BBM 304 Study Notes

MOI UNIVERSITY
P.O Box 3900 - 30100, Eldoret- Kenya
TEL: +25405343620, FAX: +25405343047
E-mail: vcmu@mu.ac.ke
Website: www.mu.ac.ke
SCHOOL OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
COURSE CODE; BBM 304
COURSE TITTLE; ADNANCED ACCOUNTING 1
STUDY MODULE
Prepared by Mr Rodgers Maiyo

COURSE OUTLINE: BBM 304: ADVANCED FINANCIAL ACCOUNTING I
Course objectives
1. To familiarize the learner with the current regulatory framework. IAS and IFRS.
2. To enable the learners prepare published accounts.
3. To enable the student prepare group accounts
4. To equip learners with knowledge on mergers, amalgamation of partnership firms, takeovers,
reorganization and reconstruction of accounts on mergers and takeovers and bankruptcy accounts
Expected Learning Outcomes
By the end of the course, learners should be able to:
1. Prepare group accounts as per IFRS 3.
2. Prepare published financial statements.
3. prepare mergers and takeovers accounts, reorganize and reconstruct accounts on mergers and
takeovers and bankruptcy accounts
Course Content
1.Regulatory framework,
2.Published Financial Statements,
3.Accounting for Business combination:
 Business acquisition
 Consolidated statement of financial position and income statement for Holding and Subsidiary
companies.
 Amalgamation; Takeovers and Mergers of Businesses:
 Accounting for Investments in Associates and Joint venture accounts
4. Bankruptcy, Receivership and Liquidations:
 Bankruptcy and Petitioning;
 Bankruptcy Accounts,
 Statement of Affairs and Deficiency Accounts;
 Receivership and Liquidation Accounts.
5. Absorption; and Reconstruction of companies
Learning and Teaching Methodologies
Lectures, Tutorials, Group discussion, and Presentation
Instructional Materials and Equipments
Lecture rooms, white boards and white board markers
Assessment:
Type Weighting
Continuous Assessment Tests 30 %
Examination 70 %
Total 100 %
Course Texts
1. Saleemi, N. A. (2010). Advanced Financial Accounting Vol. I & II, Nairobi.
2. Paul gee (1996). Spicer and Pegler’s Book Keeping and Accounts, Butterworths, London.
3. Meigs, W. B. & Larsen, (1997) E.- Modern Advanced Accounting (International Edition)
4. Wood, F., & Sangster, A. (2008). Frank Wood's Business Accounting 2 (Vol. 2). Ft Pr.
5. International Financial Reporting Standards (IFRS
TOPIC ONE
REGULATORY FRAMEWORK OF ACCOUNTING.
Regulatory framework of accounting refers to system of ideas and objectives that leads to the
creation of a consistent set of rules and standard. It is basically basis over which accounting
standards are set.
The framework comprises seven sections which cover areas as:
(1) The objective of financial statements;
(2) Underlying assumptions; - accrual basis and going concern
(3) Qualitative characteristics of financial information; Understandability, Relevance, Reliability,
Comparability
(4) The elements of financial statements; BS- assets liability, equity. IS- Income and expense
(5) Recognition of the elements of financial statements; it must have value, and flow of revenue
(6) Measurement of the elements of financial statements; historical, current cost, realizable value
and present values
(7) Concepts of capital maintenance. Financial concept of capital, Physical concept of capital
THE NEED FOR A REGULATORY FRAMEWORK.
A regulatory framework for the preparation of financial statements is necessary for a number of
reasons:
 To ensure that the needs of the users of financial statements are met with at least a basic
minimum of information.
 To ensure that all the information provided in the relevant economic arena is both
comparable and consistent. Given the growth in multinational companies and global
investment this arena is an increasing international one.
 To increase users' confidence in the financial reporting process.
 To regulate the behavior of companies and directors towards their investors.
Financial reporting standards on their own would not be sufficient to achieve these aims. In
addition there must be some legal and market-based regulation.
Principles-based Systems
It based upon a conceptual framework such as the IASB’s Framework;
Accounting standards are set on the basis of the IASB’s framework.
Rules-based Systems
Rules-based framework made up of Companies Acts, EU directives and stock exchange rulings.
Problems of a principles-based system
 The Framework was produced in 1989 by the IASC and adopted by the IASB in 2001.
The updated version was issued in 2010 and so it is in danger of becoming out of date as
constant changes take place in financial reporting. IFRSs are reflecting these changes
but the Framework which underpins them is not.
 For instance, the fair value concept is now an important part of many IFRSs, but is not
referred to in the Framework. So the IFRRs are running ahead of the Framework, rather
than vice versa. In this regard, a rules-based system, while more unwieldy, at least has
the merit of keeping pace with what is happening.
 If it is accepted that the Framework should be subject to a continuous process of review
and updating, then some machinery will have to be set up to do this, and a rules-based
approach could be used to deal with issues which arise between reviews.
 The IASB and the FASB are not working to produce a joint conceptual framework which
should combine the best of both approaches.
The International Accounting Standards Board (IASB)
The organizational structure consists of:
(a) The IASC Foundation
(b) The IASB
(c) The Standards Advisory Council (SAC)
(d) The International Financial Reporting Interpretations Committee
o The International Accounting Standards Board is an independent, privately-
funded accounting standard setter based in London.
o In March 2001 the IASC Foundation was formed as a not-for-profit corporation
incorporated in the USA. The IASC Foundation is the parent entity of the IASB.
o From April 2001 the IASB assumed accounting standard setting responsibilities
from its predecessor body, the International Accounting Standards Committee
(IASC). This restructuring was based upon the recommendations made in the
Recommendations on Shaping IASC for the Future.
o The 14 members of the IASB come from nine countries and have a variety of
backgrounds with a mix of auditors, preparers of financial statements, users of
financial statements and an academic. The Board consists of 12 full-time
members and two part-time members.
Objectives of the IASB
The formal objectives of the IASB, formulated in its mission statement are:
(a) To develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in general purpose financial statements
(b) To provide the use and vigorous application of those standards
(c) To work actively with national accounting standard setters to bring about
convergence of national accounting standards and IFRS to high quality solutions.
International Financial Reporting Standards (IFRS) and International Accounting
Standards (IAS)
Both IAS and IFRS are standards themselves that prescribe rules or accounting treatments for
various individual items or elements of financial statements. IASs are the standards issued before
2001 and IFRSs are the standards issued after 2001. There used to be 41 standards named IAS 1,
IAS 2, etc., however, several of them were superseded, replaced or just withdrawn.
What is the difference between IFRS & IAS?
International Accounting Standards Committee (IASC) was responsible for developing
International Accounting Standards (IAS) before 2001. IASC was renamed as The International
Accounting Standards Board (IASB) in 2001. Consequently the standards issued thereafter are
known as IFRS. Therefore all the standards issued after 2001 are IFRS. The previous IAS are
still valid but are being gradually superseded by new IFRS
INTERNATIONAL FINANCIAL REPORTING STANDARS (IFRS)
Currently we have 16 IFRS in operational namely;
Date issued Effective date
1. IFRS 1 First time adoption of IFRS 24 NOV 2008 01JUL 2009
2. IFRS 2 Share-Based payment 19 FEB 2004 01 JAN 2005
3. IFRS 3 Business combination 10 JAN 2008 01 JUL 2009
4. IFRS 4 Insurance contracts 31 MAR 2004 Superseded by IFRS 17
5. IFRS 5 Non-current assets
Held for sale and
Discontinued operations 31 MAR 2004 01 JAN 2005
6. IFRS 6 Exploration for and
Evaluation of minerals 09 DEC 2004 01 JAN 2006
7. IFRS 7 Financial instruments-Dsclr 18 AUG 2005 01 JAN 2007
8. IFRS 8 Operating segment 30 NOV 2006 01 JAN 2009
9. IFRS 9 Financial instruments ` 24 JUL 2014 01 JAN 2018
10. IFRS 10 Consolidated F. statements 12 MAY 2011 01 JAN 2013
11. IFRS 11 Joint arrangements 12 MAY 2011 01 JAN 2013
12. IFRS 12 Disclosure of interest

In other entities 12 MAY 2011 01 JAN 2013
13. IFRS 13 Fair value measurement 12 MAY 2011 01 JAN 2013
14. IFRS 14 Regulatory deferral accounts 30 JAN 2014 01 JAN 2016
15. IFRS 15 Revenue from contracts
With customers 28 MAY 2014 01 JAN 2018
16. IFRS 16 Lease 13 JAN 2016 01 JAN 2019
17. IFRS 17 Insurance Contract 01 JAN 2017 01 JAN 2021
INTERNATIONAL ACCOUNTING STANDARDS (IAS)
IAS 1 Presentation of financial statements
IAS 2 Inventories
IAS 7 Statement of cash flow
IAS 8 Accounting policies, change in accounting estimates and errors
IAS 10 Events after the reporting period
IAS 11 Contraction contracts
IAS 12 Income taxes
IAS 16 Property plant and equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employees benefits (2011)
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 Effects of changes in foreign exchange rates
IAS 23 Borrowing cost
IAS 24 Related party disclosure
IAS 26 Accounting and reporting by retirement benefit plans
IAS 27 Separate financial statements (2011)
IAS 27 Consolidated and separate financial statements (2008)
IAS 28 Investment in associates and joint ventures (2011)
IAS 28 Investment in Associates (2003)
IAS 29 Financial reporting in hyperinflationary economies
IAS 30 Disclosure in financial statements of Banks and similar financial institutions
IAS 31 Interest in joint ventures
IAS 32 Financial instruments: Presentation
IAS 33 Earnings per share
IAS 34 Interim financial reporting
IAS 36 Impairment of assets
IAS 37 Provisions, contingent assets and contingent liabilities
IAS 38 Intangible assets
IAS 39 Financial instruments; recognition and measure
IAS 40 Investment property
IAS 41 Agriculture
CONTINUOUS ASSESSMENT TEST (CAT)- To be submitted in two weeks’ time.

Question 1
State three different regulatory influences on the preparation of the published accounts of quoted
companies and briefly explain the role of each one. Comment briefly on the effectiveness of this
regulatory system. (10 marks)
Question 2
There are those who suggest that any standard setting body is redundant because accounting
standards are unnecessary. Other people feel that such standards should be produced, but by the
government, so that they are a legal requirement.
Required:
(a) Discuss the statement that accounting standards are unnecessary for the purpose of
regulating financial statements.
(b) Discuss whether or not the financial statements of not-for-profit entities should be subject
to regulation. (10 marks)
Revision question
Historically financial reporting throughout the world has differed widely. The International
Accounting Standards Committee Foundation (IASCF) is committed to developing, in the public
interest, a single set of high quality, understandable and enforceable global accounting standards
that require transparent and comparable information in general purpose financial statements. The
various pronouncements of the IASCF are sometimes collectively referred to as International
Financial Reporting Standards (IFRS).
Required:
(a) Describe the functions of the various internal bodies of the IASCF, and how the IASCF
interrelates with other national standard setters. (10 marks)
(b) Describe the IASCF’s standard setting process including how standards are produced,
enforced and occasionally supplemented. (10 marks)
(c) Comment on whether you feel the move to date towards global accounting standards has
been successful. (5 marks)
TOPIC TWO
PUBLISHED FINANCIAL STATEMENTS.
Company’s financial statements prepared in accordance with the provisions of company’s Act
and international financial reporting standard (IFRS) are called published financial statements.
The companies Act requires that limited companies prepare the financial statements in a form
suitable for publication.
The Companies Act (CAP 486) of 2015 gives guidelines on preparation of the financial
statements, filling with registrar of companies, auditing and certain disclosures required in the
published financial statement.
The requirements of the Companies Act as pertaining to accounts can be found in the section
below;
SI47: Keeping proper financial statements;
SI48: Presenting final statements before the members at the AGM;
SI49: Financial statements must present a true and fair view of operations of the comp:
S150 – SI54: Presentation of group accounts to members at the AGM and related matters
S155: Signing the balance sheet
S156 – 157: Constitution of documents to be presented at AGM.
S158: Sending statement of financial position and annexed documents to members and
debenture holders Before the AGM
S197: Directors emoluments disclosure requirements
S198: Disclosure requirements for loans to directors
Sixth schedule to the Companies Act: Accounts
IFRSs Gives the guideline on the content and the accounting statements of certain events and
transactions in the financial statements. The following IFRSs are relevant for the purpose of
preparing published financial statements;
IAS 1: - Presentation of Financial Statements
IAS 7: - Cash flow statements
IAS 8: - Accounting policies, changes in accounting estimates and errors
IAS 10: - Events after the balance sheet.
IAS 12: - Income Tax
IFRS 5 - Non-current assets held for sale and discontinued operation.
IAS 1: Presentations of Financial Statements

