420 2,760
Equity
Ordinary share capital 4,000 500
Retained earnings 5,380 1,550
9,380 2,050
Liabilities
Current Liabilities 1,160 238
5,189 811
The following information is available:

(i) TT Ltd acquired 70% of the share capital of Unliver Ltd on 31 st May 2010.
There have been no changes in the share capital of Unliver Ltd since that
date.
(ii) On 31 may 2010, the fair value of the non-current assets of Unliver Lt was
150,000,000/= higher than their book value on that date. This valuation
has been reflected in the books of Unliver Ltd.
(iii) On 31st may 2010, the retained earnings of Unliver were 850,000,000/=
(iv) Good will has suffered no impairment since 31 May 2010.
Required: Prepare a consolidated statement of financial position as at 31 may 2018.
Illustration three
The following are draft balance sheets of a holding company (H. Ltd.). Subsidiary and
associated company as at 30.9.2015.
H. Ltd. S. Ltd. A. Ltd.
‘000 ‘000 ‘000
Fixed Assets: 300,000 100,000 160,000
Investments at cost:
18000 Shares in S. Ltd. 75,000
18000 Shares in A. Ltd. 30,000
Net current assets 345,000 160,000 80,000
750,000 260,000 240,000
Ord. Share capital 250,000 30,000 60,000
P & L (revenue) 400,000 180,000 100,000
Long term liability 100,000 50,000 80,000
60
750,000 260,000 240,000
Additional information:
The reserves of S. Ltd and A. Ltd when the investments were acquired were a credit of
30,000,000 for A and 70,000,000 (credit) for S. Ltd.
Required:
Prepare a consolidated balance sheet of H. Ltd. and Group at 30.9.2015 (assume cost of each
ordinary share is 1,000).
Illustration One:
The following summarizes the balance sheet of Ntungamo Ltd. and its Subsidiary Kisoro
Ltd.
Ntungamo Ltd. Kisoro Ltd.
Shs.’000 Shs’000
8% preference share capital 40,000
Revenue reserve 75,000 33,000
Capital reserve 25,000 15,000
Accumulated depreciation 35,000 27,500
Creditors 65,000 16,250
450,000 211,750
Fixed assets at cost 225,000 140,000
45,000 ordinary Shares in Kisoro Ltd.
(Investment) 92,500
25,000 preference shares in Kisoro Ltd.
(Investment) 27,500
5,000 debentures in Kisoro Ltd. (loan) 5,000
Current assets. 100,000 71,750
450,000 211,750
1. Each ordinary share Shs.1, 000 and the share value is the same for each preference
share.
The debenture stock is Shs.1, 000 per unit of stock.
2. Ntungamo Limited acquired 45,000 ord. Shares, 25,000 pref. Shares and 5,000
debentures in Kisoro Limited on 1st July 2007.
At the date of acquisition, the capital and revenue reserves were Shs.6, 000,000 (Cr) and
Shs.15, 250,000 (Dr.) respectively.
3. Included in the current assets of Ntungamo Ltd is a debenture interest receivable from
Kisoro Ltd, which has been accrued for 1 year.
4. During the year just ended, Ntungamo Ltd. received goods worth Shs.45, 000,000, of
this 11,400,000 in stock is still unsold. Kisoro invoices at cost plus 25%.
5. The preference dividends were proposed by Kisoro Ltd. but not yet paid. Ntungamo
has not yet recognized the proposed dividends of Kisoro Ltd.
6. It is the group’s policy to amortize goodwill arising on consolidation over a period of
6 years.
61
Required:
Prepare the consolidated Bal. Sheet of Ntungamo Ltd. and group as at 30.6.2010.
Illustration Four
The statements of financial position of MLtd, P ltd and Q Ltd as at 31st July 2014 are as
follows.
M LTD PLtd Q Ltd

Non current assets shs."000" shs."000"
Property, plant and equipment 2,570,000 370,000 280,000
Investment in P Ltd 410,000
Investment in Q Ltd 100,000
3,080,000 370,000 280,000
Current assets 1,150,000 220,000 170,000
Total Assets 4,230,000 590,000 450,000
Equity
Ordinary share capital 1,000,000 100,000 80,000
Retained earnings 2,420,000 380,000 280,000
3,420,000 480,000 360,000
Liabilities
Current Liabilities 810,000 110,000 90,000
4,230,000 590,000 450,000
The following information is available:

(a) On 31July 2011, M Ltd paid 410,000,000/= to acquire 90% of the share capital of P
Ltd. The retained earnings of P ltd on that date were 220,000,000/=. The company’s
issued share capital has not changed since M ltd acquired its holding. On 31 July
2011, the fair value of the non-currents assets of P Ltd was 80 million shillings higher
than their value. This valuation has not been reflected in the books of P Ltd.
(b) On 31 July 2013, M Ltd paid 100 million to acquire 25% of the share capital of Q ltd.
The retained earnings of Q Ltd on that date were 240,000,000/= and all of its assets
and liabilities were carried at fair value. The company’s issued share capital has not
changed since M ltd acquired its holdings.
(c) There have been no impairments losses.
(d) Non-controlling interests in subsidiaries are to be measured at the appropriate
proportion of the subsidiary’s identifiable net assets.
Required: prepare a consolidated statement of financial positon for M ltd as at 31.05.2014
Illustration Five
Kampala Ltd. acquired 80% of ordinary shares of Rubaga Ltd on 1 st January 2009 for the
sum of Shs. 153,000,000 and 60% of the share capital of Kawempe Ltd. on 1 st July 2009 for
the sum of Shs. 504,000,000. the following are the balance sheets of the companies as at
31.12.2009.
Kampala Ltd. Rubaga Ltd. Kawempe Ltd.
Shs’000 Shs’000 Shs’000
Free hold property at cost 116,000 200,000
Plant and machinery at cost 216,000 104,000
62
Investment in subsidiaries:
Rubaga 153,000
Kawempe 504,000
Trade investments 52,000
Inventory 206,000 99,000 294,200
Debtors 172,200 73,000 95,000
Bank balance (Crane bank) 7,900 62,800

Cash 1,100 700 1,200
Current account 12,700_____________________________________
1,433,000 284,600 979,600
Ordinary shares Shs.250@ 750,000 100,000 400,000
Share premium 15,000
Profit and loss account
1.1.2009 191,000 19,400 132,000
Retained profit for 09 37,000 3,000 54,000
Taxation 78,000 24,000 56,000
Creditors 162,000 74,400 149,000
Bank overdraft (Nile bank) 74,000
Depreciation
Freehold property 9,000 40,000
Plant and machinery 87,000 39,000 124,600
Dividends proposed
(creditor’s due) 30,000 15,000 24,000
Current account. 9,800
_______________________________________________
1,433,000 284,600 979,600
Solution are recognized as Y’s:

1. No interim dividends were declared or paid in 2009 profits. Kampala Limited has
not yet accounted for the dividends from subsidiaries.
2. A remittance of Shs.1,700,000 from Rubaga Ltd in December 2009 was not
received by Kampala Ltd until January 2010.
3. An invoice for Shs. 1,200,000 for stock invoiced at cost plus 25% had been
included in sales in 2009 by Kampala Ltd. but it was not received by Rubaga Ltd.
until 2010. (source: documents’ principle).
4. In Rubaga Ltd’s stock at 31.12.2009, were goods to the value of Shs. 8,000,000
on which Kampala Ltd. had added profit of Shs. 1,600,000.
5. Profits of Kawempe Ltd are deemed to have accrued equally throughout the year.
6. It is the group’s policy to amortize goodwill arising on consol over a period of
four years.
You are required to prepare a consolidated balance sheet of Kampala and Group as at
31.12.2009.
63
64
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ( P & L A/C)
Just as the statement of comprehensive income of a single company shows the results of the
year’s trading of that company, so does the consolidated statement of comprehensive income
shows the results of the trading in the year by the holding company together with its
subsidiaries.
Consolidated statement of comprehensive income is prepared by combining the information
given in the statement of comprehensive income of individual companies after making any
adjustments that may be necessary to eliminate inter-company items such as, unrealized
profits, inter- company items etc.
Consolidated statement of comprehensive income has an underlying form as follows.
Section A: To show the results achieved with the assets under the directors control. This
normally shows the whole of turnover, cost of sales, gross profit, taxation and profit and loss
on ordinary activities after taxation.
Section B: To show how much of the net gains shown in section A accrues to Holding/Parent
company shareholders and how much to others. This section basically shows a deduction for
minority interests share of the profits of subsidiaries not wholly owned by the group.
Section C: To show how the directors intend to dispose of the gains accruing to holding
company shareholders. The section specifically shows dividends, capitalized profits (if any),
retained profits or transfers to reserves.
Example:
H ltd acquired several years ago, 75% ordinary share capital of S ltd. Their results for the
year ended 30th Nov.2017 were as follows.
H ltd S ltd
Turnover 8,500,000 2,200,000
Total costs (7,650,000) (1,980,000)
Trading profits for the year 850,000 220,000
Taxation (400,000) (100,000)
PAT 450,000 120,000
Required: Prepare consolidated statement of comprehensive income for the group.
Solution:
Minority interest = 25% x $ 120,000 = $ 30,000.
Consolidated statement of comprehensive income for the year ended 30th Nov. 2017.
$
Turnover 10,700,000
Total costs (9,630,000)
Group profits 1,070,000
Tax on profit (500,000)
570,000
Minority interest (30,000)
Profit for the year retained 540,000
Note:
65
Profit retained by H ltd 450,000
H ltd share of retained profit of
S ltd 75% x $ 120,000 90,000
540,000
Revenue Reserves brought forward:
When consolidating statement of comprehensive income, holding company’s reserves
brought forward should be added to share of H ltd revenue reserves of the subsidiary
company after the controlling interest has been acquired (i.e. Post-acquisition revenue
reserves) and retained profit for the year of the group. As far as the consolidated statement of
comprehensive income is concerned, the balance brought forward consists of:
- Holding company’s own profit and loss a/c balance brought forward, and
- Holding company’s share of the post-acquisition retained profits of subsidiary.
Example:
Facts as in the previous example, but you are provided with additional information.
a) Profit and loss a/c balance brought forward at the beginning of the year amounted to
$2,300,000 for H ltd and $ 400,000 for S ltd.
b) H ltd acquired the shares in S ltd when the revenue reserves of S ltd amounted to
$100,000.
Calculate the brought forward and carried forward figure for the consolidated profit&
loss account.
Solution:
Bal.B/f 2,300,000
S ltd 75%(400,000 – 100,000) 225,000
2,525,000
540,000
3,065,000
It is important to note that the calculation of retained profits brought forward is of the same
form as the calculation of group reserves in the balance sheet.
INTRA-GROUP TRADING
(a) Inter-company dividends – Ordinary shares.
Most complications in preparing consolidated statement of comprehensive income arise
because of dividends paid from one company to another. Investment income of the holding
company may for example, include;
a) Ordinary dividends received (or receivable) from subsidiaries; and
b) Income from trade investments.
Only (b) is shown separately as income in the consolidated profit and loss account, inter-
company dividends being eliminated on consolidated.
For example, if Leg ltd owns 80% of the ordinary shares of Foot ltd and Foot pays an
ordinary dividend of $10,000, then $2,000 will be paid to the outside shareholders in Foot ltd
and $8,000 will be paid to Leg ltd.
The $8,000 should be eliminated in the consolidated statement of comprehensive income and
$2,000 will be part of the minority interests.
A payment of a divided by S to P will need to be cancelled. The effect of this on the
consolidated income statement is:
 Only dividends paid by P to its shareholders appear in the consolidated financial
statements. These are shown within the consolidated statement of changes in equity.
66
 Any dividend income shown in the consolidated income statement must arise from
investments other than those in subsidiaries or associates.
( b) Intra-group sales:
Any intra-group sales are included in the sales revenue of the selling company and in the cost
of sales of the buying company. Therefore, intra-group sales are deducted from group sales
revenue and from group cost of sales when preparing the group statement of comprehensive
income. This ensures that the group financial statements show only the sales revenue from
external customers and the cost of goods acquired from external suppliers.
( c) Any unrealized profit on inventories.

