INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA UNDERSTANDING FINANCIAL REPORTING & AUDITING FOR SACCO’S CPA DERRICK MAJANI Credibility . Professionalism . Accountability CPA Derrick Majani; majani35@gmail.com

Understanding Financial Reporting & Auditing for Sacco’s Directors Responsibilities Avoid conflict of interest Avoid fraudulent trading Maintaining company records and producing company accounts- in doing do the directors should; Select suitable accounting policies and apply them consistently. Use applicable accounting standards as have been followed, subject to material departures disclosed and explained in the Financial Statements Prepare financial statements on the correct basis (going concern) Deliver financial statements to respective stakeholders in time. CPA Derrick Majani; majani35@gmail.com

Understanding Financial Reporting. The financial statements comprise a profit and loss account (income statement), statement of other comprehensive income, balance sheet (statement of financial position), statement of changes in equity, statement of cash flows, and notes. Income and expenses, excluding the components of other comprehensive income are recognized in the statement of comprehensive income and comprises items of income and expense, (including reclassification adjustments) that are not recognized in the profit and and loss account as required or permitted by IFRS. Reclassification adjustments are amounts reclassified to the profit and loss account in the current period that were recognized in other comprehensive income in the current or previous periods. Transactions with the owners of the company in their capacity as owners are recognized in the statement of changes in equity. CPA Derrick Majani; majani35@gmail.com

Key notes to Financial Statements Revenue Recognition (IAS 18) Interest income and expense The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. When calculating the effective interest rate, the society estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. CPA Derrick Majani; majani35@gmail.com

Key notes to Financial Statements Revenue Recognition (IAS 18) Fee and commission income Fees and commission income, including account servicing fees, sales commission and custody fees are generally recognized on an accrual basis when the service has been provided. Other income i) Rental income is accrued by reference to time on a straight line basis over the lease term ii) Dividend is recognized when the right to receive income is established. Dividend are reflected as a component of other operating income based on the underlying classification of the equity instrument. CPA Derrick Majani; majani35@gmail.com

Reporting of Assets Key accounting standards to be considered include; IAS 16 Property Plant and Equipment IAS 2 Inventory IAS 38 Intangible Assets IAS 36 Impairments IAS 40 Investment Property Key objectives should include; Explain how different methods of recognizing and measuring assets and liabilities can affect reported financial position Explain and appraise accounting standards that relate to assets and non-financial liabilities for example: property, plant and equipment; intangible assets, held-for-sale assets; inventories; investment properties; provisions and contingencies CPA Derrick Majani; majani35@gmail.com

Reporting Assets for Sacco’s PPE (IAS 16) Subsequent measurements can be based on two models; Cost model- depreciate over estimated useful life(exclude land). Should be reviewed annually for impairments as per IAS 36. Revaluation model only if fair value can be measured reliably as per IFRS 13 with gains and losses to OCI (Other comprehensive Income) and P & L respectively. CPA Derrick Majani; majani35@gmail.com

Cont.. Reporting of Assets IAS 38 INTANGIBLE ASSETS Key issues to note; They should meet recognition of an asset Sacco’s to review for impairments. They include computer software, trade licenses, patents CPA Derrick Majani; majani35@gmail.com

Cont. Reporting of Assets Impairment of Non Financial Assets and Intangible assets (IAS 36) At the end of each reporting period, the society reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).  Assets that have an indefinite useful life are not subject to amortization and are tested for impairment   An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. CPA Derrick Majani; majani35@gmail.com

Cont. Reporting of Assets CPA Derrick Majani; majani35@gmail.com

Financial Instruments The objective of disclosures on the above is to enable users to evaluate; The significance of financial instruments for the entity’s financial position and performance. The Nature and extent of risks arising from financial instruments to which the Sacco is exposed How the Sacco manages the risks CPA Derrick Majani; majani35@gmail.com

Cont. Financial Instruments CPA Derrick Majani; majani35@gmail.com

Cont. Financial Instruments Sacco’s should disclose the extent of risk exposure, the Sacco’s objective for managing those risks and any change in risk from the previous period (both quantitative and qualitative; Credit risk- the risk that one party will cause a financial loss for the other party by failing to discharge an obligation. Liquidity risk Market Risk Currency risk Interest rate risk CPA Derrick Majani; majani35@gmail.com

Cont..Financial Reporting for Sacco’s Key reporting mistakes made by Sacco’s Non review of assets for impairment. Non disclosure of related parties as required by the Regulation and IAS 24. Key employment benefits (retirement benefits) not disclosed. Wrong treatment of reserves Non disclosure of special purpose vehicles which have an implication on reporting. Non disclosure of Regulatory reserve based on provision for bad debts as required by IFRS 7 and Sacco Regulation. Non disclosure of provisions as required by IAS 37. Considering events after reporting period. Non recognition of deferred taxes. Recognition of income on non preforming loans Capitalization of costs intended to go to the P&L and vice versa CPA Derrick Majani; majani35@gmail.com

Conclusion Financial reporting remains a Key requirement under which Saco’s report and the Board and management need to continuously appraise themselves on key reporting issues as how assets and liabilities are reported. It becomes an ethical issue and professional Accountants as regulated by ICPAK should be on the front line to steer good reporting CPA Derrick Majani; majani35@gmail.com

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