The objective is to give guidance regarding the preparation of published financial statements and
prescribe the content of the published financial statement.
The following information should be prominently displayed and repeated when it is necessary for a
proper understanding of the information presented:
(a) The name of the reporting enterprise and other means of identification.
(b) Whether the financial statements cover an individual enterprise or a group of enterprises.
(c) The balance sheet date or the period covered by the financial statements whichever is
appropriate to that component of the financial statements.
(d) The reporting currency.
(e) The level of precision used in the presentation of figures in the financial statements (e.g. Shs.
‘000’ or millions of Shs.)
IAS 1 requires companies to observe the following rules in preparing published financial
statements:
1. The financial statements should reflect a true and fair view of the company’s financial
position and performance. Where transactions are reported faithfully and the financial
statements comply in all aspects with IFRSs then the true and fair view objective is achieved.
2. The company should apply its accounting policies consistently form one financial period to
the next and in case there is a change in the accounting policy then, adequate disclosure
should be made.
3. The Financial statement should be prepared on a going concern basis in case the going
concern basis isn’t suitable; adequate disclosure should be made.
4. The financial statements should be made on an annual basis (should related to a period of 12
months) and incase the period covered is more or less than 12months then, this fact should be
disclosed.
5. The financial statement should be presented on a comparable basis i.e. the current years’ and
previous years’ financial results unless it is the first year of trading.
6. [Financial statements should disclose the date when they were approved for issue by the
directors.
IAS 1 prescribes the contents of published financial statements. The major reports that
are included as part of the published financial statements is:-
i) The income statement.
ii) Statement of financial position
iii) The statement of changes in equity.
iv) The Cash flow statement.
v) The notes to the accounts/financial statements.
The most cases, companies that prepare published financial statements include the following
additional reports (that are not financial statements).
i) Corporate information (Company’s address, lawyers. Location, bankers and others).
ii) Chairman’s report (principle business activities of the firm, directors to be elected or retiring,
summary results for the year and dividends).
iii) Auditors report.
iv) Corporate governance (I.T systems, internal audit, audit committees and other systems in
place to ensure good management).
v) Statistical information (major highlights of the company’s performance, over a period of time
e.g. 5 years).
DICLOSURE REQUIREMENTS OF COMPANIES FINANCIAL STATEMENTS
The following details should be disclosed in the published financial statements in accordance
with the provisions of the companies Act. (CAP 486) of 2015
STATEMENT OF FINANCIAL POSITION.
It shows the financial position of the company as at the end of a given financial period. The
standard requires that assets and liabilities should be classified between current and non-
current portions.
Currently, the standard requires the statement of financial position to show the total net assets
(i.e. fixed assets + current assets less liabilities) and total share capital and reserves. The
statement of financial position should disclose the following
a) Fixed assets. These include land and buildings, plant and machinery, motor vehicle,
goodwill, fixtures and fittings e.t.c
b) Current assets. All current assets available must be disclosed. These include stock,
debtors, bank, prepayments e.t.c.
c) Current liabilities and provisions. All current liabilities and provisions in the company
must be disclosed. Examples of these include; trade creditors, accrued expenses,
provision of corporate tax, overdraft, provision for dividends e.t.c.
d) Capital expenditure. Capital expenditure not written off should be stated under separate
heading. These include; preliminary expenses, expenses incurred on issues of capital,
commission paid in relation to debentures, discount allowed in respect of debentures e.t.c.
e) Share capital and reserves. Detailed summery of authorized and issued capital,
preference share capital, share premium, capital reserve and revenue reserve.
f) Loans and debentures. All loans and debenture including those which the company has
powers to re-issue.
The format of statement of financial position is given as follows:
ABC LTD
STATEMENT OF FINANCIAL POSITION AS AT 31/12/2016
Shs Shs
FIXED ASSETS
Property, plant and equipment X
Goodwill X
Other intangible assets X
Investment Long-term X
X
CURRENT ASSETS
Inventory X
Accounts receivables and prepayments X
Short-term investment X
Cash at bank and in hand X
X
CURRENT LIABILITIES
Bank overdraft (x)
Trade and other payables (accruals) (x)
Current tax (tax payable) (x)
Dividend payable (x)
Net current assets X
TOTAL NET ASSETS X
FINANCED BY;
Share capital X
Capital reserves X
Retained profit X
Debentures X
Share premium X
X
Most of the items in the statement of financial position are shown in totals and the breakdown of the
figures is given by way of notes to the accounts. E.g. property, plant and equipment which is made
up of land, buildings, plant and machinery and motor vehicles is given in the statement of the
financial position at the total net book values of all these assets and part of the notes to the accounts
will explain the make-up of the assets and movements during the year.
No workings should be given/shown in the S.F.P. for most of the items and only the total or the
net figures should be presented e.g. accounts receivables should be net of provision for doubtful
debts.
IAS 32 requires that redeemable preference shares should be treated as a non-current liability just
like any other loan. Therefore, the preference dividends are shown as part of finance costs in the
income statement, and other accrued interest and shown as part of current liabilities.
If the company proposes dividends on ordinary and preference share capital before the year end
then, this will be provided for in the statements of changes in equity and shown as part of current
liabilities in the balance sheet.
INCOME STATEMENT
The following expenses charged to the income statement should be disclosed;
i) Provision for depreciation, diminution or loss of value of assets
ii) Interest charged on company’s debentures
iii) Any amount provided for redeemable debentures
iv) All transfer to or from reserves
v) Increase or decrease in provision other than depreciation
vi) Dividend paid or proposed
vii) Auditors remuneration or expenses
viii) Extraordinary items
ix) Corresponding figures of previous accounting period
The company should also disclose basis on which corporate tax was provided for.
The format of Icome statement is given as follows:
ABC LTD
STATEMENT OF FINANCIAL POSITION AS AT 31/12/2016
2015 2016
Shs shs
Turnover x x
Cost of sales (x) (x)
Profit before Tax
and extraordinary items x x
Tax (x) (x)
Profit after tax x x
Extra ordinary items (x) (x)
Profit for the year x x
Profit b/f x x
Transfer to general reserve (x) (x)
Dividends (x) (x)
Retained profit x x
THE NOTES TO THE ACCOUNTS
The notes to the accounts provide additional information on the a/c policies that the company has
adopted the make-up of some of the items appearing on the face of the financial accounts and
additional information on items not provided for in the accounts.
IAS 1 does not give the standard format of the notes to the accounts and that this would vary
from one company to another. However, the standard requires the following approach to be used
when presenting the notes to the accounts.
1. The company should state the basis of financial statement (most cases historical basis of
accounting)
2. The company should present the significant policies adopted
3. The make-up of some of the items appearing on the face of the final accounts e.g. PPE and
inventory.
4. Explanation of items not provided for in the final accounts (e.g. Dividends)
An example of the notes to the accounts examined within the scope.
NOTE 1: Accounting Policies.
These financial statements have been prepared under the historical cost basis of accounting
which is modified to accommodate the revaluation of certain property, plant and equipment.
Property, plant and equipment are stated in the accounts of cost or revalued amount less
accumulated depreciation. Depreciation is based on the estimated useful life of the asset and is
provided at the following rates:
Inventory is stated at the lower of cost and net realizable value. Cost represents the purchase
price or production cost and other expenses incurred to get the inventory ready for sale. Net
realizable value is the selling price of the inventory less other expenses that will be incurred to
get the inventory ready for sale.
NOTE 2: Profit for the period
The profit for the period has been arrived at after charging the following expenses:
Shs Shs
Depreciation X
Amortization (impairment of good will ) X
Directors emoluments:
Salaries X
Fees X
Re-imbursement of expenses X
Pension X
Compensation for loss of office X X
NOTE 3: Inventory
Inventory was valued at net realizable value or cost whichever is lower
NOTE 4: Dividends
During the year, the company paid a dividend of Sh.2 per share on the ordinary share s
outstanding and Sh.1 on the preference shares outstanding. The company is now proposing a
final dividend of Sh.3 per share on ordinary shares and sh.1 on preference shares.
Example 1
The following were extracted from the books of Panda Limited as at March 31st 2020.
Sh.
Ordinary shares of sh.10 each fully paid 300,000
8% preference shares of sh.10each fully paid 50,000
Share premium 40,000
6% Debentures 50,000
Creditors 74,000
Debtors 165,000
Sales 2,400,000
Purchases 2,110,000
Discounts Allowed 2,500
Discounts Received 6,500
Freehold Building (at cost) 450,000
Accumulated Depreciation on freehold buildings 125,000
Fixtures and fittings (at cost) 120,000
Accumulated Depreciation on fixtures and fittings 28,000
Stock 1st April 2019 210,000
Returns outward 40,000
Directors fees 20,000
Administration expenses 73,000
Selling and distribution expenses 83,500
Bad debts written off 2,000
Provision for doubtful debts 9,000
Retained profits b/f on 1st April 2019 180,000
Goodwill 80,000
Bank overdraft 13,500
Additional Information:
i. Depreciation is charged annually on the cost of fixed asset held at the end of the
financial year at the following rates;
Freehold buildings 5%
Fixtures and fittings 20%
ii. The debtors’ balance includes sh.5, 000 due from John who has been declared
bankrupt and it has been decided to write off the debt.
iii. The provision for doubtful debts is to be 5% of debtors
iv. Administration expenses accrued as at March 2020 amounted to shs. 4,000
v. Those items which the law permits to be written off against the share premium
account should be written off out of the balances of that account.
vi. Further provision is to be made for directors’ fees amounting to shs.10, 000
vii. The company paid interest on the debentures for the year ended 31st March 2020 on
April 15, 2020.
viii. Gross profit on sales is at the rate of 20% of sales
ix. The company’s directors proposed that the preference share dividend be paid and also
a dividend of 10% on ordinary shares was also to be paid.
Required
a) An Income statement and statement of appropriation for the year ended 31st march
2020. (8 marks)
b) Statement of financial position as at 31 March 2020 (7 marks)
Example 2
The authorized share capital of Shirika Jipya Limited consists of 75,000 redeemable preference
shares of Sh.10 each and 1,500,000 ordinary share of Sh.25 each. The former are to be redeemed
during 2018.
The trial balance of Shirika Jipya Limited as at 30 June 2020 was as follows:
Sh. ‘000’ Sh. ‘000’