As explained in the previous chapter, any unrealized profit on inventories is deducted from
the inventories figure shown in the group statement of financial position. A reduction in
closing inventory causes an increase in cost of sales, so the group’s cost of sales figure must
be increased by the amount of any unrealized profit.
( d) Interest
If there is a loan outstanding between group companies, the effect of any loan interest
received and paid must be eliminated from the consolidated income statement.
The relevant amount of interest should be deducted from group investment income and group
finance costs.
(e) Goodwill impairment

If any goodwill acquired by the parent company on acquisition has suffered an impairment
loss during the period, this loss is shown as an expense in the group statement of
comprehensive income.
(f) If a group includes any partly – owned subsidiaries, part of the group’s profit after
tax is attributable to the non-controlling interest. This amount is deducted in the
group statement of comprehensive income, leaving the profit attributable to the
group.
EFFECT ON NON CONTROLLING INTERESTAS (NCI)

If the unrealized profit originally arose in the subsidiary, the non-controlling interest must be
adjusted for its share in the unrealized profit. To achieve this, in the first instance all the
unrealized profit must be eliminated to determine the correct amount of gross profit earned
by the group trading as if it were a single entity. Then the NCI’s share is calculated by
reference to the reduced amount of the subsidiary’s post-tax profits. PURP is added in to cost
of sales and remove NCI share in the NCI working
The group statement of changes in equity

The purpose of the group statement of changes in equity is to show how each component of
the group’s equity (shown in the group statement of financial position) has changed during
the accounting period. In general, there is one column for the parent’s share capital and one
column for each of the group’s reserves. These columns are totaled to show the equity which
belongs to the parent’s shareholders. There is then a further column for the non-controlling
interest and a final column which shows the total equity of the group.
Example one
67
P Ltd owns 80% of the shares in soil Ltd. The statement of comprehensive of the companies
for the year ending 31st December 2017 are as follows.
P ltd Soil Ltd
shs. "000" shs. "000"
Revenue 640,000 330,000
Cost of sales 410,000 200,000
Gross profit 230,000 130,000
Distribution costs -35,000 -20,000
Administrative expenses -70,000 -55,000
Profit before taxation 125,000 55,000
Taxation -26,000 -10,000
Profit for the year 99,000 45,000
( i) Soil Ltd had sold goods which cost 20,000,000/= to P ltd for 30,000,000/=
(iii) At the end of the year, 30% of the goods in (a) had not been sold by P ltd.
(iv) Of the 35,000,000/= retained profits of Soil Ltd brought forward,
15,000,000/= is post-acquisition profits.
Required to prepare a P consolidated statement of comprehensive income for the year ended
2017.
Answer
P Ltd
consolidated statement of comprehensive income for the year ending 31st December
2017
Millions
Revenue (640 + 330 -30) 940
Cost of sales (410 + 200 - 30 +3) 583
Gross profit 357
Administrative expenses (70 +55) -125
distribution costs (35 +20) -55
Profit before taxation 180
Taxation (26 + 10) -36
Profit after taxation 141
minority interest (w3) -9
profit for the financial year 132
Workings
W1 Revenue
640 +330 – intercompany sales of 30 million = 940 million
W2 : cost of sales
410 + 200 – intercompany purchases 30millions + unrealized profit in inventory (30% x
10 m) = 583m
W3. Minority interest
20% x 45,000,000 = 9,000,000/=
Acquisition during the year
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If the subsidiary is acquired during the accounting year, it is necessary to apportion its profit
for the year between pre-acquisition and post-acquisition elements. The entire income
statement of the subsidiary is split between pre-acquisition and post-acquisition proportions.
Only post-acquisition figures are included in the consolidated income statement.
Example two
P co. acquired 60% of the equity of S co on 1 st April 2015. The statement of
comprehensive income for the two companies for the year ended 31 December 2015 are
set out below.
workings
Sco
P co S co (9/12)
sales revenue 170,000 80,000 60,000
Cost of sales 65,000 36,000 27,000
Gross Profit 105,000 44,000 33,000
other income -dividend received from
sco 36,000
Administrative expenses 43,000 12,000 9,000
Profit before tax 65,600 32,000 24,000
Income tax expense 23,000 8,000 6,000
Profit for the year 42,600 24,000 18,000
Note
Dividends (paid 31 Dec. 12,000 6,000
Profit retained 30,600 18,000
Retained earnings brought forward 81,000 40,000
Retained earnings carried forward 111,600 58,000
Required: Prepare the consolidated statement of comprehensive income and retained
earnings extract from the statement of changed in equity.
Answer:
The shares in S co were acquired three months into the year. Only the post-acquisition
proportion (9/12 months) of S co statement of comprehensive income is included in the
consolidation.
P Co CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 2015
Sales revenue (170 + 60) 230,000

Cost of sales (65 + 27) 92,000
Gross profit 138,000
Administrative expenses (43 + 6) -52,000
Income tax expense (23 + 6) 29,000
Profit for the year 57,000
Profit attributable to:
Owners of the parent 49,800
Non-controlling interest (18 X 40%) 7,200
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57,000
Statement of changes in equity

Balance brought forward 81,000
Dividend paid -12,000
Total comprehensive income for the
year 49,800
Balance carried forward 118,800
EXERCISE
Question one
On 1st July 2015 R ltd acquired 70% of the ordinary share capital of S ltd. There are no
preference shares. The retained earnings of S Ltd on 1/July 2015 were 2000/= .
Statement of comprehensive income for the year 30 June 2018.
R Ltd S Ltd
sales revenue 624,000 109,000
Cost of sales 267,400 65,300
Gross Profit 356,600 43,700
Distribution costs -71,370 -5,100
administrative expenses -101,430 -10,500
Operating profit 183,800 28,100
Dividends received from S Ltd 14,000
profit before tax 197,800 28,100
Taxation 51,200 7,100
Profit for the year 146,600 21,000
The following are taken from the retained earnings column of the statement of changes in
equity of R Ltd for the year to 30/June 2018
Balance at 30/June 2017 54,900 7,000
profit for the year 146,600 21,000
Dividends paid -120,000 -20,000
Balance at 30/June 2018 81,500 8,000
The following information is also available:

(a) During the year, R ltd sold goods to S Ltd for 8000/=. These goods had cost R Ltd
5000/=. At the year end, one-half of the goods were still held by S Ltd.
(b) Goodwill arising on consolidation has suffered no impairment losses.
Required: Prepare a consolidated statement of comprehensive income for the year to 30 June
2018 and an extract of changes in equity, showing the changes in the groups retained
earnings during the year.
Question two
a. The following information relates to Pin group of companies for the year to 30 th April
2014
70
Pin Co ($000) Lash Co ($000) Orrie Co ($000)
Sales revenue 1,100 500 130
Cost of sales 630 300 70
Gross profit 470 200 60
Administrative expenses 105 150 20
Dividend from Lash 24 - -
Dividend from Orrie 6 - -
Profit before tax 395 50 40
Taxation 65 10 20
Profit after tax 330 40 20
Interim Dividends 50 10 -
Proposed Dividends 150 20 10
Profit for year 130 10 10
Reserves b/f 460 106 30
Reserves c/f 590 116 40
i. the issued share capital of the group was as follows:
ii. Pin Co 5,000,000 ordinary shares of $1 each
iii. Lash Co: 1,000,000 ordinary shares of $1 each
iv. Orrie Co 400,000 ordinary shares of $1 each
v. Pin Co purchased 80% of the issued share capital of Lash Co in 2004. At that time
the revenue reserves of Lash amounted to $56,000.
vi. Pin co purchased 60% of the issued share capital of Orrie Co in 2008. At that time
the revenue reserves of Orrie amounted to $20,000
vii. Pin Co recognizes dividends proposed by other group companies in its income
statement.
Required:
In as far as the information permits, prepare a consolidated income statement of the group.
Question three
H Co owns 80% of shares in Sco. The income statements of the companies for the year to
31st Dec 2004 are as follows:
H Co ($000) S Co ($000)
Sales revenue 640 330
Cost of sales 410 200
Gross profit 230 130
Administrative expenses 105 75
Profit before tax 125 55
Taxation 26 10
Profit after tax 99 45
Reserves b/f 29 35
128 80
Proposed dividends 60 35
Transfers to reserves 82 10
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Retained profits 46 35
a. Sco has sold goods costing $20,000 to Hco for $30,000 at the balance sheet date 30%
of these goods had not been sold.
b. Of the $35,000 retained profits of S co, $15,000 is in respect of post-acquisition
profits
Required; Prepare a consolidated income statement.
Question Four
Below is the statement of comprehensive income of the Angel group of company and its
associated company, as at 31. December 2018.
Angel co. Nice Co. Shumuk Co.
Sales revenue 385,000 100,000 60,000
Cost of sales -185,000 -60,000 -20,000
Gross profit 200,000 40,000 40,000
Operating expenses -50,000 -15,000 -10,000
Profit before tax 150,000 25,000 30,000
Tax -50,000 -12,000 -10,000
Profit after tax 100,000 13,000 20,000
(i) Angel acquired 60,000 ordinary shares in shumuk for 80,000/= when that
company had a credit balance on its retained earnings of 50,000/= a number of
years ago. Shumuk has 200,000, Ugx. 1 ordinary shares.
(ii) Angel acquired 45000 ordinary shares in Nice company, a number of years ago,
for 70,000/= when retained earnings were 20,000/=. Nice has 50,000, Ugx. 1
ordinary shares.
(iii) During the year shumuk sold goods to Angel for 28,000/=. None of these goods
were in inventory at the year end.
(iv) Goodwill and investment in the associate were impaired for the first time during
the year as follows:
Shumuk Ugx. 2,000
Nice Ugx. 3,000
Impairment of the subsidiary’s goodwill should be charged to operating expenses.
Required: Prepare the consolidated statement of comprehensive income for angel including
the results of its associated company for the year ended 31 December 2018
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CHAPTER FOUR
IFRS 11: JOINT ARRANGEMENTS
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A joint arrangement exists if two or more parties exercise joint control over business
enterprise. IFRS 11 joint arrangements includes the following definitions.
A joint arrangement is an arrangement of which two or more parties have joint control. And
Joint control is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require the unanimous consent of the parties
sharing control.
Types of joint arrangement
IFRS 11 identifies two types of joint arrangement and prescribes the accounting treatment for
each. These are as follows:
( a) Joint Operations
A joint operation is á joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement’. For example, the parties to a joint arrangement could agree to manufacture a
product together, each party being responsible for a specific task and with each party using
its own assets and incurring its own liabilities. The agreement between these joint operators
would specify the way in which the revenue and expenses of the operation should be shared
between them.
A joint arrangement that is not structured as a “separate vehicle” (a business entity which is
separate from the parties to the arrangement) must be joint operation.
( b) joint ventures. A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets of the arrangement”. For example, the
parties to a joint to a joint arrangement might establish a separate business entity over which
the parties to a joint control and which has its own assets and liabilities. In this case, the
assets and liabilities of the arrangement would belong to the separate entity and not to the
parties themselves. However, the “joint venturers” would each have an interest in the net
assets of the arrangement, generally by virtue of their ownership of shares in the separate
entity concerned.
In most cases, a joint arrangement that is structured as a separate vehicle would be regarded
as a joint venture.
A jointly controlled entity will operate in the same way as any other firm, but for the fact that
a contractual arrangement between the venturer establishes joint control over its economic
activity. Each joint venturer takes a share of the results of the joint venture, although in some
arrangements they may share the joint venture’s output.
Types of Joint ventures:
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(a) Jointly controlled operations
The operation of some joint ventures involves the use of the assets and other resources of the
venturers rather than the establishment of a corporation, partnership or other entity, or a
financial structure that is separate from the venturers themselves. Each venturer uses its own
property, plant and equipment and carries its own inventories. It also incurs its own expenses
and liabilities and raises its own finance, which represent its own obligations.
In respect of its interests in jointly controlled operations, a venturer shall recognize in its
financial statements:
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from the sale of
goods or services by the joint venture.
Example: A and B decide to enter into a joint venture agreement to produce a new product.
A undertakes one manufacturing process and B undertakes the other. A and B each bear
their own expenses and take an agreed share of the sales revenue from the product.
(b) Jointly controlled assets
Some joint ventures involve the joint control, and often the joint ownership, by the venturers
of one or more assets contributed to, or acquired for the purpose of, the joint venture and
dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the
venturers. Each venturer may take a share of the output from the assets and each bears an
agreed share of the expenses incurred.
In respect of its interest in jointly controlled assets, a venturer shall recognize in its financial
statements:
(a) its share of the jointly controlled assets, classified according to the nature of the
assets;
(b) any liabilities that it has incurred;
(c) its share of any liabilities incurred jointly with the other venturers in relation to the
joint venture;
(d) any income from the sale or use of its share of the output of the joint venture, together
with its share of any expenses incurred by the joint venture; and
(e) any expenses that it has incurred in respect of its interest in the joint venture.
( c) Jointly controlled entities

A jointly controlled entity is a joint venture that involves the establishment of a corporation,
partnership or other entity in which each venturer has an interest. The entity operates in the
same way as other entities, except that a contractual arrangement between the venturers
establishes joint control over the economic activity of the entity.
A venturer shall recognize its interest in a jointly controlled entity using proportionate
consolidation or the equity method.
A jointly controlled entity keeps its own accounting records, and presents financial
statements in the same way as other firms in accordance with national legislation and IASs.
Accounting for a Joint arrangement.

IFRS 11 specifies the required accounting treatment of each type of joint arrangement. The
requirements are as follows:
(a)Joint operations: A Joint operation raises no special accounting problems. In general
terms, the financial statements of each operator should recognize:
75
(i) its own assets that are being used in the joint operation
(ii) its own liabilities that relate to the joint operation
(iii) its share of the revenue arising from the joint operation
(iv) its share of the expenses arising from the joint operation.
(b) Joint ventures. A joint venture should recognize its interest in a joint venture as an
investment in its own financial statements. This investment should normally be accounted
for by the equity method.
Disclosure requirements
IFRS 12 Disclosure of Interests in other Entities requires an entity to disclose the significant
judgements and assumptions it has made in determining the nature of its interest in other
entities (e .g significant influence or joint control) and the type of any joint arrangement to
which it is a party. The entity should also disclose information which enables the users of its
financial statements to evaluate:
(a) the nature, extent and financial effects of its interests in associates and its
interests in joint arrangements.
(b) The nature of (and changes in) any risks associated with the interests in
associated and joint arrangements.
CHAPTER FIVE
RECONSTRUCTION, AMALGAMATION AND ABSORPTION
RECONSTRUCTION – meaning
It means reconstruction of a company’s financial structure. It may take place either with or
without the liquidation of the company. If the company going into reconstruction is
liquidated then the reconstruction is called as “external reconstruction”, otherwise it is called
“internal reconstruction”. The two types of reconstruction thus are:
1. Internal reconstruction. This is generally resorted to by a company which is being
reorganized internally. A scheme of reorganization is prepared in which all parties
sacrifice. The sacrifices are made in this order - equity shareholders, preference
shareholders, unsecured creditors and partially secured creditors. Under this scheme
the existing company continues in its legal entity form and can take advantage of
carry forward and set off of the past losses.
2. External reconstruction. When a new company is formed with the same name in order
to take over the business of an existing company, it is called external reconstruction.
This is generally resorted to in case of a company having accumulated past losses, the
book value of assets are not shown at their true value etc.
A company that goes into liquidation can be purchased by some other company and the
purchase price may be paid, fully or partly, by issuing shares or securities in the purchasing
company.
76
INTERNAL RECONSTRUCTION OR CAPITAL
REDUCTION/REORGANISATION
Internal reconstruction means the reduction of capital to cancel any paid up shares which is
lost or unrepresented by available assets. It is the re-arrangement of the company’s share
capital. This is generally resorted to write off past accumulated losses of the company. Thus
internal reconstruction/reorganization and reduction of capital mean the same.
Reduction of capital is unlawful except when sanctioned by the court because conservation
of capital is one of the main principles of the company law. The issued share capital of a
company represents the security on which the creditors rely. Companies usually do not call
the full value of shares at one time. The uncalled capital acts as a future security for the
company’s creditors. Therefore, any reduction of capital reduces the security of the creditors.
Keeping this in view, all safeguards have been provided for in the companies act to conserve
the capital of a company. However, in genuine cases, a company is permitted to reduce its
share capital by section 76 of companies’ act 2012 in any of the following ways:
1. By extinguishing or reducing the liability on any of its shares in respect of share
capital not paid up ie reducing or extinguishing the uncalled liability of members
of the company
2. To cancel any paid up share capital which is lost or unrepresented by available
assets
3. by paying off any paid up capital which is in excess of the needs of the company.
The court consults creditors for giving approval of capital reduction because security
available to creditors is affected by capital reduction. If some creditors are unwilling to give
their consent to capital reduction, the company will have to settle their claims before getting
sanction from the court.
Procedure for reducing share capital (legal requirements as per companies act 2012, sec
76(1)
1. there must be a provision in the AOA allowing such a scheme
2. a special resolution must be passed in the shareholders meeting
3. a special resolution passed must be confirmed and granted by court.
Accounting issues I nvolved

The main account is the reorganization or capital reduction account
When a company effects a re-organization scheme, the following may be carried out;-
- Reduction in the liability of unpaid share capital.
- Reduction / redemption of share capital if redeemable.
- replacement of one class of shares by another
- Revaluation of assets.
- Settlement of liabilities by cash/bank or by issuance of shares.
- The Intangible Assets and debit balances on profit or loss account will be written off.
- The preference shareholders may waiver of their dividend arrears in acceptance for shares
- There may be reorganization costs
-settlement of preference share dividends in arrears by issue of shares
- witting off reserves
- Capitalization of surplus on capital reduction account
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Accounting entries on internal reconstruction
1. When the face value of the shares is changed or the rate of dividend on preference
shares is changed, it is treated as change in the category of the share capital. The
journal entry in such a case on reduction of capital is:
 Debit old share capital account – with the paid up value of the old shares
 Credit new share capital – with the paid up value of new shares
 Credit capital reduction a/c – with the difference ie amount of capital reduced
2. On the other hand, when the face value of the shares or rate of dividend on preference
shares is not changed on reduction of share capital, it does not result in the change of
the category of the share capital. The category of share capital remaining the same,
the journal entry then is:
o Debit share capital a/c – with amount of reduction of capital
o Credit capital reduction account
3. For reduction in share premium/reserves
 Debit share premium/reserve
 Credit capital reduction
4. For debit balance on reserves accounts
 Debit capital reduction
 Credit reserve account
5. If any sacrifice has been made by creditors and debenture holders:
 Debit creditors –with the amount of sacrifice
 Debit debenture holders – with amount of sacrifice
 Credit capital reduction account
6. For settlement of liabilities by cash/bank
 Debit liability account
 Credit cash/bank
7. For settlement of liabilities by issuance of shares
 Debit liability
 Credit share capital
8. Waiver of divided arrears in receipt of shares
 Debit capital reduction
 Credit share capital
9. for amounts written off assets
 debit capital reduction account
 credit various assets accounts
10. if a credit balance now exists on the capital reduction account
 debit capital reduction account – to close it
 credit capital reserve
78
It is very unlikely that there would ever be a debit balance on the capital reduction
account as the court would very rarely agree to any such scheme which would bring
about that result
Example one (class activity)

The financial position of XY PLC at 30th December 2010 was as follows
BALANCE SHEET AS AT 30TH DECEMBER 2010
FIXED ASSETS Cost Depn NBV
freehold premises 100,000 20,000 80,000
190,00
plant and equipment 250,000 60,000 0
Vehicles 45,000 15,000 30,000
300,00
395,000 95,000 0
Current Assets
Stock 40,000
Debtors 30,000
Bank 10,000 80,000
Less
current Liabilities
Creditors 140,000 60,000
240,00
total net assets 0
financed by
share capital : Authorized
150,000 7% preference shares 150,000
400,000 ordinary share of 1.00 per
share 400,000
550,000
issued and fully paid
100,000 7% preference shares of 1.00
per share 100,000
400,000 ordinary shares of 1.00 per 400,00
share, 0.75 paid 300,000 0
160,00
Reserves 0
240,00
profit and loss (Dr) 0
The 7% preference dividends are two years in arrears.

