Specialised Transactions and Entities

Specialised Transactions and Entities

Syllabus tag: KASNEB CPA | Advanced Level | CA32 Advanced Financial Reporting and Analysis | Topic 8 Specialised Transactions and Entities

Lesson objectives

By the end of this topic, you will be able to:

• Measure biological assets and split the gain into its causes
• Account for government grants under both permitted methods
• Apply IFRS 6 to exploration and evaluation assets
• Classify and measure assets held for sale under IFRS 5
• Identify the reporting requirements of specialised entities

Why this matters

These standards govern industries central to the Kenyan economy — agriculture, extractives, and entities receiving donor and government funding. An examiner reaches for them precisely because they are not everyday transactions.

Biological assets: IAS 41

A biological asset is a living animal or plant. Agricultural produce is the harvested product.

Measurement: fair value less costs to sell, at each reporting date, with all changes recognised in profit or loss.

That is unusual and deliberate. Most assets are carried at cost and gains wait for a sale. Here an unrealised gain goes straight to profit, because a maturing herd or crop genuinely changes in value and cost tells the reader almost nothing.

Bearer plants — a tea bush or coffee tree that produces the crop but is not itself sold — are excluded and accounted for as property, plant and equipment under IAS 16. The fruit growing on them remains under IAS 41. That distinction matters in Kenya, where the bush is a long-lived asset and the leaf is the produce.

Worked example. A dairy herd: 160 head at the start valued at KES 38,000 each, 180 head at the year end valued at KES 42,000 each. Costs to sell are 3%.

	KES
Opening (160 × 38,000 × 0.97)	5,897,600
Closing (180 × 42,000 × 0.97)	7,333,200
Total gain to profit or loss	1,435,600

The standard encourages splitting that gain:

• Price change — on the original 160 head: 160 × (42,000 − 38,000) × 0.97 = 620,800
• Physical change — the balance: 814,800

The split is informative because the two have different causes. Price change is a market movement management did not create; physical change reflects breeding and husbandry, which it did.

:::checkpoint A coffee farm reports a large IAS 41 gain in a year when world prices rose sharply but the trees produced less than usual. Explain what the price and physical change split would show, and why a lender would want to see it. :::

Government grants: IAS 20

A grant is recognised only when there is reasonable assurance that the conditions will be met and the grant received. Recognition follows the matching principle: the grant is taken to profit over the periods in which the related costs are recognised.

Grants relating to assets may be presented in either of two ways:

Method	Treatment
Deferred income	Grant held as a liability, released to profit over the asset's life
Netting	Grant deducted from the asset's carrying amount, reducing depreciation

A grant of KES 12,000,000 towards an asset with an eight-year life releases 1,500,000 a year, leaving 7,500,000 deferred after three years.

Both methods give the same effect on profit. They differ in the balance sheet and in the depreciation figure, so a ratio comparison between two companies using different methods is not like for like.

Grants relating to income are recognised as the related expenditure is incurred, either as other income or netted against the expense.

Repayment of a grant is treated as a change in estimate, applied prospectively rather than by restating prior periods.

Exploration and evaluation: IFRS 6

IFRS 6 is a temporary exemption rather than a full standard. It permits an entity to continue its existing accounting policy for exploration and evaluation expenditure, which is why practice varies so widely across the industry.

• Expenditure before the legal right to explore is obtained is expensed
• E&E assets are measured at cost initially, then at cost or revaluation
• They are classified as tangible or intangible according to their nature
• Once technical feasibility and commercial viability are demonstrable, the asset ceases to be an E&E asset and is reclassified — and must be tested for impairment before that reclassification

The impairment trigger is specific to the standard: the right to explore expiring, no further exploration budgeted, or a decision to discontinue.

Held for sale: IFRS 5

An asset or disposal group is classified as held for sale where its carrying amount will be recovered principally through sale rather than continuing use. The sale must be highly probable, the asset available for immediate sale in its present condition, and completion expected within twelve months.

On classification:

• Measured at the lower of carrying amount and fair value less costs to sell
• Depreciation ceases
• Presented separately in the statement of financial position

An asset with a carrying amount of KES 34,000,000, fair value 31,000,000 and costs to sell 1,400,000:

Fair value less costs to sell = 29,600,000 Impairment on classification = 4,400,000

Depreciation stopping is the point candidates forget. The asset is no longer being consumed through use, so charging depreciation would misstate both the asset and the result.

Discontinued operations — a component disposed of or held for sale that is a separate major line of business or geographical area — are presented as a single amount in profit or loss, so that continuing operations can be read on their own.

Specialised entities

Small and medium entities may apply IFRS for SMEs, a simplified framework with reduced disclosure, no requirement to present earnings per share, and simpler treatments — goodwill amortised rather than tested annually, and all borrowing costs expensed.

Not-for-profit and public sector entities in Kenya report under IPSAS where applicable, with fund accounting and a focus on accountability for resources rather than on profit.

Retirement benefit plans report under IAS 26, presenting the net assets available for benefits and the actuarial present value of promised benefits.

:::checkpoint A company reclassifies a factory as held for sale in October, expecting to complete the sale in March. It continues charging depreciation to the year end and presents the factory within non-current assets. Identify the two errors and state their effect on profit. :::