Ordinary Share capital (shares fully paid) 15,375
6% redeemable preference share capital 750
Share premium account 3,150
Profit and loss account (1 July 2019) 21,600
10% convertible loan stock 8,000
Deferred tax 1,080
Inventories (1 July 2019) 25,073
Trade receivable 34,979
Trade payables 25,425
Provision for doubtful debts 90
Wages and salaries payable 473
Value added tax payable 681
Interim dividend paid 430
Freehold land, at cost 848
Building at cost 5,100
Plant at cost 30,750
Provision for depreciation on building 398
Provision for depreciation on plant 12,059
Long-term investment quoted 3,525
Interest paid 450
Purchases 141,450
Preferred dividend paid 32
Profit on sale of plant 173
Bad debts 23
Sales 179,100
Dividend received from investments (gross) 300
Installment tax and withholding tax paid 738
Wages and salaries 24,450
Bank 806
268,654 268,654
Additional information:
1. The 10% convertible loan stock is secured against the plant.
2. (i.) During the year fixed assets were purchased as follows
Buildings Sh.750,000 and plant Sh.4,050,000.
(ii). Plant with an original cost of Sh.1,500,000.
3. Depreciation is to be charged as to buildings Sh.53,000 and plant Sh.690,000.
4. The quoted investments had a market value at 30 June 2013 of Sh.6,750,000.
5. The wages and salaries figure includes the following:
Directors Salaries 122,00
General Manager 33,000
Company Secretary 23,000
6. The firm had signed a contract for Sh.23,243,000 being the lower of cost and net realizable
value.
7. Sh.75,000 needs to be transferred from the deferred tax account.
8. The stock as at 30 June 2000 was Sh.23,243,000 being the lower cost and net realizable
value.
9. The following provisions need to be made:
(i). Audit fees of Sh. 53,000
(ii). A final dividend on ordinary shares of Sh.35 per share. This had been proposed
before the year end.
(iii) The provision of doubtful debts is to be adjusted to Sh.120,000.
(iv). Corporate tax of the year’s profit is estimated at Sh. 4,290,000. Last year’s tax was
Overestimated by Sh.15, 000: this figure had been netted off against the installment and
with-holding tax paid.
10. After payment of the preference dividend in March 2020, the company decided to redeem
these shares and this was done in June 2020. No entries have been made in the books in
respect of the same. The shares were redeemed at a premium of 5% and this is to be written –
off in the share premium account.
Required:
(a) An Income Statement (do not attempt to classify expenses according to their functions).
(b) Statement of financial position as at that date in a form suitable for publication and
conforming (as far as the information permits) with the requirements of the Companies Act
and International Accounting Standards.
Example 3
Athi River Cement (ARC) Ltd. is a company quoted on the Nairobi Stock Exchange. It makes
up its accounts to 31 March each year. The balance of the company as at 31 March 2003 is as
follows:
Sh. Million Sh. Million

Administrative expenses 99
Borrowings 103
Buildings: Valuation at 1 April 1998 180
Accumulated depreciation 30
Capital work in progress 74
Cash and bank balances 5
Cost of sales 601
Compensating tax payable 8
Deferred income taxes 151
Deferred expenditure 15
Distribution costs 109
Finance leases payable 7
Finance costs 27
Finance income 2
Inventories 186
Other operating expenses 3
Other operating income 4
Plant and machinery: Cost 907
Accumulated depreciation 283
Prepaid operating lease rental: Cost 80
Amortization of prepaid operating lease rental 20
Revaluation reserve 110
Share capital 450
Share premium 188
Taxation 17
Turnover (net of VAT) 884
Trade and other payables 160
Trade and other receivables 194
Revenue reserve 95
Unclaimed dividends _____ 2
2,497 2,497
Additional information
1. Borrowings comprise:
Sh.million
Bank overdraft (interest are payable in the year 20%) 53

50
Bank loan, repayable 31 March 2005 (interest rate 13% fixed)
103
2.
60
Buildings: Historical cost
6
Depreciation charge for the year included in cost of sales
ARC’s accounting policy in relation to the difference between depreciation
based on the revalued amount of buildings (Sh.6 million) and depreciation
based on the buildings’ historical cost (Sh.2 million) is to treat it as revaluation
surplus realized as the buildings are used. This transfer for the year has not yet
been made.
The buildings had been revalued by Roy and Samika, Registered Valuers and
Estate Agents, on an open market basis.
Accumulated depreciation on historical cost of buildings as at 31 March 2003
was Sh.20 million
No impairment losses have occurred in the life of the company
3. Capital work in progress relates to ongoing construction of a new kin.
4. The compensating tax payable was in respect of the previous year’s dividend
paid in the year.
The directors have proposed that a dividend of 10% be paid for the year ended
31 March 2003. No entry has been made in the financial statements to reflect
this. Proposed dividends are accounted for as a separate component of equity
until they have been ratified at a general meeting.
5. Deferred expenditure represents development costs relating to production of
new products that are written off over four years. Expenditure of Sh.20 million
was incurred early in the year to 31 March 2003. The amortisation charge for
the year was Sh.5 million.
6. The tax expense for the year is as follows: Sh. Million

Current taxation based on adjusted profit at 30% -
Deferred tax expense 17
17
Ignore deferred tax on the revaluation surplus
7. Finance lease payable comprise: Minimum Present value

lease of minimum
payments lease
Sh. payments
Million
3 Sh. Million
5
Payable within one year 8
5
Payable later than one year but not later than five 11
years 7
8. Finance costs comprise: Sh. Million

Interest on bank loan 9
Interest on bank overdraft 16
Interest on finance leases 2
27
9. Finance income: Sh. Million
Interest received on bank deposits
2
10. Inventories comprise: Sh. Million
Raw materials 48
Work in progress 29
Finished goods 51
Stores and spares 58
186
11. The depreciation charge for the year on the plant and machinery was Sh.52
million and the amortization charge of the prepaid operating lease rental was
Sh.2 million
All depreciation and amortization charges are included in cost of sales
12. Other expenses included in the various functional expenses or cost of sales are:
Sh. Million Sh. Million
Directors’ emoluments: Fees 2
Other emoluments 12 14
Other staff costs: Wages and salaries 81
Social security cost 2
(NSSF)
3 86
Termination benefits
2
Auditors’ remuneration
3
Loss on disposal of motor vehicles
105
The average number of staff employed by the company during the year was
603.
13. The authorized share capital of the company is made up of 90 million ordinary
shares of Sh.5 each.
Required:
Prepare the Income Statement and the statement of financial position as at 31 March 2003 in
form suitable for publication.
TOPIC THREE
ACCOUNTING FOR BUSINESS COMBINATION (IFRS3)
When two or more companies are combined together then this situation is considered as business
combination. An example is when an entity (parent company) acquire control of another
company (subsidiary company) then they come under a common ownership. The group as whole
is regarded as one entity. IFRS 3 seeks to enhance the relevance, reliability and comparability of
information provided about business combination e.g. mergers and acquisition and their effects.
It sets out principles on the recognition and measurement of acquired assets and liabilities,
determination of goodwill and necessary disclosures.
IFRS 3 defines business combination as transaction or event in which acquirer obtains control
over a business (e.g. acquisition of shares or net assets, legal mergers, reverse acquisitions). This
standard provides rules for recognition and measurement of business combinations when an
acquirer acquires assets and liabilities of another company (acquiree) and those constitute a
business (parent – subsidiary company situation). IFRS 3 does NOT set out the rules for
preparation of consolidated financial statements for business combination, such as group of
companies under the control of parent, etc. because it falls under the scope of IFRS 10.
History of IFRS 3
IFRS 3 superseded IAS 22 business combination in 31 st march 2004. On 30th June 2005 exposure
draft of proposal amendments where published. On 10th January 2008 it was issued and expected
to be adopted by entities beginning their financial year on 1 st January 2009. On 6th may 2010, it
was amended by annual improvement (measurement of NCI) become effective on 1 st July 2010.
0n December 12th 2013, it was again amended by annual improvement and become applicable on
1st July 2014.

Definition of terms used in business combination.
Business combination- A transaction or other event in which acquire obtain control of one or
more business.
Business- an integrated set of activities and assets that is capable of being conducted and
managed for purpose of providing returns in form of dividends, lower cost or other economic
benefit directly to investors, owner, participant or members.
Acquisition date- the date on which the acquirer obtain control of the acquiree
Acquirer- the entity that acquires control of the acquiree.
Acquiree- the business or business that the acquirer obtain control of in a business combination.
IFRS 3 does not apply to:
 The accounting for the formation of a joint arrangement in the financial statements of the
joint arrangement itself.
 Acquisition of an asset or group of assets that is not a business.
 A combination of entities or businesses under common control.
RECOGNITION AND MEASURE
As of the acquisition date, the acquirer recognizes, separately from goodwill:
 The identifiable assets acquired
 The liabilities assumed
 Any NCI in the acquiree
 The acquired assets and liabilities are required to be measured at their acquisition-date
fair values
 NCI interests that are present ownership interests and entitle their holders to a
proportionate share of the entity’s net assets in the event of liquidation (e.g. shares) are
measured at acquisition-date fair value or at the NCI’s proportionate share in net assets
 All other components of NCI (e.g. from IFRS 2 Share-based payments or calls) are
required to be measured at their acquisition-date fair values
Goodwill is recognized as the excess between:
- The aggregate of the consideration transferred, any non-controlling interest in the acquiree and,
in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree
There are certain exceptions to the recognition and/or measurement principles which cover
contingent liabilities, income taxes, employee benefits, indemnification assets, reacquired rights,
share-based payments and assets held for sale.
Methods of accounting for business combination.
Acquisition method. The acquisition method called the purchase method in 2004 version is used
for all business combination. The steps in applying this method include;
1. Identifying the acquirer. IFRS 10 is used to identify acquirer in B.C
2. Determination of the acquisition date. Consider among other things, date of public offer,
when the acquirer can effect changes in the board of directors of acquiree, acceptance of
unconditional offer and when acquirer direct the acquiree’s operating and financing
policies.
3. Recognition and measure of identifiable assets acquired, liabilities consumed and any
non-controlling interest (formally called minority interest) in the acquiree. Recognition
principle- identify assets acquired and liabilities assumed and recognize separately from
goodwill. Measurement principle- all assets acquired and liabilities assumed in business
combination at the date of acquisition are measured at their fair value.
4. Recognition and measurement of goodwill or a gain from a bargain purchase. Goodwill =
consideration transferred + amount of non-controlling interest + fair value of previously
held equity interest – net assets recognized.
Disclosure requirements of business combination.
Disclosure of information about the current business combinations. An acquirer is
required to disclose information that will enable the users of its financial statements to
evaluate the nature and financial effect of a business combination that occurred either during
the current reporting period or after the end of the period but before the financial statements
are authorized for issue.
Disclosure of information about adjustments of past business combination. An acquirer
is required to disclose information that will enable the users of its financial statements to
evaluate the financial effect of adjustments recognized in the current reporting period that
relate to business combinations that occurred in the period or previous reporting periods.
AMALGAMATION BUSINESS- Takeovers and mergers of business
Amalgamation is a process where two or more companies come together to form one large
company. In such a case the shares come into common ownership. There are two methods of
achieving this,
1. Acquisition accounting –this method applies to parent and subsidiary situations.
2. Merger method- which is restricted to specific circumstance.