The company had formulated an approved scheme of reorganization, to take effect on 1st Jan
which contained the following provisions.
(i) The ordinary shares are to be written down to 00.25 per share and then to be
converted into new ordinary shares of 1.00 per share fully paid.
(ii) The preference shareholders are to receive 50,000 ordinary shares of 1.00 per
share, fully paid at par, in exchange for their preference shares.
79
(iii) In consideration for waiving their rights to arrears of preference dividend, the
preference shareholders have agreed to accept 10,000 new ordinary shares of 1.00
per share, fully paid, in full and final settlement.
(iv) The creditors have agreed to take 100,000 new ordinary shares of 1.00 per share,
fully paid at par, in part satisfaction of the sums due to them.
(v) The adverse balance on profit and loss is to be written off
(vi) The following are the revalued amounts of assets
Freehold premises 100,000
Plant and equipment 105,000
Vehicles 25,000
Stock 36,000
Provision for bad debts is to be raised to at 1000
Required;
(a) Post the appropriate accounts to effect the reorganization
(b) Prepare the balance sheet of XY PLC immediately after all the reorganization entries
have been posted.
SOLUTION Freehold premises A/c

100,00
balance b/f 0 Provision for depreciation 20,000
100,00
Bal c/d 0
120,00 120,00
0 0
Plant and Equipment

250,00
Bal b/f 0 Provision for depreciation 60,000
Capital Reduction 85,000
105,00
Bal c/d 0
250,00 250,00
0 0
Vehicle A/c
bal b/f 45,000 Provision for depreciation 15,000
capital reduction 5,000
bal c/d 25,000
45,000 45,000
Stock A/c
Balance 40,000 capital reduction 4000
Balance c/d 36000
40,000 40,000
80
Creditors A/c
ordinary share 140,00
capital 100,000 balance b/d 0
balance c/d 40,000
140,00
140,000 0
Provision for bad debts

Balance c/d 1000 capital reduction 1000
Profit and loss Alc

160,00
Balance c/d 160,000 capital reduction 0
7% preference share capital

100,00
capital reduction 100,000 Balance b/d 0
Ordinary share capital

capital reduction
( 400,000 x (0.75- 200,00 300,00
0.25) 0 Balance b/d 0
260,00 capital reduction
Balance c/d 0 (preference share exchange) 50,000
capital reduction 10,000
100,00
Creditors 0
460,00 460,00
0 0
Capital reserve A/c
Balance c/d 1000 Capital reduction 1000
Capital reduction
plant and equipment 85000 freehold premises 20000
7% preference share 100,00
Vehicle 5000 capital 0
200,00
Stock 4000 ordinary share capital 0
provision for bad debts 1000
profit and loss 160,000
ordinary share capital 50,000
ordinary share capital 10,000
share premium 4,000
capital Reserve 1,000
320,00
320,000 0
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NB; The preference dividends are two years in arrears;
7% X 100,000 X 2 = 14,000
The preference shareholders agreed to accept 10,000 of ordinary shares in full settlement.
Effectively, therefore, the extinguishing of the arrears by an issue of a lower nominal amount
of ordinary shares has given rise to a share premium of 4000 (14000 – 10,000).
XY PLC BALANCE SHEET AS AT 1ST January 2010.
Fixed Assets at valuation
100,00
Freehold premises 0
105,00
plant and equipment 0
230,00
Vehicles 25,000 0
Current Assets
Stock 36,000
Debtors 29,000
Bank 10,000
75,000
Less current Liabilities
Creditors 40,000 35,000
265,00
0
Financed by
share capital
Authorized
150,000 &% preference shares of 1.00 per 150,00
share 0
400,00
400,000 Ordinary shares of 1.00 per share 0
550,00
0
260,00
issued ad fully paid 260,000 Ordinary shares 0
Reserves
Share Premium 4,000
Capital Reserve 1,000 5,000
265,00
0
Exercise
Question 1
The statement of financial position of BAF111 Limited at June 30, 2014 was as follows:
Shs shs
Non-current assets
Freehold land and buildings 34,000
Plant 96,000
82
Tools and dies 27,300
Investments 15,000
Current assets
Receivables 53,400
Inventories 42,500
Development expenditure 18,000 113,900
286,200
Represented by:
Share capital:
Authorized and fully paid:
100,000 6% cumulative preference shares at shs 1@ 100,000
300,000 ordinary shares at shs 0.5 @ 150,000
Retained earnings (profit or loss) (98,000)
152,000
Interest due 4,200 64,200
Loan - secured 20,000
Payables 50,000
286,200
The reorganizations detailed below has been agreed by all interested parties and approved by
the court.
(a) The following assets are to be revalued as shown below:
Plant 59,000
Tools and dies 15,000
Inventory 30,000
Receivables 48,700
(b) Development expenditure and the balance on profit or loss accounts are to be written
off
(c) A piece of land recorded in the books at shs 6,000 is valued at shs 14,000 and is to be
taken over by the debenture holders in part repayment of the principle. The remaining
freehold land and buildings are to be revalued at shs 40,000
(d) A creditor for shs 18,000 has agreed to accept new second mortgage debenture
carrying interest of 10% per annum in settlement of shs 15,500. Other creditors
totaling shs 10,000 agree to accept a payment of 0.85 in the shs 1 for immediate
settlement.
(e) The investment at valuation of shs 22,000 are to be taken over by the loan creditors.
Shs 2,000 is refunded to the company
(f) The equity shares are to be written down to 0.05/= per share and preference shares to
0.80/= per share.
(g) The ordinary shareholders agree to subscribe for two new ordinary shares at par for
every share held. This cash is all received
(h) The costs of the scheme are sh 3,500, these have to be written off. The debenture
interest has also been paid
Required:
(i) Post and close off the ledgers necessary to effect the reorganization (journal entries
not required)
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(j) Prepare the SOFP of BAF 111 Limited as at 1 st July, 2015 immediately after the
reorganization scheme
Question two
The Shires construction company ltd found itself in financial difficulty. The following is a
trial balance at 31st December 2012 extracted from the books of the company
Shs
Land 156,000
Buildings (net) 27,246
Equipment (net) 10,754
Goodwill 60,000
Investments (quoted) 27,000
Stock and WIP 120,247
Receivables 70,692
Retained earnings 39,821
511,760
Financed
Ordinary shares of shs 1 @ 200,000
5% cumulative pref. shares of shs 1 @ 70,000
8% debentures – 2005 80,000
Interest payable on debentures 12,800
Loans from directors 16,000
Bank overdraft 36,713
511,760
The authorized share capital is 200,000 0rdinary shares of shs 1@ and 100,000 5%
cumulative pref. shares of shs 1@. During the meeting of shareholders and directors, it was
agreed to carry out a scheme of internal reconstruction. The following was agreed:
1. Each ordinary share is to be redesigned as a share of shs 0.25
2. The existing 70,000 shares are to be exchanged for a new issue of 25,000 8%
cumulative preference shares of shs 1@ and 140,000 ordinary shares of 0.25
3. The ordinary shares are to accept a reduction in nominal value of shares from shs 1 to
shs 0.25 and subscribe for a new issue on the basis of 1 for 1 at a price of shs 0.30 per
share
4. The debenture holders are to accept 20,000 ordinary shares of shs 0.25@ in lieu of the
interest payable. The interest rate is increases to 9.5%. a further shs 9,000 of this
9.5% debenture is to be issued and taken up by the existing holders at shs 90 per shs
100
5. Shs 6,000 of the directors’ loan is to be cancelled. The balance is to be settled by
issue of 10,000 ordinary shares of 0.25@
6. Goodwill and retained earnings balance are to be written off
7. Investment in shares is to be sold at the current market price of shs 60,000
8. The bank overdraft is to be repaid
9. Shs 46,000 is to be repaid to trade payables now and the balance at quarterly intervals
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10. 10% of the receivables are to be written off
11. The remaining assets were professionally valued and should be included in the books
of accounts as follows
Land 93,037.2
Buildings 80,000
Equipment 10,000
Stock and WIP 50,000
It is expected that due to changed conditions and the new management, operating
profits will be earned at a rate of 50,000 p.a after depreciation but before interest and
tax. Due to losses brought forward and capital allowances, it is unlikely any tax
liability will arise until 2010.
Required
(a) Show necessary ledgers including cash to effect the reorganization scheme
(b) Prepare the SOFP immediately after reorganization scheme
(c) Show how the anticipated operating profits will be divided amongst the interested
parties before and after the reconstruction and comment on the capital structure of
the company subsequent to reconstruction.
Question three
The financial position of Muko PLC at the end of 2014 was as follows:
Cost Acc. Depr. Carrying amount
Non current assets $ $ $
Freehold premises 100,000 20,000 80,000
Plant and equipment 250,000 60,000 190,000
Motor vehicles 45,000 15,000 30,000
395,000 95,000 300,000
Current assets
Inventory 40,000
Receivables 30,000
Bank 10,000
80,000
380,000
Equity and liabilities
Capital: 100,000 7% preference shares of $1 each 100,000
: 400,000 ordinary shares of $1 each ($0.75 paid) 300,000
Reserves:
Profit or loss (debit balance) (160,000)
Liabilities
380,000
1. The 7% preference dividends are two years in arrears
2. In the reorganization scheme, the ordinary shares are to be written down to $0.25 per
share and then be converted into ordinary shares of $1 per share fully paid
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3. The preference shareholders are to receive 50,000 ordinary shares of $1 per share
fully paid at par in exchange for their shares
4. In agreement to waive off their rights to arrears of dividends on the preference shares,
the preference share holders have agreed to accept 10,000 new ordinary shares of $1
each per share fully paid, in full and final settlement
5. The creditors have agreed to take 100,000 new ordinary shares of $1 each per share
fully paid at par in partial satisfaction of the sum due to them
6. Because of reorganization the assets have been revalued as follows
(a) Freehold premises 100,000
(b) Plant and equipment 105,000
(c) Motor vehicles 25,000
(d) Inventory 36,000
And a provision for bad debts is to be raised at $1000.
Required
(a) Post the appropriate accounts to effect the reorganization
(b) Prepare the SOFP immediately after the reorganization process
AMALGAMATION AND ABSORPTION

Sometimes companies carrying on similar business combine with each other to obtain the
economies of large scale production or to avoid the disastrous results of cut throat
completion. It is being done by amalgamation and absorption.
The term amalgamation is used when two or more companies carrying on similar business go
into liquidation and a new company is formed to take over their business.
The term absorption is also used when an existing company takes over the business of one or
more existing companies. Absorption involves swallowing up of a company by another
company. The company swallowed up is effectively wound up. The company which is
absorbed then goes into voluntary liquidation. Its assets alongside liabilities are taken over by
the absorbing company. On the contrary, amalgamation involves the formation of a new
business which then acquires the assets (and possibly liabilities) of the two or more existing
businesses, which are then wound up.
There are two types of companies ie the purchasing company (Transferee Company) and the
winding up (transferor) company in the case of amalgamation, and external reconstruction;
so accounting entries which are to be passed in the books of transferee company and
transferor company/companies will be the same in case of amalgamation and external
reconstruction.
A purchase consideration in form of cash, shares, debentures etc is made and remitted to the
shareholders of the winding up company.
Accounting entries in the books of the company being wound up (Transferor Company) will
be the same as the books of a partnership firm being dissolved. Some of the accounts that are
necessary include:
(a) Realisation account
(b) Purchasing company account
(c) Sundry shareholders account (or equity share holders a/c)
Accounting in the books of the purchasing (transferee) company
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The following entries are to be passed in the books of the transferee company for
incorporating the financial statements of the transferor company:
1. On amalgamation of business
Debit business purchase account – with amount of purchase consideration
Credit liquidators of transferor company – with amount of purchase consideration
2. For recording assets and liabilities taken over (at current valuations)
Debit individual assets accounts
Credit business purchase account
3. Liabilities taken over (at actual amounts to be liquidated), reserves
Debit business purchase account
Credit individual liabilities accounts
4. Payment of purchase consideration to liquidator/business(es) being wound up
Debit liquidators of transferor company a/c
Credit bank(cash) and/or share capital and or debentures and share premium (any
any)
5. If liquidation expenses are paid by the transferee(purchasing) company
Debit profit or loss
Credit bank
6. For formation expenses of the purchasing company
Debit preliminary expenses
Credit bank
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Question
On 31st March 2009, Thin Ltd was absorbed by Thick Ltd. The later taking over all the assets
and liabilities of the former at book value. the consideration for the business was fixed at
$400,000 to be discharged by the transferee company in the form of its fully paid equity
shares of $10 each, to be distributed among the shareholders of the transferor company, each
shareholder getting two shares for every share held in the transferor company. The SOFP of
the two companies as on 31st March 2009 stood as under
Liabilities Thick ltd Thin Ltd Assets Thick ltd Thin Ltd
$ $ $ $
Share capital: Goodwill 200,000
Authorized 1,500,000 60,000
500,000 Plant & machinery 412,000
Issued and subscribed: 100,000
Equity shares of $ 10 Furniture 80,000
Each, fully paid 900,000 30,000
200,000 Stock in trade 265,500
General reserve 180,000 60,000
50,000 Prepaid insurance ---
Profit or loss a/c 20,502 700
12,900 Income tax refund claim --
workmen’s compensation 6,000
Fund 12,000 Cash in hand 869
9,000 356
Sundry creditors 58,567 Cash at bank 14,000 8,300
30,456 Sundry debtors 221200 46000
Staff provident fund 10,200
4,000
Provision for taxation 12,300
5,000 1,193,569 311,356
1,193,569
311,356
Amalgamation expenses amounting to $ 1,000 were paid by Thick Ltd. You are required to:
(i) Prepare relevant accounts in the books of Thin ltd
(ii) Prepare the necessary accounts in the books of Thick Ltd and
(iii) Prepare SOFP of Thick Ltd after the amalgamations in the nature of merger.
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CHAPTER SIX
BANKRUPTCY ACCOUNTING (LIQUIDATION AND RECEIVERSHIP)
Learning Objectives:
(i) define and identify the acts of bankruptcy

(ii) Distinguish between accounts for going concern companies and those for
companies under receiverships.
(iii) Explain the duties of the official receiver and trustee
(iv) Rank payments in case of receivership and liquidation of companies
(v) Prepare a statement of affairs and statement of estimated deficiency.
Introduction
A person is commonly said to be insolvent if he is unable to meet his liabilities as and when
claimed. That is when a person becomes heavily indebted due to various circumstances to the
extent that liabilities exceed the amounts realizable from assets at fair valuation and against
whom the court makes an order of adjudication. Insolvency means the procedure by which
the state takes in its possession the property of the Debtor for realization and equitable
distribution among the creditors of the insolvent. The proceedings in such cases are called
Insolvency proceedings. The terms “Insolvency’ and ‘Bankruptcy are more or less
synonymous. The word ‘bankruptcy’ is used in Uganda.
Companies may get into financial difficulties, which may call for re-organization, mergers,
takeovers and/ or bankruptcy in the extreme case.
Bankruptcy means that, a person/company is unable to meet its financial obligations as they
mature. In such instances, the aggregate value of the property of such a person or company
cannot, at fair valuation meet the value of outstanding debts.
A person/company, who commits an act of bankruptcy, may be declared bankrupt. in one or

more of the following actions:
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1. Makes conveyance or assignment of his property to a trustee for the benefit of his
creditors generally.
2. Leaves the country or intentionally keeps away from his house or place of office with
intent to delay or defeat his creditors.
3. Gives notice to any of his creditors that he has suspended or his is about to suspect
payment of his debts.
4. The person or company files a declaration of his inability to pay debts or files a petition
against himself.
There are many other acts of bankruptcy the details of which can be obtained from the
bankruptcy act.
For a person or company to be declared bankrupt, court must be petitioned and it is the courts
of law, which declare a person(s) bankrupt. Once court declares a company bankrupt, it
appoints an official receiver who acts in trust and on instruction of the court. The official
receiver, is therefore responsible the court.
DUTIES OF A TRUSTEE OR OFFICIAL RECEIVER

On appointment, the trustee/official receiver takes possession of the estate and converts the
estate’s assets into cash, which is then distributed to settle claims as directed by the
bankruptcy court.
Other duties many include the following:
1. To investigate the financial affairs of the debtor.
2. Provide information about the debtor’s estate and its administration to parties in interest.
3. To examine creditor’s claims as to their authenticity and object claims that appear
improper.
4. The official receiver, may operate the business of the debtor because if so authorized and
thus will be required to provide periodic reports and operational status or receipts and
disbursements and any other information as a court specifies.
5. The receiver/trustee is required to file a final report on the receivership, which includes,
“a statement of affairs”.
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A statement of affairs is a legal document prepared as of a given date, which presents the
financial position of the debtor company under receivership and the status of the creditors
with respect to their claims against the assets.
It shows the realizable value of the assets and portrays the liabilities and equity in the order
in which these claims against the assets will be liquidated.
Once a statement of affairs is received, the official receiver convenes a meeting of creditors
to decide whether the debtor should be declared (adjudicated) bankrupt subject to legal
proceedings. To consider any proposal which may be made by the debtor for settlement of
his indebtedness is acceptable.
BASIC CONCEPTS AND TERMINOLOGIES
1. PLEDGED ASSETS
These are assets, which are furnished as collateral security for purposes of obtaining credit.
They are assets, which are actually pledged there are 2 (two) categories for pledged assets
i) Fully pledged and
ii) Partially pledged assets.
(i) Fully pledged assets
These are those pledged assets whose realizable amounts at fair valuation exceed the amount
of credit due they are covering e.g. a building valued at 100m is tendered as a security for a
loan of say 700,000/=.
(ii) Partially pledged assets
These are those pledged assets whose realizable amounts at fair valuation is less than the
amount of credit due they are covering /pledged against e.g. MKV 170m building for a loan
of 100m.
2. FREE ASSETS
These are those assets, which do not have a specific claim. They are actually free of liability
3. SECURED CREDITORS
These are creditors who posses a collateral security for their credit.
There are 2 categories of secured creditors i.e.
(a) Fully secured CREDITORS
They are those whose credit amount due is less than the fair value of the collateral security.
(b) Partially secured creditors:
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They are those whose credit amount due exceeds the from the pledged asset at fair valuation
4. UNSECURED CREDITORS
These are creditors who do not secure their credit on any specific asset. There are 2
categories under this i.e.
(a) Priority unsecured creditors – e.g. salaries of employees which could have been paid
(salary arrears/unpaid), Taxes to government e.g. PAYE, NSSF, corporation tax in arrears
Liquidation expenses.etc
(b) Non priority unsecured creditors
These are creditors whose credit amounts are “naked” i.e. not secured at all
(iii) Capital equity accounts: These are residual claimants
NOTE
1. Fully pledged assets are matched against fully secured creditors.
2. Partially pledged assets are matched against partially secured creditors.
Free assets are available to pay the claims of creditors with priority unsecured, non-priority
unsecured and equity Accounts in that order.
PROCEDURE OF PAYMENTS BY A RECEIVER