1. ACQUISITION METHOD.
This method is also known as purchase method. According to this method a company acquires or
purchases shares in another company by paying cash or issuing its own share or loan stock in
exchange for its shares. If much of the purchase consideration is paid in cash then there would be
a significant outflow of cash from the group. This method is based on the principle that the
parent company acquire control of all assets of the subsidiary even if it does not control 100% of
its shares. In this method the following procedures are adopted;
i. Shares purchased in the subsidiary should be shown at cost less dividend received out
of pre-acquisition profit.
ii. Dividend out of pre-acquisition profit cannot be regarded as available for distribution
as dividend by the parent.
iii. Assets and liabilities of the subsidiary at the date of acquisition should be shown in
the statement of financial position at their fair values.
iv. The difference at the date of acquisition between the fair value of the purchase
consideration and the fair value of net assets is treated as goodwill. Positive or
negative.
v. Only the post-acquisition profit of the subsidiary should be included in the
consolidated reserve of the group.
Example 1 A ltd has just made an offer shs 270,000 for the whole of share capital of B ltd and
this has been accepted. Payment is to be by cash. The ‘fair value’ placed on the tangible fixed
assets of B ltd for the purpose of the merger is shs 148,000. The following are the two
companies’ balance sheet, immediately before the merger on 31st December 2013.
A ltd B ltd
Shs’000’ shs’000’ shs’000’ shs’000’
Tangible fixed assets 400 120
Current assets 450 200
Less current liabilities 130 320 90 110
720 230
Ordinary shares of shs 1 per share 500 150
Revenue reserve 220 80
720 230
Required
i) Prepare the balance sheet of A ltd and the Group immediately following the merger (7
marks)
2. MERGER ACCOUNTING METHOD.
This method is also known as pooling of interest method. According to this method one
company acquires shares in another company and issue its own share as a purchase
consideration instead of paying cash. In this method business combination is brought about
without any significant outflow of cash from the group. There is joint interest in the new
group which is called pooling of interest. Sometimes a new company is formed to take over
two or more companies giving old shareholders new share. It therefore show that the
shareholders have merged into one company. In merger the following procedure are adopted.
i. Assets and liabilities of the merged subsidiary are not adjusted to reflect their fair
values at the date of acquisition of the subsidiary. Shares issued by the parent
company are merely the means achieving the merger.
ii. No share premium arise in this case. The shares are shown in the parent’s
consolidated statement of financial position at their nominal values.
iii. All reserves or profit of the subsidiary company are treated as post acquisition
profit or reserves and therefore included in consolidated statement of financial
position. If the total nominal value of the shares issued by the parent company is
more than the nominal value of share of the subsidiary, then the difference is
deducted from group reserves.
iv. On the other hand if the total is less, then the difference is regarded as capital
reserve. No goodwill arise in case of a merger.
Example 2
Using the previous example, prepare statement of consolidated financial position of A ltd and the
Group immediately after merger given that instead of cash offer of shs 270,000, they offered
200,000 ordinary shares of shs 1 each at a stock exchange value of shs 270.000. (8 marks)
Example 3
Utility chemicals ltd and Safi drycleaners ltd are companies quoted on Nairobi Stock
Exchange. On 1 st April 2012 the companies decided to amalgamate. A new company
Star ltd was formed to take over the two companies. The following are summarized
statements of the financial position as at 31 st march 2012;
Utility ltd Safi ltd
Shs’000’ shs’000’
Assets;
Fixed assets 2,400 2,000
Current assets 1,760 1,130
4,160 3,130
Capital and liabilities;
Equity share of shs 100 each 2,000 1,600
15% preference shares of shs 100 each 800 600
Revaluation reserve 200 160
General reserve 400 300
Profit and loss account 160 120
12% debentures of shs 100 each 192 160
Current liabilities 408 190
4,160 3,130
Additional information;
i. Preference shareholders of Utility ltd and Safi ltd have received same
number of 15% preference shares of shs 100 each in the new company.
ii. 12% Debentures of Utility ltd and Safi ltd are discharged by the new
company by issuing adequate number of 16% debentures of shs 100 each to
ensure that they continue to receive the same amount of interest.
iii. Star ltd has issued 1.5 equity shares for each equity share of Utility ltd and 1
equity share for each share of equity of Safi ltd.
iv. The face value of each share issued by Star ltd is shs 100 each
Required
Prepare the statement of financial position of Star ltd as at 1 st April 2012 immediately
after the amalgamation using pooling of interest method. (10 marks)
GROUP ACCOUNTS
A group of companies comprise of parent company together with its subsidiaries. IFRS provide a
clear and precise meaning of parent company and a subsidiary company. The company’s Act
CAP 486 requires that each company within the group produce its own financial statements to its
shareholders and file with registrar of companies. These financial statements should be prepared
according to the provisions of the company’s Act. It therefore means that the parent company
and each of its subsidiaries are separate legal entities. However, the information contained in
individual financial statements does to give a clear and adequate picture of the group activities as
a whole, hence consolidation becomes necessary. The main objective of consolidated financial
statements is to provide the parent company’s shareholder with a true fair view of the affairs of
the group as whole.
Group structure.
a) Direct holding. In this case, the parent company has a direct interest in the shares of its
subsidiaries companies
b) Indirect holding. In this case, the parent company has interest in shares of its
subsidiaries through its subsidiaries.
CONSOLIDATED FINANCIAL STATEMENTS- IFRS 10
The objective of IFRS 10 is to establish principles for consolidation related to all investees based
on control that parent exercises over the investee rather than the nature of investee. Therefore,
also special purpose entities are subject to consolidation according to this standard.
A parent is required to present consolidated financial statements, except if:
 It meets all the following conditions:
 It is a subsidiary of another entity and all 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 statement.
 Its debt or equity instruments are not traded in a public market.
 It did not, nor is in the process of filing, financial statements for the purpose of issuing
instruments to the public.
 Its ultimate or any intermediate parent produces IFRS compliant consolidated financial
statements available for public use.

 It is a post or long term-employment benefit plan to which IAS 19 Employee Benefits
applies.
 It meets the criteria of an investment entity. Investment entities are required to measure
interests in subsidiaries at fair value through profit or loss in accordance with IFRS 9
Financial Instruments (IAS 39) instead of consolidating them.
CONSOLIDATION PROCEDURES UNDER IFRS 10
 Combine assets, liabilities, income, expenses, cash flows of the parent and subsidiary
 Eliminate parent’s investment in each subsidiary with its portion of the subsidiary’s
equity
 Fully eliminate intra group transactions and balances.
 Parent and subsidiaries must have uniform accounting policies and reporting dates. If not,
alignment adjustments must be quantified and posted to ensure consistency.
 Reporting dates cannot vary by more than 3 months.
 Consolidation of an investee begins from the date the investor obtains control of the
investee and ceases when the investor loses control of the investee.
Basic consolidation of parent and its subsidiary
The main aim of consolidating a parent and its subsidiaries is to give a clear and adequate picture
of the group’s activities as a whole.
They are required to prepare the following consolidated accounts
 Consolidated statement of financial position
 Consolidated income statement

 Statement of change in equity
Preparation of consolidated statement of financial position.
Techniques of consolidation;
1. Make necessary adjust to the balance sheet to consolidate.
2. Add all items not requiring any adjustment.
3. Enter the holding company share of capital.
4. Cancel out items which appear as assets in one company and a liability in another
company.
5. Determine minority interest which consist of share capital and reserves belonging to
outsiders.
6. Determine cost of control, a debit balance represent goodwill and a credit balance
represent capital reserve.
7. Determine the reserves which will appear in the consolidated balance sheet.
These steps are explained below;
Cancellation;
Items which appear as asset in one company and a liability in another company must be
cancelled and should not appear in the consolidated Balance sheet. This include share of capital
of subsidiary which belong to the parent company and inter-company dealings where one
company is a debtor and the other is a creditor.
Non-controlling interest (Minority interest).

When some shares of the subsidiary are held by outsiders, then it is called minority shareholders.
This is because they have less than 50% of total share capital of the subsidiary. Minority interest
is the aggregate of share capital and reserves attributable to outsiders.
Example; from the following balances H ltd is the holding company and S ltd is the subsidiary.
Prepare consolidated statement of financial position
Statement of financial position as at 31st December 2016
H ltd shs 000 S ltd shs 000
Fixed assets 450 200
Investment in shares of Sltd 120 -
Current assets;
Stock 80 20
Debtors; S ltd 20 -
Others 80 60
Total assets 750 280
Capital and reserves
Ordinary share capital of shs 20 each 450 150
Reserves 150 50
Creditors; H ltd - 20
Others 150 60
Total capital & reserves 750 280
Cost of control or Goodwill.
If the parent company purchases shares of a subsidiary at price higher than the nominal value of
those share then the excess amount represent goodwill or cost of acquiring control of the
subsidiary if there were no reserves, profit or loss at the date of acquisition. The good will is
shown at the asset side of the consolidated balance sheet. It is recommended that this goodwill
should written off against reserve or alternatively eliminated from the account by amortization
through profit and loss account. If share are purchased by the parent company at a price less than
nominal value of those shares then the less amount paid represent Capital reserve. This is shown
as capital reserve in the consolidated balance sheet.
Pre-acquisition reserves or profit
These are profit and reserves of the subsidiary on the date of acquisition. These became
attributable to the parent company on acquisition. These are capital profit or reserve and are
shown as capital reserve. In case of goodwill, such reserves and profit reduces the cost of
control. Minority share of such profit and reserves are added to minority interest account. The
same rule applies to pre-acquisition losses.
Post- acquisition profit.
Profit of the subsidiary made after the date acquisition of shares by the parent company are
treated as revenue profit. The parent share of such profit is added to the profit of the parent
company and the minority share is added to minority share account. In deciding whether it’s a
pre-acquisition profit/reserve or post-acquisition profit/reserve the date of purchase is very
crucial.
Practical example.
From the statement of financial position below, prepare consolidated financial statement of
financial position.
Statement of financial position as at 31st December 2008
H ltd (shs) S ltd (shs)
Assets- fixed assets
Land and building 700,000 500,000
Machinery 800,000 250,000
Fixtures and fittings 100,000 50,000
Investment in shares of Sltd
(30,000 shares) 900,000 _____
Current assets:
Stock 300,000 200,000
Debtors 250,000 250,000
Bank balances 50,000 150,000
3,100,000 1,400,000
Share capital:
Ordinary shares of shs 20 each 2,000,000 800,000
General reserves 300,000 200,000
Profit and loss account 450,000 250,000
Current liabilities:
Creditors 350,000 150,000
3,100,000 1,400,000
S ltd reserves and profit and loss account were shs 160,000 and shs 200,000 respectively at the
date of acquisition of shares of S ltd. This profit have not been distributed since that date.
Treatment of unrealized profit
If goods are sold by the subsidiary to the parent company and vice versa and these goods remain
unsold at the end of financial year, then the profit charged by the company is considered as
unrealized profit. This profit must be eliminated while preparing consolidated statement of
financial position. DR group profit and loss a/c and CR Group stock account. If the subsidiary is
not wholly owned then the parent share should only be eliminated.
Intercompany sale of fixed assets
Sometimes fixed assets like machinery furniture e.t.c. are sold by the parent to the subsidiary or
vice versa. If these assets are sold at a profit then an adjustment is required in the fixed asset
account and depreciation charged which also affect the reserves. To eliminate the profit, DR
profit and loss a/c and CR Asset account. In case of depreciation, the depreciation overcharge is
eliminated in the following manner, DR provision for depreciation account and CR consolidated
p&l account.
Revaluation of assets and liabilities
If assets and liabilities of the subsidiary company are revalued at the time of acquisition, profit or
loss on account of such revaluation is treated as capital profit or capital loss and it is divided
among the minority shareholders and parent company share. The parent company share is
transferred to capital reserve and it is used to reduce to cost of control. Share of such profit
belonging to minority shareholders is added to minority interest and deducted if it a loss.
Practical example.
From the following statement of financial position and information given, prepare statement of
consolidated financial position.
Statement of financial position as at 31st December 2016.
Land and building at cost 650,000 350,000
Machinery less 10% depreciation 270,000 135,000
(15,000 shares) 450,000 _____
Current assets:
Stock 150,000 165,000
Debtors 180,000 80,000
1,780,000 770,000
Share capital:
General reserves 200,000 100,000
Profit and loss account:
Balance on 1/1/2016 80,000 50,000
Profit for 2016 300,000 120,000
Creditors 200,000 100,000
1,780,000 770,000
H ltd acquired 15,000 equity shares in S ltd on 1 st July 2016. It was observed that the values of
land and buildings and machinery of S ltd were 450,000 and 167,000 respectively on the date of
acquisition.
Treatment of dividends.
Dividends may be received by the parent company out of pre-acquisition (capital) profit or post
acquisition (revenue) profit. If dividends are paid out of post-profit then there is no problem.
This dividend is treated as revenue and credited to profit and loss account of the parent company.
If profit are received out of pre-acquisition profit of the subsidiary then this dividends are
credited to investment in shares of the subsidiary account thereby reducing the cost of control. If
dividend are partly out of pre-acquisition profit and partly out of post-acquisition then the
dividend received will be divided in two i.e dividend out of pre-acquisition profit and those
declared out of post-acquisition profit. Dividend relating to pre-acquisition profit is credited to
investment in subsidiary account but dividend relating to post-acquisition profit will be credited
to profit and loss account of the parent company. If dividend has been simply proposed by the
subsidiary and it appear as “proposed” in the statement of financial position, then the parent
share of such profit is added to profit or loss of the parent company and share of the minority
shareholders of such profit is added to minority interest account.
Practical example.
From the following statement of financial position and information given prepare a
consolidated statement of financial position.