These are made using the following order.
1. Receipts from the sale of pledged assets (mortgaged)
These are first shared out to the secured creditors to whom the assets were pledged. The
balance available is added to that of unpledged/free assets. And this balance is made
available to creditors with priority. Then to unsecured creditors.
2. Receipts from the sale of free assets or unpledged assets
These are distributed to creditors with priority then to unsecured creditors.
It should be remembered that When receipts from the pledged assets are not sufficient too
cover the secured creditors in full. The unpaid balance becomes unsecured claim/amount.
The unsecured Creditors share on pro-rata basis during the distribution of receipts after
paying off creditors with priority. Priority claims include: Taxes, Wages and salaries
accruing to employees in service of the debtor., Liquidation costs/expense
STATEMENT OF AFFAIRS
This is a statement of financial position of a company at a given date. It shows a statement of
creditors in respect of their claims against the assets. Here assets are shown at the net
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realizable values while liabilities are shown in the order on which claims against assets will
be liquidated. A statement of affairs is different from the balance sheet
Difference between balance sheet and statement of affairs
Balance sheet Statement of affairs
It is prepared for the sake of proprietor and others It is prepared for the satisfaction of the court
It is prepared for all the years during which the business is It is prepared at the time of insolvency
carried on.
It is prepared to show the financial position of the business It is prepared to show the inability of the debtor to pay off the
liabilities
It exhibits the book value of assets and liabilities It exhibits the book value as well as realizable values.
It shows the excess of assets over liabilities, capital/equity It shows the excess of outside liabilities over assets i.e.
interest deficiency.
It includes intangible assets, both fictitious and non- It excludes intangible assets, if fictitious
fictitious
All liabilities including preferential items are shown on Preferential debts are shown as a deduction from the total
liability side assets available
It is prepared at the end of the accounting period It is prepared on the date on which an adjudication order is
passed.
It has no lists for the grouping of assets and liabilities It has various lists for placing assets and liabilities
It does not classify creditors among unsecured, fully It divides the creditors as secured, partly secured and
secured, partly secured and preferential creditors. preferential creditors
It shows the book value of fixed assets, less depreciation, It shows the assets at a value for which they can be disposed
which may differ from its market value. off in the market.
It separates personnel assets and liabilities from the trader It integrates personal and trade assets and liabilities in case of
and liabilities individuals.
It implies balances taken from the books of accounts Its significance is given to realization value, as against book
value.
It contains items like capital profit, drawings, interest on It excludes all such items
capital etc
Balance sheet of individuals is not prepared according to It is prepared according to the rules laid down in the
any Act. insolvency Act
a trustee or official receiver realizes the assets and distributes the proceedings in the
following order of priority.
1. Fully secured creditors, in full

2. Partly secured creditors to the extent they are secured
3. Expenses of realization and remuneration to the receiver
4. Preferential creditors
5. Unsecured creditors, including uncovered balance of partly secured creditors.
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DEFICIENCY ACCOUNT
This shows how the deficiency or surplus in the statement of affairs came about.
It’s a company’s statement of affairs and its reconciliation A/C
Deficiency account
Shs Shs 000
000
Excess of assets over liabilities of Xxxx Excess of liabilities over
capital Xxxx assets or losses from Xxxx
Profit from business /retained Xxxx business Xxxx
earnings b/f Xxxxx Drawings Xxxx
Share capital a/c balances xxxx Bad debts Xxxxx
Profit on realization of any assets ++++ Other losses on realization
Any other incomes of assets Xxxxx
DEFICIENCY as per Statement of Loss of bills discounted and
Affairs dishonored xxxx
Any other losses
Totals zzzz Totals zzzz
FORMAT OF STATEMENT OF AFFAIRS
NBV ASSETS MKV Amts Avail Gain/Loss NBV Liabilities &Capital Amoun
Fully Pledged Assets Fully Secured Creditors
XXX Plant&Machinary XX - XX Notes Payable XX

XXX Land & Buildings XX XX XX Mortgage Bonds XX
+++ XX Acc.Interest XX
Less:Fully Secured Creditors XX XX
Partially Pledged Assets
XX Accounts Receivable XX - Partially Secured Creditors
Free Assets XX Notes Payable XX

XX Notes Receivable XXX XX XX Acc.Interest XX
XX Acc.Interest XX XX
Less:Partialy Pledged
XX Accounts Receivable XX XX Assets XX
Priority Unsecured
XX Subscriptions XX XX Wages payable X
XX XXX Income tax X

XX F&Fittings XX XXX Liquidation Expenses XX
XX Stock/Inventories XX XX 3,1
XX Organisational costs - XXX Unsecured Creditors
XX
XX Goodwill - XX X Notes Payable-Suppliers
XX Cash XX XXX - XXX Acc.Interest

Estimated total Amts Avail. XXX XX Accounts payable
Less:priority Unsecured
Creditors XXX Capital Accounts
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XX XX Capital Stock
X
Estimated deficiency XXX XX Capital Stock Subscriptions
XX Retained Earnings
XXX TOTALS XXX XXX TOTALS
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INSOLVENCY OF AN INDIVIDUAL AND OF PARTNERSHIP FIRM
In case of an insolvency of individuals, no distinction is made between private assets and
business assets and private liabilities and business liabilities. But in case of insolvency of a firm,
a distinction is made between the assets and liabilities of the firm and assets and liabilities of
individuals. Private assets should first be utilized for paying off private liabilities and similarly
business assets are to be utilized for paying off the liabilities of the business. If there is any
surplus at one place, that can be transferred to the other, if necessity arises. But, it must be
remembered that the deficiency of any partner will never be transferred to the firm. That is, if
partner’s private assets are less than his private liabilities, the deficiency is not made good by
using the assets of the firm. In case of insolvency of the firm, separate statement of affairs and
deficiency accounts are to be prepared for the firm and for each of the partners. We may come
across situations, where a partners helps the firm in getting a loan by mortgaging his private
property and in such cases, the creditors will first recover the money, whatever they can, from
the firm and the amount which could not be recovered from the firm, is recovered from the
security given by the partner
REVISION QUESTION 1.
A) Explain the duties of an official receiver
B) Give a distinction between a balance sheet and a statement of affairs
C)
LOLHA LTD advises you that its facing bankruptcy proceedings. The balance sheet as at June
30 2009 was as follows
Liabilities & capital accounts Amounts Assets Amounts
Accounts payable 80,000 Cash 2,000
Notes payable 135,000 Accounts receivable less 70,000
allowance for bad debts
Accrued wages 15,000 Inventory-raw materials 40,000
Mortgage payable 130,000 Inventory- finished 60,000
goods
Common stock 100,000 Marketable securities 20,000
Retained earnings (20,000) Land 13,000
Buildings less acc 90,000
depreciation
Machinery less acc 120,000
depreciation
Goodwill 20,000
Prepaid expenses 5,000
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Totals 440,000 Totals
Additional data
1) Cash includes an shs 500-travel advance, which has been spent.
2) Accounts receivables of shs 40,000 have been pledged in support of bank loans of shs 30,000.
Credit balances of shs 5,000 were netted in the accounts receivable total. All accounts
receivable are expected to be collected except those for which an allowance had been set up.
3) Marketable securities consist of government bonds costing shs 10,000 and shs 500 shares of
yaya company stock. The market value of the bonds is shs 10,000 and the stock is shs 18 per
share. The bonds have accrued interest due of shs 200. The securities are collateral for a shs
20,000 bank loan
4) Appraisal value of raw materials is shs 30,000 and finished goods are shs 50,000. For an
additional cost of shs 10,000, the raw materials would realize shs 70,000 as finished goods.
5) The appraisal value of fixed assets is: land shs 25,000, building shs 110,000, machinery shs
75,000
6) Prepaid expenses will be exhausted during the liquidation period
7) Accounts payable include shs 15,000 withheld payroll taxes and shs 6,000 to creditors who
had been reassured by the president that they would be paid. There are unrecorded employers
payroll taxes in the amount of shs 500.
8) Wages payable are not subject to any limitations under bankruptcy laws,
9) Mortgages payable consists of shs 100,000 on land and building and a shs 30,000 chattel
mortgages on machinery. Total unrecorded accrued interests for these mortgages amounts to
shs 2,400
10) Probable judgment on a pending damage suit is shs 50,000
11) Estimated legal fees and expenses in connection with the liquidation are shs 10,000
12) You have not submitted an invoice for shs 5,000 for last years’ audit and you estimate a shs
1,000 for liquidation work.
You are required to:

a) Prepare a statement of affairs and a deficiency account/statement
b) Compute the estimated settlement per shilling of unsecured liabilities
GREENLAND INVETSMENT
STATEMENT OF AFFAIRS
LOSS/GIAN
ON
BOOK APPRAISED AVAILABL REALISATIO BOOK LIABILITIES & AMOUNT
VALUE ASSETS VALUE E AMOUNT N VALUE CAPITAL AMOUNTS UNSECURED
Fully pedged fully secured creditors
40,000 a/c receivable 40,000 30,000 bank loans 30000
mortages payable
103,000 land & buildings 135,000 32,000 100,000 (land) 100000
mortages payable
120,000 Machinery 75,000 -45,000 30,000 (machinery) 30000
250,000 accrued interest 2400
less: fully secured
creditors 162,400 87,600 162400
partially pledged partially secured

bank loan (notes
20,000 marketable securities 19,000 -1,000 20,000 payable) 20000
add: accrued interest 200 200 less: partially pledged assets
total partially pledged 19,200 (contra) 19,200 800
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free assets liabilities with priority
2,000 cash (less 500) 1,500 -500 15,000 payroll taxes 15,000
a/c
35,000 receivable+nettings 35,000 6,000 pref. creditors 6,000
un recorded payroll
raw materials taxes 500
40,000 (70,000 - 10,000) 60,000 20,000 15,000 accrued wages 15,000
60,000 finished goods 50,000 -10,000 legal fees & exps 10,000
20,000 goodwill -20,000 liquidation fees 1,000
5,000 prepaid exp 146,500 -5,000 total (contra) 47,500
unsecured creditors
total amount available 234,100 64,000 a/c payable
less:liabilities with priority 47,500 (59,000+5,000) 64,000
amount available to unsecured
creditors 186,600 85,000 notes payable 85,000
contingent exp 50,000
audit exp 5,000
estimated deficiency on secured

creditors 18,200 100,000 capital
-20,000 loss
445,000 204,800 445,000 204800
GREEN LAND INVESTMENTS DEFICIENCY

ACCOUNT
Estimated loss
Machinery 45,000
marketable securities 1,000
Cash 500
finished goods 10,000
Goodwill 20,000
prepaid expenses 5,000
add: un recorded expenses 81,500
legal fees 10,000
liquidation fees 1,000
audit invoice 5,000
contingency liability 50,000
payroll taxes 500
accrued interest on mortgages 2,400
68,900
150,400
less: gain on realization
land & buildings 32,000
accrued interest 200
raw material inventory 20,000
retained earnings -20,000
Capital 100,000
132,200
estimated deficiency on unsecured creditors 18,200
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Question 2
A receiver is appointed for BIZIBU LTD on November 1 2008, at which time the following trial
balance was prepared from the General Ledger:
TRIAL BALANCE, NOVEMBER 1 2008