Land and building 800,000 400,000
Machinery 200,000 150,000
(15,000 shares) 460,000 _____
Current assets:
Stock 80,000 100,000
Debtors 100,000 80,000
1,700,000 800,000
Share capital:
General reserves 1/1/2008 300,000 100,000
Profit and loss account 250,000 160,000
Creditors 150,000 140,000
1,700,000 800,000
Additional information.
The profit and loss account of S ltd showed a credited balance of shs 100,000 on 1 st January
2008. A dividend of 20% was paid in October 2008 for year 2007. This dividend was credited to
the p&l account by H ltd. H ltd acquired shares in S ltd on 1st July 2008.
Treatment of contingent liabilities.
Contingent liability is that liability which may arise or may not arise. Its payment depends on
occurrences of a future event which is not certain e.g. liability in respect of bills discounted.
Arrears of dividends on cumulative preference shares. Claims against the company in respect of
pending court decision. Treatment of contingent liability depends on whether it is towards
outsiders or internally between the parent company and subsidiary company. External contingent
liability is shown by way of footnotes to financial statements while internal contingent liability is
eliminated completely from the consolidated statements.
Piecemeal acquisition. Parent company may buy shares in the subsidiary company at different
times instead of purchasing them at once. In such cases the first purchase may not give control to
the parent company on subsidiary company. When the shares are purchased at different time then
it becomes difficult to distinguish between pre-acquisition and post-acquisition profit. In this
regard it is stated that no reserve or profit shall be considered as post-acquisition profit until
control is obtained by the parent company. Sometimes the pre-acquisition and post-acquisition
reserves and profit are established at each purchase of shares. This method should be followed if
each purchase is substantial and ultimate objective is to gain control of the company.
MULTI-COMPANY OR VERTICAL GROUP.
Multi-company or vertical group refers to those situations when the parent has several
subsidiaries and sub-subsidiaries. The principles of consolidation of statement of financial
position remain the same if in case of multi-company structure. However, the following
procedures should be adopted;
a) A parent company with several subsidiaries.
When a parent company has several subsidiaries, the consolidated statement of financial
position will show;
i. Single figure of minority interest.
ii. Separate total of goodwill or capital reserve.

b) Sub-subsidiaries.
When there are sub-subsidiaries in the group, then then the following two method is used in
preparation of statement of financial position. These are;
i. Direct or single stage method. This method involve ascertainment of the group
relationship i.e. the relationship between the parent, subsidiary and sub-subsidiary.
After determining the percentages of ownership of the parent company and that of
outsiders then the working accounts are constructed. This method is commonly used.
ii. Indirect or two stage method.
This involve the following stages;
1. Consolidation of subsidiary and sub-subsidiary.
2. Consolidation of the holding company with the subsidiary consolidated statement of
financial position.
Example.
From the statement of financial position below and information provided, prepare
consolidated statement of financial position.
H ltd (shs) S ltd (shs) SU ltd (shs)
Assets- 800,000 600,000 300,000
Fixed assets
Investment in shares of Sltd 720,000 _____ _____
Investment in shares of SUltd ____ 230,000 ____
Current assets: 180,000 170,000 100,000

1,700,000 1,000,000 400,000
Share capital:
Ordinary shares of shs 20 each 1,000,000 600,000 250,000
Profit and loss account 500,000 300,000 100,000
Proposed dividends 200,000 100,000 50,000
1,700,000 1,000,000 400,000
i. S ltd acquired 70% of ordinary shares capital of SU ltd in 2005 when profit and loss
account of S ltd where shs 200,000 and those of SU ltd were shs 50,000.
ii. H ltd acquired 80% of ordinary share capital of S ltd in 2006 when the profit and loss
account balances of S ltd were 250,000 and those of SU ltd were shs 80,000.
CONSOLIDATION OF INCOME STATEMENT.
Consolidated income statement is prepared to show the profit or loss of the group as a whole.
The group of companies are treated as single entity. Basically the various items that appear in the
income statement of the parent and that of the subsidiary ae added together in order to prepare
the consolidated income. However some adjustment are made in order to show the earnings of
the group. This are as follows;
Inter-company trading.
It means the sale or purchase of goods within the group. In the consolidated income statement,
the sale and purchases within the group are eliminated. If such goods remain unsold at the end of
financial year then it raises the question of unrealized profit. This unrealized profit should be
eliminated by DR consolidated income statement with the amount of unrealized profit and CR
the provisions for unrealized profit account. This unrealized profit is shown as deduction from
the group’s total stock. The same applies in case of sale of fixed assets at a profit.
Common items. There are some common items of expenditure and income which appear in the
income statement of both the parent company and that of the subsidiary. Such common income
and expenses should be eliminated in the consolidated income statement.
Inter-company dividends.
The dividends received by the parent company from the subsidiary should be eliminated as inter-
company transactions. Similarly, the inter-company interest from debenture should also be
eliminated.
Pre-acquisition profit
The parent company’s share of share of profit arising before the date of acquisition of shares
should be DR consolidated income statement and CR to cost of control account. If the subsidiary
was acquired during the year then only the post-acquisition profit will be shown in the
consolidated income statement.
Minority interest. Minority share of all profit of the subsidiary should be added to the minority
interest account and debited to consolidated income statement. It should be noted that the
minority interest in the subsidiary is calculated on the basis of post-tax profit. In this regard the
following should be taken into consideration.
i. if there is unrealized profit of unsold goods then M.I should be on the basis of post-
tax profit less unrealized profit
ii. if a subsidiary has issued preference shares then preference dividends should be paid
first. The M.I shall be calculated on the basis of post-tax profit after deducting
preference dividends. This adjustment should be made irrespective of whether the
dividend is paid, proposed or even not proposed.
Practical examples.
Example 1
H ltd acquired 80% of shares of S ltd. The summarized income statement for the two
companies for the year ended 31st December 2015 is given below.
Income statement for the year ended 31st December 2015.
‘000’ ‘000’
Sales 29,000 12,000
Cost of sales (18,000) (8,800)
Gross profit 11,000 3,200
Administration and selling expense (5,000) (1,700)
6,000 1,500
Income from investment in S ltd:
Dividend received 80
Dividend receivable 60_ ____
Profit before tax 6,240 1,500
Taxation (3,000) (750)
Profit after tax 3,240 750
Dividends: paid (700) (100)
Proposed (1,300) (200)

Retained profit 1,240 450
Profit brought forward 9,300 2,150
Profit carried down 10,540 2,600
i. Closing stock of H ltd and S ltd as at 31 st December 2015 were shs 280,000 and shs
150,000 respectively.
ii. During the year H ltd sold goods to S ltd costing 150,000 at a profit of 25% on selling
price. 50% of this goods were unsold at the end of the year.
Example 2
S ltd’s capital consist of , 8% shs 20 preference shares and 30,000 shs 20 ordinary shares. On 1 st
January 2013 the date of S ltd incorporation, H ltd acquired 6,000 of preference shares and
24,000 of ordinary shares. The income statement of the two companies for the year ended 31 st
December 2016 is given below.
‘000’ ‘000’
Sales 2,200 1,800
Cost of sales (1,600) (1,300)
Gross profit 600 500
Administration and selling expense (350) (280)
Profit before tax 250 220
Taxation (100) (80)

Profit after tax 150 140
Dividends proposed. Preference ___ (32)
Ordinary (80) (60)
Retained profit 70 48
Profit brought forward 120 80
Profit carried down 190 128
H ltd has not accounted for dividend receivable from S ltd.
You are required to prepare consolidated income statement.
Example 2
‘000’ ‘000’
Sales 1,200 800
Cost of sales (650) (500)
Gross profit 550 300
Administration and selling expense (250) (150)
Profit before tax 200 150
Taxation (70) (60)
Profit after tax 130 90
Dividends proposed. Paid (30) (20)
Retained profit 100 70

Profit brought forward 120 80
Profit carried down 220 150
H ltd has not accounted for dividends received from S ltd.
Dividends were paid on 31st December 2015.
Required
Prepare consolidated income statement for the year ended 31st December 2015.
ACCOUNTING FOR ASSOCIATE COMPANIES – IAS 28.
Overview: IAS 28 prescribes accounting for investments in associates (in which an entity
exercises significant influence) and specifies application of equity method for accounting of
investments in associates as well as investments in joint ventures.
SCOPE.
Applies to all entities that are investors with joint control of, or significant influence over, an
investee.
DEFINITIONS
Associate -An entity over which the investor has significant influence.
Significant influence
Power to participate in financial and operating policy decisions of the investee.
But not control or joint control over those policies.
Joint arrangement
Arrangement of which two or more parties have joint control.
Joint control
The contractually agreed sharing of control of an arrangement - decisions require the unanimous
consent of the parties sharing control.
Joint venture
A joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement.
The equity method of accounting:
That initially recognizes an investment in an investee at cost
Thereafter adjusts the investment for the post-acquisition change in the investor’s share of net
assets of the investee (IAS 28.2)
The profit or loss of the investor includes the investor's share of the profit or loss of the investee.
SIGNIFICANT INFLUENCE
Rebuttable presumption: 20% - 50% shareholding gives rise to significant influence
Evidenced in one or more of the following ways:
Representation on the board of directors or equivalent governing body of the investee
Participation in policy-making processes, including participation in decisions about dividends or
other distributions
Material transactions between the investor and the investee

Interchange of managerial personnel
Provision of essential technical information
EQUITY METHOD
The investment is initially recognized at cost
Subsequently, the carrying amount is increased or decreased to recognize the investor’s share of
the profit or loss of the investee after the date of acquisition (IAS 28.10):
The investor’s share of the profit or loss of the investee is recognized in the investor’s profit or
loss
Distributions received from an investee reduce the carrying amount of the investment
Adjustments to the carrying amount may also arise from changes in the investee’s other
comprehensive income (OCI) (i.e. revaluation of property, plant and equipment and foreign
exchange translation differences. The investor’s share of those changes is recognized in OCI of
the investor
An investment in an investee that meets the definition of a ‘non-current asset held for sale’
should be recognized in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
The equity method is used from the date significant influence arises, to the date significant
influence ceases
EXEMPTION FROM EQUITY METHOD

If the entity is a parent that is exempt from preparing consolidated financial statements, as set out
in IFRS 10 Consolidated Financial Statements paragraph 4(a), or if:
The investor is a wholly owned subsidiary and its owners have been informed about the decision
The investor’s debt or equity instruments are not publicly traded
The investor did not file its financial statements with a securities commission or other regulator
for the purposes of issuing its shares to the public
The ultimate or intermediate parent of the investor produces consolidated financial statements
that comply with IFRSs.
DISCONTINUING THE USE OF THE EQUITY METHOD
An entity is required to discontinue the use of the equity method from the date when its
investment ceases to be an associate or a joint venture as follows:
If an investment becomes a subsidiary, the entity follows the guidance in IFRS 3 Business
Combinations and IFRS 10
If any retained investment is held as a financial asset, the entity applies IFRS 9 Financial
Instruments, and recognize in profit or loss the difference between:
The fair value of any retained interest and any proceeds from disposing of a part interest in the
associate or joint venture.
The carrying amount of investment at date equity method discontinued.
Account for all amounts recognized in OCI in relation to that investment on same basis as if
investee had directly disposed of related assets and liabilities.