PARTICULARS DR Shs(000). CR Shs(000)
Cash 66,000
Notes receivable 114,000
Accounts receivable 438,000
Inventory of merchandise 291,000
Investments at cost 60,000
Plant and equipment 1,040,000
Accumulated depreciation 170,000
Notes payable 210,000
Accounts payable 960,000
Capital stock – per value Sh.20 300,000
Retained earnings 369,000
Totals 2,009,000 2,009,000
Additional data:
a) An accrued expense not recorded at this date amount to shs 20,100, of which shs
6,600 is for property taxes and shs 7,200 is for wages for the past month.
b) The investments have a market vale of shs 69,000 and have been pledged as collateral
on a note for shs 60,000.
c) Accounts receivables of shs 180,000 have been assigned as security for the remainder
of the notes payable.
d) It is estimated that 95% of notes receivable, 95% of the assigned accounts receivable,
and 75% of the remaining accounts receivable will be collected. A quick sale of the
inventory will realize shs 180,000 and the plant shs 330,000. The corporation also
owns a patent not recorded on the books which is expected to realize shs 12,000.
You are required to prepare a statement of affairs and a deficiency account.
QUESTION 3
BINEMYE LTD after a series of trading loses over several years decided to go into voluntary
liquidation. The balance sheet as at 1th Nov 2010 was as follows
ASSETS Ushs EQUITY&LIABILITIES Ushs
Freehold property 580,000 Ordinary share capital 475,000
Plant and machinery 289,000 5%Preferrence share capital 600,000
Vehicles 57,500 Share premium 50,000
Stock 186,000 5% Debenture 100,000
Debtors 74,000 Debenture interest 2,500
Profit &Loss 214,000 Bank overdraft 58,000
Creditors 115,000
1,400,500 1,400,500
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Additional data
1) Preference dividends are in arrears since the year 2007
2) The articles of association provided that, out of the surplus assets remaining after
paying outside liabilities, there shall be paid firstly all arrears of preference dividends,
secondly paid up preference share capital together with a premium of thereon of shs
10 per share and any balance remaining paid to the equity share holders.
3) The bank overdraft was secured against vehicles while the creditors were secured
against the freehold property
4) Creditors were paid with a discount granted of 5%
5) Liquidation costs were 38500 and liquidation fees were 10% of the total realized
amounts from the assets
6) Upon liquidation the following assets were realized as follows
Freehold property 700,000
Plant and machinery 240,000
Vehicles 59,000
Stock 150,000
Debtors 60,000
Calls in arrears 25,000
Required Prepare a Statement of Affairs and a statement of estimated deficiency
QN 5.
TROUBLE LTD Whose Balance Sheet was as below as at 30.6.2006 is under going liquidation
ASSETS Ushs000 Ushs 000
NON CUURENT ASSETS
Land 5,000
Plant & Machinery(at cost) 16,500
Fixtures and Fittings 10,500
Buildings 25,000
57,000
Goodwill 4,000
Organization Costs 900 4,900
CUURENT ASSETS
Inventories 24,000
Notes Receivable 14,500
Accrued Interest on Notes 307.5
Stock subscription receivable 2,500
Provision for Doubtful debts (400)

Accounts Receivable 9,750
Cash 7,067.5 57,725.0
119,625
FINANCED BY
EQUITY ACCOUNTS
Capital stock 32,500
Capital stock subscribed 2,500
Retained Earnings (19,850)
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15,150
LIABILITIES
Notes payable
CERUDEB 9,000
Citibank 3,000
Suppliers 12,000
Accrued Interest on Bonds 640
Accounts payable 40,260
Wages Unpaid 700
Income tax withheld 215
Mortgage Bonds 16,000
Interest Accumulated on Bonds 910
Accumulated Depreciation on
Buildings 7,500
Plant and Machinery 9,500
Fixtures and Fittings 4,750 104,475
119,625
A) Notes receivable of shs 12,500,000 were pledged to collate rise the shs.9000, 000 Notes
Payable to CERUDEB. Interest of shs 250,000 was accrued on pledged notes and shs
300,000 was accrued on the shs 9000,000 notes payable to the bank. All the pledged
notes were collectable. Of the remaining notes receivable the shs. 500,000 non-interest
earning note was not collectable
B) Accounts receivable include shs 3,500,000 from UCB which is currently being liquidated
Creditors expect to realize 0.4 on a shilling. The allowance for doubtful debts is Adequate
to cover any other in collectable accounts. A total of shs.1, 600,000 of the Remaining
collectable accounts receivable was pledged as collateral for the notes Payable to Citi
bank of shs 3,000,000 with accrued interest of shs 90,000 as at the date of the balance
sheet.
C) Subscriptions receivable from stock holders are due and are considered fully collectable
D) Inventories are valued at cost and are expected to realize 25% on the post liquidation sale
after a write off of shs 5,000,000 as obsolete stock
E) Land and buildings, which are appraised at 110% of the carrying value, are collateral to
the bond. The respective interest is shs 910,000 to date. At the same time the company
expects to realize 20% of the cost on machinery and equipment and 50% of the cost on
fixture and fittings after incurring a refinishing cost of shs 400,000
F) Estimated costs of liquidation are shs 2,250,000
a) Required Prepare a Statement of Affairs and a statement of estimated

deficiency
b) Explain the difference between a balance sheet and a statement of affairs
102
CHAPTER SEVEN
NON – CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS
Introduction
Non – current assets such as property, plant and equipment are generally held for use, rather than
for sale. In other words, an entity which holds non-current assets normally intends to use them in
its business operations. In these circumstances, it is appropriate to spread the cost (or revalued
amount) of the assets over their useful lives in the form of depreciation charges which are then
matched against the revenue which use of the assets has helped to generate. Importantly, the
realizable value of such assets is usually of no interest.
However, if a non-current asset is held for sale rather than use, the notion of useful life is
inapplicable and it is no longer appropriate to make depreciation charges or to carry the asset at
its cost (or revalued amount) less depreciation to date. A more suitable accounting treatment for
such assets is prescribed by IFRS 5 Non-current assets Held for sale and Discontinued
Operations and the first purpose of this chapter is to explain that accounting treatment.
A non-current asset held for sale may originally have been acquired for use in a business
operation that has now been discontinued. It is logical, therefore, that IFRS 5 should deal with
discontinued operations as well as with non-current assets held for sale. The standard establishes
certain presentation and disclosure requirements with regard to discontinued operations.
Objectives
 Correctly classify non-current assets as either held for use or held for sale, in accordance
with the requirements of IFRS 5.
 Explain the concept of disposal group
 State the main presentation and disclosure requirements of IFRS 5 with regard to non-
current assets held for sale and discontinued operations.
Classification of non-current assets as held for sale

IFRS 5 states that a non-current asset should be classified as held for sale if its carrying amount
(the amout at which it is carried in the financial statements) will be recovered principally through
a sale transaction rather than through continuing use. For this purpose, the asset must be
available for immediate sale in its present condition, subject only to terms that are usual and
customary for sales of such assets. The sale must also be highly probable. A sale is usually
regarded as highly probable if:-
(a) Management is committed to a plan to sell the asset and an active programme has been
initiated to locate a buyer and complete the plan.
(b) The asset is being actively marketed at a sale price that is reasonable in relation to its
current fair value
103
(c) A completed sale is expected within one year from the date of classification (although
this period may be extended if the delay is caused by circumstances beyond the entity
control.
(d) It is unlikely that there will be any significant changes to the plan or that the plan will be
withdrawn.
If these criteria are not satisfied at the end of the reporting period, the asset should not be
classified as held for sale. If the criteria are satisfied after reporting period but before the
financial statements are authorized for issue, the fact that the asset is now classified as held for
sale should be disclosed in the notes to the financial statements.
Disposal groups
IFRS 5 also applies if any disposes of a group of assets (possibly with some directly associated
liabilities) in a single transaction. Such a group is known as a disposal group, and may consist of
a number of cash-generating units, single cash-generating unit or part of a cash-generating unit.
A cash generating unit is defined as the smallest identifiable group of assets that generates such
cash inflows that are largely independent of the cash inflows from other assets or groups of
assets.
As with individual non-current assets, a disposal group should be classified as held for sale if its
carrying amount will be recovered principally through a sale transaction rather than through
continuing use. The criteria which are used to determine whether or not a disposal group is held
for sale are the same as those which apply in the case of individual non-current assets.
Example One
The example is based upon implementation guidance provided with IFRS5
(a) Company A is committed to plan to sell its headquarters building and has initiated
an active programme to find a buyer and complete the plan. The building is being
marketed at a reasonable price and a complete sale is expected within 12 months.
It is unlikely that this plan will change significantly. The company will not
actually vacate the building until a buyer is found but then the time taken to
vacate the building until a buyer is found but then the time taken to vacate the
building will not exceed what is regarded as usual and customary for buildings.
(b) Company B is also committed to plan to sell its headquarters building and is in
precisely the same situation as company A except that it will not vacate the
building and transfer it to a buyer until a new headquarters building has been
constructed.
(c) Company C is committed to plan to sell a factory and has initiated actions to find
a buyer. However, there is currently a backlog of uncompleted orders and the
company does not intend to transfer the factory to a buyer until it has dealt with
this backlog.
Answer :
(a) Strictly speaking, the building is not immediately available since it will take time for the
company to move out once a buyer is found. However, the time taken will be Usual and
customary. Furthermore, all of the other criteria for classification as held for sale are
satisfied. Therefore, this building should be classified as held for sale.
104
(b) The building is not available for immediate sale since the sale cannot be completed until
a new HQ building has been constructed. This building should not be classified as held
for sale.
(c) The factory is not available for immediate sale since the sale cannot be completed until
the backlog of orders has been dealt with. This is similar situation to (b) above and the
factory should not be classified as held for sale
Measurement of non-current assets held for sale