IMPAIRMENT LOSSES
Entities apply IAS 39 Financial Instruments: Recognition and Measurement to determine
whether an impairment loss with respect to its net investment in the investee
Goodwill that forms part of the carrying amount of an investment in an investee is not separately
recognized and therefore not tested separately for impairment – instead the entire investment is
tested as ‘one’ in accordance with IAS 36.
SEPARATE FINANCIAL STATEMENTS
An investment in an investee is required to be accounted for in the entity’s separate financial
statements either at cost or at fair value in accordance with IFRS 9.
ISSUES TO NOTE
Potential voting rights are taken into account to determine whether significant influence exists,
but equity accounting is based on actual interest only
Financial statements of the investor and investee used must not differ by more than 3 months in
terms of the reporting date
The investors’ share in the investee’s profits and losses resulting from transactions with the
investee are eliminated in the equity accounted financial statements of the parent
Use uniform accounting policies for like transactions and other events in similar circumstances
If an investor’s share of losses of an investee exceeds its interest in the investee, discontinue
recognizing share of further losses. The interest in an investee is the carrying amount of the
investment in the investee under the equity method, and any long-term interests that, in
substance, form part of the investor’s net investment in the investee. E.g., an item for which
settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an
extension of the entity’s investment in that investee
If ownership interest is reduced, but equity method remains, the entity reclassifies to profit or
loss the gain or loss that had previously been recognized in OCI.
DISCLOSURES
The disclosure requirements for Investments in Associates and Joint Ventures are provided in
IFRS 12 Disclosure of Interests in Other Entities.
Examples.
The following information relates to H ltd, S ltd and A ltd
H ltd (shs) S ltd (shs) A ltd (shs)
‘000’ ‘000’ ‘000’
Sales 10,000 5,000 2,500
Cost of sales (4,000) (2,000) (1,000)
Gross profit 6,000 3,000 1,500
Administration & selling expense (2,500) (1,000) (700)
3,500 2,000 800
Dividends;
S ltd 600 ___ ___
A ltd 90_ ____ ___
Profit before tax 4,190 2,000 800
Taxation (1,500) (800) (320)
Profit after tax 2,960 1,200 480
Proposed dividends (1,000) (750) (300)
Retained profit 1,690 450 180
Profit brought forward 4,000 3,000 1,500
Profit carried down 5,690 3,450 1,680
H ltd (shs) S ltd (shs) SU ltd (shs)
‘000’ ‘000’ ‘000’
Assets- 5,000 4,500 3,000
Fixed assets
Investment in shares of Sltd 4,000 _____ _____
Investment in shares of SUltd 500 ____ ____
Current assets: 180,000 170,000 100,000
Stock 1,200 1,700 300

Debtors 2,500 1,500 400
Dividend receivable 690 _____ ____
Creditor (2,700) (1,130) (820)
Proposed dividend (1,000) (700) (300)
11,690 6,450 2,680
Share capital:
Ordinary shares of shs 20 each 6,000 3,000 1,000

Profit and loss account 5,690 3,450 1,680
11,690 6,450 2,680
1. H ltd holds 80% of S ltd and A ltd at percentage of 80% and 30% respectively.
2. The reserves of S ltd and A ltd were 2,000,000 and shs 500,000 at the time of acquisition by H
ltd.
Required.
Prepare consolidated income statement and consolidated statement of financial position as at 31 st
December 2008.
TOPIC FOUR
BANKRUPTCY AND LEQUIDATION ACCOUNTS

BANKRUPTCY ACCOUNTS
The issues addressed here deal with the properties of an individual (a sole trader or partner in a
partnership) when they become bankrupt. There is a lot of legal issues and most of these are
addressed under the Bankruptcy Act. Please go through the notes patiently but emphasize more on
the final accounts i.e. the statement of affairs and the deficiency account.
A bankrupt is a person against whom an adjudication order has been made by the court primarily
on the grounds of his insolvency. Any person (other than a body corporate) can be made bankrupt
(including in certain cases, infants and persons of unsound mind) who:
(a) Has incurred liquidated debts of Shs 1,000 or more; and
(b) Has committed an act of bankruptcy within the three months preceding presentation of the
petition; and
(c) At the time the petition was presented was domiciled or within a year before, was ordinarily
resident in Kenya or carrying on business in Kenya personally or by an agent or as a member
of a firm.
ACTS OF BANKRUPTCY
The following are the acts of bankruptcy on which a petition may be founded:
(a) Assignment of property to trustee: whereby one gives up all his property to be managed by a
trustee
Provided that:
i. The assignment is of substantially the whole of the debtor's property, and
ii. It is for the benefit of the creditors generally.
Such an assignment will normally be void unless registered as a deed of arrangement.
(b) Fraudulent conveyance: the debtor unfairly transfers his property to one creditor, so that the
other creditors have no assets to attach their claims on.
i.e. a transfer of any property to any person which gives one creditor an unfair advantage, or
which tends to defeat or delay creditors.
(c) Fraudulent preference
Where the preference constitutes a conveyance or transfer of property, or a charge thereon,
(d) Absenting
i.e. departing or remaining out of Kenya, or departing from his dwelling-house, or otherwise
absenting himself, or 'keeping house', with the intention of defeating or delaying his
creditors.
(e) Execution against goods
This is committed when the bailiff has taken possession of goods and either sold them or
retained them for 21 days.
(f) Petition by debtor
A bankruptcy petition by the debtor against himself, or a formal declaration of his inability to
pay his debts filed with the court, operates as an act of bankruptcy.
(g) Non-compliance with bankruptcy notice
A bankruptcy notice may be issued by a judgement creditor in respect of a final judgment or
order for any amount provided that execution has not been stayed or already levied: failure
by the debtor to pay the amount of the judgment within seven days of service of the notice
constitutes an act of bankruptcy, unless the debtor applies to have it set aside on the grounds
of set off, etc.
(h) Notice of suspension of payment of debts
This may be in any form provided it shows a clear intention to suspend payment.
THE PETITION
(a) Petition by debtor
If the debtor presents his own petition, a receiving order is made at once without a court
hearing and an adjudication order may also be made at once.
(b) Petition by creditor
Any creditor including an assignee of a debt, may petition, provided:
i. The debt due to him amounts to at least Shs 1,000;
ii. The debt is certain and is for a liquidated sum;
iii. The petition is based on an act of bankruptcy committed within the previous
three months.
iv. The debtor is domiciled in Kenya, or within the previous year has ordinarily
resided or carried on business in Kenya.
A creditor whose debt is less than Shs 1,000 may petition jointly with other, if the
aggregate of the debts is Shs 1,000 or more A secured creditor may only petition in
respect of the balance unsecured unless he agrees to surrender his security.
RECEIVING ORDER
(a) Effect of receiving order
The consequences of the making of the receiving order are:
i. The debtor retains ownership, but loses possession and control of his property;
ii. The official receiver becomes receiver of the debtor's property;
iii. No legal proceedings may be brought in respect of provable debts except by
leave of the court;
iv. Transactions subsequently entered into by the debtor are prima facie invalid;
v. The receiving order must be advertised in the kenya gazette;
(b) Rescission of receiving order:
The order may be rescinded by the court if:
i. The court has sanctioned a composition or scheme of arrangement;
ii. The debts have been paid in full; or
iii. The court otherwise considers that the order ought not to have been made.
(c) Statement of affairs
Within fourteen days of the receiving order '(or before, but not more than three days before, the
date of the debtor's own petition) the debtor must submit to the Official Receiver a statement of
his affairs verified by affidavit, showing:
1. Particulars of his assets, debts and liabilities;
2. The names, residences and occupations of his creditors;
3. The securities (if any) held by them, and the dates they were given; and
4. Such further or other information as may be prescribed or as the official receiver may
require
COMPOSITIONS AND SCHEMES OF ARRANGEMENT
The debtor may lodge a written proposal with the Official Receiver for a composition or
other arrangement of his affairs within four days of submitting his statement of affairs, or
such further time as the Official Receiver may allow. The procedure thereon is as follows:
(a) The Official Receiver must summon a meeting of creditors before the conclusion of
the public examination, sending a copy of the proposal to each of them with his report
thereon;
(b) The proposal must be approved by a majority in number and three fourths in value of
all creditors who have proved;
(c) If the proposal is accepted by the creditors, it must be approved by the court, three
days' notice of hearing being given to each creditor; the hearing cannot take place until
after the conclusion of the examination;
(d) The court cannot approve the proposal until it is heard the Official Receiver's report on
the debtor's conduct and any objections of the creditors: the court should approve the
proposal if satisfied that the statutory requirement have been complied with, and it is in
the interests of creditors generally and not contrary to public policy;
(e) The court must refuse to approve it if:
i. The terms are unreasonable or not for the benefit of the creditors generally, or
ii. Any of the facts that would disentitle a bankrupt to an immediate unconditional
discharge from bankruptcy are proved unless provision is made of at least Shs 25
per Shs 100 on all provable unsecured debts, or
iii. Provision is not made for the prior payment of preferential debts;
(f) If approved by the court, the scheme is binding in respect of all provable debts, except
those from which the debtor would not be released on discharge (see paragraph 6.7(a)
below);
(g) The scheme may be annulled if:
i. The debtor defaults in payment, or
ii. It cannot proceed without injustice or undue delay to the creditors or the debtor,
or
iii. The court's consent was obtained by fraud.
In practice, such proposals are rare; of a debtor wishes to put forward a scheme, he will
normally do so before bankruptcy proceedings are begun.
ADJUDICATION OF DEBTOR
1. Adjudication order
The court may adjudge the debtor bankrupt on the application of the O.R. or any creditor in
the following cases:
a.If the creditors so resolve at their first meeting, or pass no resolution, or do not meet at all;
i. If a composition or scheme is not approved within 14 days after the conclusion of the
public examination, or such further time as the court may allow;
ii. If the debtor applies to be made bankrupt;
iii. If there is no quorum at the first meeting of the creditors;
iv. If the debtor has absconded or does not intend to propose a composition or scheme;
v. If the public examination is adjourned sine die;
vi. If the debtor fails without reasonable cause to submit his statement of affairs;
vii. If a composition or scheme is annulled by the court.
2. Consequences of adjudication
The consequences of the making of the adjudication order are:
1. The order must be advertised in the gazette and a local paper;
2. The ownership of the debtor's property vests in the trustee in bankruptcy;
3. The debtor must not obtain credit for shs 100 or more without informing the creditor that he
is an undischarged bankrupt; credits under shs 100 can be added together to make this
offence r v. Hartley (1972);
4. The debtor must not engage in any trade or business under a different name without
disclosing the name under which he was adjudicated;
5. The debtor cannot act as a company director or take part in the management of a company
except by leave of the court;
6. The debtor cannot act as a receiver or manager of the property of a company unless
appointed by the court;
7. The debtor cannot be appointed or act as a justice of peace or be elected to or hold the office
of mayor or member of local authority council, school committee or road board: this
disqualification operates for five years after discharge unless he obtains a certificate of
misfortune or the bankruptcy is annulled.
3. Annulment of order
The order may be annulled if
a. In the opinion of the court the debtor ought not to have been adjudicated bankrupt;
b. All the debts have been paid in full; or
c. A composition or scheme is accepted by the creditors and approved by the court.
As to (b) voluntary release of a debt is not equivalent to payment; a disputed debt is considered as
paid in full if the debtor enters into a bond to pay it if the dispute is settled in favour of the creditor
and a debt due to an untraceable or unidentifiable creditor by payment of the debt into court. The
court may refuse an annulment, although the debts have been paid in full, or the O.R. reports that
the bankrupt has committed bankruptcy offenses.
An annulment must be advertised in the Kenya Gazette, and releases the debtor from the
disabilities of bankruptcy, but does not invalidate payments or other acts properly made by the
Official Receiver or the trustee. The property of the debtor vests in such person as the court directs,
or otherwise reverts to the debtor.
DISCHARGE OF BANKRUPT
1. Application of discharge
Application may be made at any time after adjudication, but cannot be heard until the conclusion
of the public examination. Notice of the hearing must be given in the Kenya Gazette, and 14 days'
notice given to every creditor. The Official Receiver must report to the court on the bankrupt's
conduct, and the bankrupt is entitled to a copy of this report at least seven days before the hearing.
The court may -
1. Grant an absolute and immediate discharge;
2. Refuse the application; or
3. Grant a suspended or conditional discharge;
4. In particular, the court may only grant a discharge suspended for a definite period or until at
least Shs 50 per Shs 100 has been paid to all creditors, or a conditional discharge subject to
judgement being entered against the bankrupt for all or part of the unpaid balance of provable
debts, if either -
(a) The bankrupt has been convicted of a bankruptcy offence, or
(b) Any of the "facts" set out on s.29 (3) have been proved against him; such "facts"
include -
assets less than Shs 50 per Shs 100 of unsecured liabilities; failing to keep proper
books of account; knowingly trading when insolvent; gambling; extravagant living or
neglect of business; frivolous litigation; previous bankruptcy, composition or scheme;
fraud or fraudulent breach of trust.
2. Effect of discharge
An order of discharge releases the bankrupt from all disabilities imposed by the bankruptcy (except
those which apply for a fixed period after discharge - see paragraph. 6.6 (b) (g), and from all
provable debts except:
i. Debts due to the government for breach of a revenue statute, or on recognizance, unless the
Treasury gives written consent to his release;
ii. Debts incurred by fraud or fraudulent breach of trust;
iii. Liability under a judgment for seduction, or under an affiliation order, or as a correspondent
in a divorce action, unless the court otherwise orders.
The order does not release him from liability to prosecution for bankruptcy offenses.
3. Revocation of discharge
The court may revoke or vary the order of discharge in the event of the debtor's failure to assist as
required in supplying information or in the realization of the estate.
5.8 THE TRUSTEE IN BANKRUPTCY
a. Appointment of trustee
The trustee is appointed:
I .By the creditors by ordinary resolution, or
ii. By the committee of inspection, if so resolved by the creditors, or
iii. By the court if a trustee is not otherwise appointed within four weeks of the
adjudication or within seven days of rejection of a composition or scheme.
A vacancy is filled in the same way, the court having power to appoint if the vacancy is not filled
within three weeks. A trustee appointed by the court may be replaced by a new trustee appointed
by the creditors or committee of inspection.
b. Court objections
The court may object to a trustee appointed by the creditors or committee of inspection on
any of the following grounds:
i. Appointment not made in good faith by a majority in value of creditors voting;
ii. Person appointed not fit to act as trustee;
iii. Trustee’s relationship with bankrupt or a creditor makes it difficult for him to act
impartially;
iv. Misconduct or failure to render accounts or deal properly with unclaimed moneys, in a
previous trusteeship.
Certificate of appointment
If the court has no objection to the trustee, and the trustee gives security of the nature and
amount required, the court will certify that his appointment has been duly made, and the
appointment takes effect from that date. The trustee must advertise his appointment in the
Kenya Gazette and in a local paper.
RIGHTS AND DUTIES OF TRUSTEE
8. Powers of trustee
1. Of his own initiative, he may:
1.Sell and transfer any part of the bankrupt's property;

2.Gives receipts for money received;
3.Take all necessary steps to recover debts due to the bankrupt;
4.Exercise any powers vested in him under the bankruptcy act (cap.53)
5.Bar an entail; and
6.Do all necessary or expedient acts in his official name.
2. With permission of the committee of inspection or the court, he may:
1. Carry on the business of the bankrupt;
2. Bring and defend legal proceedings relating to the bankrupt's property;
3. Employ a solicitor or other agent;
4. Sell property in consideration of a future payment;
5. Mortgage or pledge any part of the property;
6. Refer disputes to arbitration and compromise claims;
7. Distribute property in specie among creditors;
8. Appoint the bankrupt to manage his property or carry on his trade for the benefit of the
creditors; and
9. Pay such allowances as he thinks fit to the bankrupt for the support of himself and of his
family.
9. (b) Right of indemnity
If the Official Receiver or trustee has seized or disposed of any property in the
possession of the debtor, without notice or claim relating thereto, he is not personally
liable to any person having a claim against that property, unless the court is of opinion
that he has been negligent.
10. (c) Remuneration of trustee
This is fixed by ordinary resolution of the creditors, or by the committee of inspection.
It takes the form of a commission payable partly on the amount realized by him less
sums paid to secured creditors, and partly on the amount distributed as dividend. The
court may fix the amount at the request of one-fourth in number or value of the
creditors or of the bankrupt, if satisfied that the agreed amount is too large. If the
trustee receives any other payment he loses all right to remuneration.
11. (d) Accounts of trustees
The trustee must keep proper books of account, which may be inspected by the
creditors at any time. The cash book must be audited by the committee of inspection at
least once every three months, and the trading account examined and certified by them
at least once a month. The accounts must be submitted for audit by the Official
Receiver every six months and when the estate has been fully realised and distributed,
one copy of the audited accounts is retained by the Official Receiver and another filed
with the court. The trustee must also submit to the Official Receiver a progress report
at least once a year.
12. (e) Trustee's bank account
The trustee must pay all money received into the Bankruptcy Estates Account at the
prescribed bank if he retains sums exceeding Shs 1,000 for more than ten days, he is
liable to pay 20% per annum interest on the amount, loses his rights to
remuneration, may be removed from office, and is liable to pay any expenses
incurred through his being advantageous to the creditors of the committee of
inspection, or the trustee satisfies the court that there are good reasons for doing so.
The trustee cannot draw cheques on the Bankruptcy Estates Account; only the
Official Receiver can do so.
TERMINATION OF OFFICE OF TRUSTEE
The trustee may vacate office in the following ways:
1. (a) Resignation
He may resign at a meeting of creditors and with their consent.
2. (b) Removal
He may be removed either by the creditors by ordinary resolution, or by the court, if:
i. He is guilty of misconduct or failure to perform his statutory duties;
ii. The trusteeship is being needlessly protracted;
iii. He is incapable of performing his duties;
iv. He is unable to act impartially; or
v. He has been removed from office in another bankruptcy for misconduct.
3. (c) Receiving order
He automatically vacates office if a receiving order is made against him..
4. (d) Release
He may be released by the court when the administration of the estate is complete, or he has
resigned or been removed.
Upon release he is discharged from liability in respect of any act or default as trustee, unless
his release was obtained by fraud or concealment of material facts.
The release must be gazetted and the trustee must deliver to the O.R. all books and papers in
his possession.
ORDER OF PAYMENTS
The bankrupt’s estate must be distributed in the following order.
1. Cost and charges
Costs and charges properly incurred in administering the estate must be paid in priority to all
debts and in the proper sequence.
2. Pre preferential debts
These are:
(a) Proper funeral and testamentary expenses of a deceased insolvent;
(b) Premiums paid by apprentices or articled clerks;
(c) Property of a friendly society of which the bankrupt is an officer; and
(d) Expenses properly incurred by a trustee of a deed of arrangement.
If funds are insufficient to pay these in full, they abate ratably.
3. Preferential debts
These include:
(a) Local rates and amounts deducted as P.A.Y.E by a bankrupt employer from employees'
pay accruing due during the twelve months preceding the receiving order;
(b) Up to one year's arrears of any other assessed taxes;
(c) Wages and salary due to employees for work done during the four months preceding
the receiving order up to Shs 4,000 per employee;
(d) Rents due to the Government not more than five years in arrear;
(e) Employer’s national social security fund contributions due during the previous twelve
months.
(f) Amounts due for compensation under the Workmen's Compensation Act. If funds are
insufficient to pay these in full, they abate ratably.
4. Unsecured debts
These rank equally after payment of preferential debts in full.
5. Deferred debts
These include:
(a) Accrued interest in excess of 6% per annum, due to an unsecured creditor;(paid in
priority to other deferred creditors).
(b) Salary or wages due to or money or other property lent by a relative by consanguinity
or affinity i.e. a grandparent, parent, uncle or aunt, brother or sister or cousin, child
(including adopted child) or nephew or niece, grandchild or any person married to any
one of these; or a husband or wife.
(c) Loans to a person for business purposes at a rate of interest varying with profits;
b) and c) rank equally — proof cannot be admitted for any purpose until all other debts
are paid in full.
(d) Statutory interest at 6% per annum; and
(e) Claims arising under a settlement set aside by the trustee.
6. Surplus
Any surplus remaining after payment of all debts and other liabilities in full must be returned to the
bankrupt.
BANKRUPTCY ACCOUNTS FOR INDIVIDUALS AND PARTNERSHIPS
These include a statement of affairs and deficiency account.
A statement of affairs takes the following form:
INDIVIDUAL
STATEMENT OF AFFAIRS AS AT
(DATE), DATE OF RECEIVING ORDER
Gross Liabilities as stated & Expecte Assets as stated & Estimated
Liabilities estimated by debtor d to rank estimated by to produce
debtor
Sh ‘000’ Sh ‘000’ Sh Sh ‘000’
‘000’
X Unsecured creditors x Cash at bank X
X Creditors fully x Cash in hand X
secured
Less value of security (x) Stock-in-trade X
Surplus to contra x Machinery X
X Creditors partly x Trade fixtures X
secured
Less value of security (x) Furniture X
x Life policies x
X Liabilities on bills x Stocks, shares
discounted and other
investments
X Contingent and other x Bank debts: x
liabilities Good
X Preferential creditors : X
Doubtful
deducted per contra x : Bad X
X
Estimated to x
produce
Bills of exchange X
Estimated to x
produce
Surplus from
secured Creditors
per contra x
x
Deduct (x)
preferential
Creditors per x
contra
Deficiency as per
Deficiency a/c x
Xx xx xx
DEFICIENCY (SURPLUS) A/C