IFRS 5 requires that a non-current asset or a disposal group which is held for sale should be
measured at the lower of its carrying amount when it was initially classified as held for sale and
its “fair vale less cost to sell”. Where:-
(d) 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 measurement
date.
(e) Costs to sell; are costs directly attributable to the disposal of an asset (or disposal
group), excluding finance costs and income tax expense.
When an asset or disposal group is initially classified as held for sale, an impairment loss should
be recognized, if the fair value less costs to sell of the asset or group at that time is lower than its
carrying amount. Subsequently, a further impairment loss should be recognized if there is
decrease in fair value less cost to sell and again should be recognized if there is an increase in
fair value less costs to sell. However, gains which exceed the cumulative impairment losses that
have already been recognized in relation to the asset or disposal group (if any) are not
recognized.
In the case of a disposal group, impairment losses and any subsequent gains are generally
allocated between the non-current assets in the group in order set out in international standards
IAS 36 Impairment of assets. However, no allocation is made to assets or disposal group that are
outside the scope of the measurement requirements of IFRS 5.
It’s important to appropriate that depreciation should cease with regard to non-current assets or
disposal groups which are held for sale and that such assets should instead be measured as
described above.
Measurement of assets no longer classified as held for sale
If an asset or disposal group has been classified as held for sale but then the criteria for this
classification are no longer met, the asset or disposal group should cease to be classified as held
for sale. A non-current asset that ceases to be classified as held for sale (or ceases to be part of a
disposal group classified as such) should be measured at lower of :
(a) Its carrying amount before classified as held for sale, less any depreciation that would have
been charged in the meantime if it had not been held for sale, and
(b)Its recoverable amount at the date of the decision not to sell, which is the higher of:-
(i) the asset’s fair value less costs to sell
(ii) The asset’s value in use, which is defined as “the present value of estimated future cash flows
expected to arise from the continuing use of an asset and from its disposal at the end of its useful
life”.
Presentation of non-current assets held for sale
105
Non-current assets held for sale and the assets of a disposal group held for sale should be
presented separately from other assets in the statement of financial position. Similarly, the
liabilities of a disposal group should be presented separately from other liabilities. It is not
permissible to offset these assets and liabilities. The major classes of assets and liabilities
classified as held for sale should be disclosed either in the statement of financial position.
106
Additional disclosures
In the accounting period in which a non –current asset or a disposal group is classified as held for
sale (or is sold) the following additional disclosures should be made in the notes to the financial
statements:
(i) A description of the asset or disposal group
(ii) A description of the facts and circumstances of the expected disposal and the
expected manner and timing of that disposal.
(iii) Any impairment loss recognized when the asset or disposal group was
classified as held for sale and any further loss or gain recognized
subsequently.
(iv) If applicable, the reportable segment in which the asset or disposal group is
presented.
If an asset or disposal group which was previously classified as held for sale is no longer held for
sale, the facts and circumstances of this decision should also be disclosed.
107
CHAPTER EIGHT
IAS 24: RELATED PARTY DISCLOSURES
Introduction
The chapter is concerned with related party disclosures, which requires entities to make certain
disclosures about relationships with other parties, including parent-subsidiary relationships. This
standard is relevant when preparing financial statements of group companies.
Objectives
 Explain what is meant by a related party
 Identify the related parties of a reporting entity
 State the main disclosures required by international standards IAS 24
Related parties
The objective of IAS 24 Related Party Disclosures is to ensure that financial statements contain
certain disclosures. These disclosures should draw attention to the possibility that n entity’s
financial performance and position may have been affected by:
(a) The existence of related parties, and
(b) Transactions with those parties
The standard accepts that relationships with other parties (e.g subsidiaries) are a normal feature
of business and commerce, but points out that related parties might enter into transactions that
unrelated parties would not. For instance, a subsidiary company which sells goods to its parent
to cost price would probably not sell goods on those terms to any other customer. Such a
transaction would of course effect the profit of both the subsidiary and the parent. In general,
transactions between related parties might involve:
(a) The transfer of assets or liabilities at prices which are above or below their true value
(b) The supply of services at reduced or increased prices
(c) The making of loans at interest rates which differ from market rates.
Even the mere existence of the relationship with another party might affect an entity’s financial
performance and position, whether or not there are any transactions with that party. For instance,
a subsidiary might be instructed by its parent to trade only with that suppliers or perhaps to cease
all research and development activity.
In summary, the users of financial statements cannot properly assess an entity’s financial
performance and positon unless they are supplied with information about the entity’s related
parties and its transactions with those parties.
Definition of related party and related party transaction

IAS 24 defines a related party as A person or Entity that is related to the entity that ia preparing
its financial statements. The term reporting entity is used to refer to the entity that is preparing
its financial statements. The rules which determine whether or not a person or entity is related to
the reporting entity may be summarized as follows:
108
(a) A person (P) or a close member of that person’s family is related to a reporting entity, if
either of the following conditions applies: -
(i) A person has control, joint control or significant influence over the reporting
entity.
(ii) A person is a member of the key management personnel of either the
reporting entity or a parent of the reporting entity.
(b) An entity€ is related to a reporting entity if any of a number of conditions applies: -
(i) Entity E and the reporting entity are members of the same group.
(ii) Entity E is an associate or joint venture of the reporting entity or (vice versa)
(iii) Entity E and the reporting entity are both joint ventures of the same third
party.
(iv) Entity E is an associate of a third entity and the reporting entity is a joint
venture of the same third entity (or vice versa).
(v) Entity E is a post-employment benefit plan (a pension scheme) for the benefit
of the employees of the reporting entity or for the benefit of the employees of
any entity which is related to the reporting entity.
(vi) Entity E is controlled or jointly controlled by a person identified in (a) above.
(vii) A person identified in (a)(i) above has significant influence over Entity E or is
a member of the key management personnel of the entity E or a parent of
Entity E.
Close member of a person’s family is ‘those family members who may be expected to
influence, or be influenced by, that person in their dealings with the entity’. They
include:
(a) The person’s children and spouse or domestic partner.
(b) The children of the person’s spouse or domestic partner
(c) Dependants of the person or of the person’s spouse or domestic partner.
Key management personnel are ‘those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, including any director. …)
A related party transaction is defined as “a transfer of resources, services or obligations between

a reporting entity and a related party, regardless of whether a price is charged”
Parties that are not necessarily related parties, through it is always important to examine the
substance of each relationship and not merely its legal form.
(a) Two entities simply because they have a director in common, or some other member of
their key management personnel in common.
(b) Two joint ventures simply because they share joint control over a joint venture
(c) Providers of finance, trade unions, public utilities and government departments or
agencies, simply by virtue of their normal dealings with an entity.
(d) A customer, supplier, franchisor, distributor or general agent with whom an entity
transacts a significant volume of business, merely by virtue of the resulting economic
dependence.
Disclosures required by IAS 24

IAS 24 is principally a disclosure standard and therefore its disclosure requirements are quite
extensive. The main disclosures that are required are as follows:
109
(a) Parent-subsidiary relationships must be disclosed whether or not there have been any
transactions between these parties. The reporting entity should disclose the name of its
parent and, if different, the name of the ultimate controlling party.
(b) The reporting entity should disclose key management personnel compensation in total
and for each of the following categories as defined in IAS 19 Employee Benefits.
(i) Short-term employee benefits
(ii) Post-employment benefits
(iii) Other long-term benefits
(iv) Termination benefits.
(c) If there have been transactions with a related party, the reporting entity should disclose
the nature of the relationship and provide information about the transactions and any
outstanding balances, as necessary for an understanding of the effect of the relationship
on the financial statements.as a minimum, disclosures should include:
(i) The amount of the transactions
(ii) The amount of any outstanding balances and their terms and conditions
(iii) Any allowances for doubtful debts relating to these outstanding balances and
the amount of any expense recognized during the period in respect of bad or
doubtful debts due from related parties.
These disclosures should be made separately by the reporting entity for each category of related
party. For example, the reporting entity’s parent, subsidiaries, associates, joint ventures, key
management personnel etc.
(d) IAS 24 gives examples of transactions that should be disclosed if they are with a related
party. These include:
(i) Purchases or sales of goods
(ii) Purchases or sales of property and other assets
(iii) The rendering or receiving of services
(iv) Leases
(v) Loans and equity contributions
(vi) Provision of guarantees or collateral
(vii) Settlement of liabilities on behalf of the reporting entity by the related party or
by the reporting entity on behalf of the related party.
110

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Contents

At the end of the chapter, students should be able to:

(i) Explain the purpose of the conceptual framework

The IASB is committed to narrowing these differences by seeking to harmonize regulation,

The steps are:

3. If approved by council, the Exposure Draft will be circulated to members of

6. If revised, the Exposure Draft is approved by council, it is issued as a Uganda

GENERALLY ACCEPTED ACCOUNTING STANDARDS (GAAP)

REVIEW OF KEY ACCOUNTING CONCEPTS

Materiality and aggregation

1. Busirness Entity Convention: The convention states that financial accounting

This definition is however not clear-cut as it is difficult to separate the affairs

2. Money Measurement convention

3. Going Concern Convention

The assumption has implications on the valuation of assets of an entity; assets

4. Historical Cost convention

This convention is difficult to enforce because certain costs cannot be isolated

10. Conservation Convention

12. Duality Convention

13. Substance over form convention

This convention requires that transactions be recorded in accordance with their

Conventions have been criticized for three major reasons:

CHARACTERISITCS OF COPORATE/COMPANY REPORTS

For data to be useful it should be understandable, it should not be so detailed as to

Verifiable data is more dependable and reliable. Verifiability happens when

Qualitative characteristics of useful financial information

Fundamental qualitative characteristics

Enhancing qualitative characteristics.

USERS OF ACCOUNTING INFORMATION AND THEIR INFORMATION NEEDS

USERS MAIN INFORMATION NEEDS

The elements of financial statements

Definitions of elements in the statements of comprehensive income

(a) Income: Income is increases in economic benefits during the

Measurement of the elements of financial statements

INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR SMALL

At the end of the chapter, students should be able to:

(i) To define small and medium sized entity

BENEFITS OF ADOPTING IFRS FOR SMEs IN UGANDA

At the end of the chapter, students should be able to:

 Identify the components of a complete set of financial statement

PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS.

Components of Financial Statements:

(a) all changes in equity; or

STATEMENT OF FINANCIAL POSITION

While a liability should be classified as a current liability when it is expected to be settled in

All other liabilities to be classified as non-current liability.

The balance sheet format should be as under:-

ABC STATEMENT OF FINANCIAL POSITION

Information to be presented at the face of the Balance sheet.

XYZ LTD STATEMENT OF COMPREHENSIVE INCOME

XYZ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR TO 31/12/2018

Bal. at 31/12/2017 xxx Xxx Xxx xxx

An alternative method of presenting changes in equity:

XYZ STATEMENT OF RECOGNISED GAINS

IAS 8: ACCCOUNTING POLICIES, ACCOUNITING ESTIMATES AND ERRORS.

Selection of accounting policies

N.B These are neither extraordinary items nor fundamental errors.

is referred as a Prior period error.

It has the benchmark and allowed alternative treatments.

Changes in Accounting policies.