Sh Sh
‘000’ ‘000’
Excess of assets over liabilities Losses from Trading x
(One year before receiving order) x Estimated loss on realization of
Excess of private assets over Assets x
Liabilities (one year before Drawings x
receiving
Order) x
Net profits from the business for
the
Period under review x
Other receipts-gifts legacies etc x
Deficiency as per statement of x
affairs
xx xx
Example 1
Kariuki, a businessman filed his own petition in bankruptcy. The balance sheet of his business as
on 31st march 2008, the date of receiving the order showed the following balances;
shs B.V N.R.V
Capital a/c as on 1/4/2007 300,000 Assets
Profit for the year ending 31/3/2008 100,000 Free-hold shop
Drawings during the year (90,000) Building 600,000 700,000
310,000 Shares in ABC
Trade creditors (including 25,000 25,000 of 20@ 500,000 10,000
Preferential in bankruptcy) 840,000 Stock in trade 200,000 150,000
Loan secured on free-hold Debtors 200,000 175,000
Shop building 400,000 Bank balances 50,000 50,000
1,550,000 1,550,000
Kariuki’s personal assets, not included above comprise of a motor vehicle valued at shs 100,000, a
current account with a bank shs 20,000 and a gold watch valued at shs 5,000. His only personal
liabilities outside business were shs 3,000 due to his trailer and shs 5,000 for unsuccessful football
forecast due to his bookmaker. The value of these personal assets and liabilities has remained
unchanged since April 2007.
12 yrs ago, kariuki had made a voluntary settlement of shs 250,000 in favour of his disabled sister
lucy.
Required
prepare as on 31st march 2008
a) Statement of affairs
b) A deficiency account
Example 2
Njuguna Mwandawiro, carrying on a business as a trader in Likoni, Mombasa, finds himself
insolvent, and on 15 August 2007 files his petition in bankruptcy. The following balances are
extracted from the books of his business on that date:
Sh Sh
N. Mwandawiro Capital 1,200,00 Shop – land and 4,000,000
0 buildings
Mortgage on shop (land and 1,000,000
buildings) 3,000,00 Furniture and fittings
575,100
0
Loan – I.C.D.C. Ltd. Stock of goods
641,300
1,200,00
Loan – Barclays Bank Ltd. Debtors
0 1,314,000
Loan – Co-operative Bank Ltd. N. Mwandawiro
600,000 2,000
drawings
Loan – Paul Nkobei
200,000
Cash on hand
Loan – Mutiso Kuria
100,000
Trade creditors
20,000
N.H.I.F., N.S.S.F. and P.A.Y.E.
1,140,00
Salaries and wages payable 0
________
18,000
18,00
0
7,532,40 7,532,400
The following information is provided:
1. The trade creditors includes Sh.30,000 owing to Mombasa Municipal Council in respect of
rates in for the current period and a small loan from Mwandawiro’s friend Waititu for Sh.
10,000.
2. The amount owing for salaries and wages and statutory payroll deductions are for 2007.
3. There is 210,000 interest unpaid on the mortgage as at 15 August 2007, which has not been
recorded in the books.
4. The loan from I.C.D.C. Ltd. is secured by a second mortgage on the shop (land and
buildings). The unrecorded interest owing as at 15 August 1997 was Sh.96,000.
5. The loan from the Co-operative Bank Ltd. was obtained when Mwandawiro pledged his
wholly owned piece of land as security. The value of the piece of land is sh.300,000. There is
no interest outstanding on his loan.
6. The interest on loan from Paul Nkobei was to vary with profits, but since the business has
beeb operating at a loss, there is no interest due.
7. There is no interest outstanding on the loan from Barclays Bank Ltd.
8. Mutiso Kuria is Mwandawiro’s brother-in-law.
9. The value of the assets is estimated to be:
Sh.
Shop – land and buildings 4,200,000
Furniture and fittings 800,000
Stock of goods 200,000
10. Of the debtors, Sh.400,000 are thought to be good and Sh.200,000 doubtful, of which
Sh.150,000 should be collectable.
11. Mwandawiro’s uncle died recently and he will be receiving Sh.50,000 as an inheritance.
12. Mwandawiro has no personal creditors outside the business, but he has other personal assets,
beside the piece of land, amounting to Sh.60,000, exclusive of household and personal
effects.
Required:
(a) A statement of affairs for Njuguna Mwandawiro as at 15 August 2007
(b) A deficiency account as at that date.

(c) A profit and loss account for the period ended 15 August 2007.
LIQUIDATION OF COMPANIES
(a) Methods of Winding Up
A company may be wound up:
i. By the court
ii. Voluntarily, either as a members' or a creditors' winding up; or
iii. Subject to the supervision of court s.212
(b) Grounds for compulsory winding up
A company may be wound up by the court under s.219 if:
a. The company so resolves by special resolution,
b. Default is made in delivering the statutory report or holding the statutory meeting: a petition
can be presented by members only at least 14 days after the last available date for the meeting
s.221: the court may order the report to be delivered or the meeting held instead of making a
winding-up order s.222,
c. The company has not commenced business within a year of incorporation or has suspended
business for a whole year (and has no intention of carrying on or resuming business:
(Middleborough Assembly Rooms Co.)
d. The number of members fall below seven, or two if a private company
e. Company is unable to pay its debts: this is deemed to be so if -
1. A creditor for more than Shs 1,000 has served a written demand for payment on the
company, and payment has not been made within three weeks; or
2. Execution or other process on a judgement remains wholly or partly unsatisfied; or
3. It is otherwise proved to the satisfaction of the court that the company cannot pay its
debts, taking into account its contingent and prospective liabilities s.220.
4. The court is of opinion that it is just and equitable for the company to be wound up, e.g.,
substratum gone, (re German Date Coffee Co), deadlock in management (re Yenidje
Tobacco Co Ltd), company a "bubble" or formed for a fraudulent or illegal purpose
mismanagement or misapplication of funds by directors of a private company (Loch v
John Blackwood Ltd). The petitioner may rely on any circumstance of justice or equity
which affects him, in a capacity, in his relations with the company or with the other
shareholders (Ebrahimi v Westbourne Galleries 1972).
(c) Persons Who May Petition
A petition may be presented by any of the following:
2. A Creditor
A creditor may petition if his debt exceeds Shs 1,000 and is undisputed. The order is made as
of right, unless the majority of creditors oppose it, in which case it is for the majority to justify
their opposition unless the company is already in voluntary liquidation (re J. D. Swain Ltd).
"Creditor" includes a contingent or prospective creditor (if he gives security for costs: s.221), a
debenture holder, and an assignee of a debt.
3. A Contributory
A contributory is a person liable to contribute to the assets of the company in the event of
winding up s.213: this includes all present members (even though their shares are fully paid)
and past members who ceased to be members during the year preceding the winding up and the
personal representative of a deceased member - but not the trustee in a member's bankruptcy or
the holders of share warrants.
A contributory can only petition if:
a. The number of members has fallen below the statutory minimum; or
b. His shares:
i. Were originally allotted to him, or
ii. Have been held by him in his own name for at least six of the preceding 18 months, or
iii. Have devolved on him through the death of a former holder s.221.
c. There will be assets for distribution among the members: if the company is insolvent a
contributory has no tangible interest in the winding up (Re Rica Gold Washing Co.)
4. The Official Receiver
The Office Receiver may petition if the company is already being wound up voluntarily or
under supervision and the liquidation cannot proceed with due regard to the interests of the
creditors or contributories, e.g., because of the liquidator's misconduct s.221 (2).
5. The Company
The company may petition in consequence of a special resolution passed for this purpose.
6. The Attorney General
The A.G. may petition if it appears from an inspector's report that it is expedient in the public
interest that the company concerned should be wound up (P.D.A. 1963, s.16; C.A. 1967, s.81).
(d) The Petition
The petition must be in the prescribed form and verified by affidavit, and must be advertised in the
Gazette and a local paper seven clear business days before the hearing. Any creditor or
contributory is entitled to be heard on the petition if he has previously given notice to the petitioner
that he intends to appear and that he supports or opposes the petition. The court may dismiss the
petition, or adjourn it, or make a winding-up order or make any other that it thinks fit s.222.
(e) Interim Liquidator
An application to the court for such an appointment (usually of the O.R.) may be made at any time
between presentation and hearing, especially if the assets are in jeopardy s.235: he takes control of
all the company's property and no legal proceedings can thereafter be begun or continued against
the company without leave of the court s.228. The court may also stay any action against the
company during this period on the application of the company or any creditor or contributory
s.223.
(f) Effect of Winding-up Order
The consequences of a winding-up order are:
a. Any disposition of the company's property and any transfer of shares is void, unless the
court otherwise orders s.224: this provision "relates back" to the commencement of the
winding up, i.e., the date of presentation of the petition, or, if the company has previously
passed a resolution to wind up voluntarily, the date of that resolution s.226,
b. Any attachment, execution or distress against the property of the company after the
commencement of the winding up is void s.225,
c. No legal proceedings may be begun or continued against the company without leave of
the court s.228,
d. The O.R. becomes provisional liquidator (contrast provisional liquidator in note e above)
until a liquidator is appointed s.236, and may apply to the court for the appointment of a
special manager to carry on business of the company pending the appointment of a
liquidator s.258,
e. Every invoice, order or business letter on which the company's name appears must state
that the company is being wound up s.329,
f. The company's employees are automatically dismissed, and the director's powers are
terminated.
(g) Procedure after Winding-up Order
1. A copy of the order must be filed by the company with the registrar s.227.
2. The company must deliver a statement of affairs to the Official Receiver within 14 days
of the order, or of the appointment of a provisional liquidator s.232 (the details are the
same as in the case of a receivership: se paragraph6.28 above.
3. The Official Receiver must submit a report to the court as soon as practicable after
receiving the statement of affairs showing:
a. The amount of issued, subscribers and paid-up capital and the estimated amount of
debts and liabilities,
b. The causes of the company's failure, if any, and
c. Whether further inquiry is desirable s.233.
If he thinks fraud has been committed he may submit a further report and the court may
then order the public examination of any promoter or officer named therein s.265.
4. The first meetings of creditors and contributories are summoned by O.R.. These must be
held within one month of the order, or within six weeks if a special manager has been
appointed, by notice in the Gazette and a local paper, and seven days' notice to each
creditor and contributory, accompanied by a summary of the statement of affairs and his
comments thereon: the meetings determine whether to appoint a liquidator and a
committee of inspection and, if so, to nominate them s.236.
(h) Appointment of Liquidator
The liquidator is appointed by the court after the above meetings have been held: if the
meetings do not agree, the court must settle the issue: if no appointment is made the O.R.
continues as liquidator ss.236.
A liquidator other than the O.R. must notify his appointment to the registrar and give security
to the satisfaction of the O.R. s.237, and must advertise his appointment.
The liquidator may be removed by the court, vacancies in the office are filled by the court,
and his remuneration is fixed by the court. s.238.
Note. A body corporate cannot be appointed liquidator in any kind of winding up s.326.
(i) Committee of Inspection
Appointed by the court if so decided at the above meetings s.248, s.249. There is no
prescribed number of members, but it should be representative of both creditors and
contributories. The function of the committee is to assist and supervise the acts of the
liquidator.
(j) Dissolution
If the winding up continues for more than a year, the liquidator must file progress reports
with the registrar at such intervals as the court may prescribe s.333. When the winding up is
complete the liquidator may either:
(a) Apply to the court for an order dissolving the company, and file a copy of the order
with the registrar within 14 days s.269: the dissolution operates from the date of the
order, but the court may declare it void at any time within two years s.352; or
(b) Apply to the registrar to strike the company's name off the register as being defunct
5338: the registrar will then strike off the company's name two years after the release of
the liquidator by three months' notice to the O.R. and in the Gazette.
(k) Defunct Companies
A company may be dissolved under s.338 without winding up if the registrar has reasonable
cause to believe it is defunct: The procedure is:
a. Registrar writes to company asking if it is still in operation
b. If no reply within one month, the registrar sends registered letter within next 14 days
warning that company will be struck off if no reply within one month
c. If no reply, notice to company and in Gazette that company will be struck off after
three months unless cause shown
d. Company struck off the notice to effect in Gazette: dissolution from date of notice
e. To protect members and creditors, the liability of every office and member continues
as if the company had not been dissolved, and the court can wind up the company
notwithstanding that it has been struck off: moreover on the application of any
member, creditor or of the company, the court may within ten years order restoration
to the register whereupon the company is deemed to have continued in existence as if
its name had never been struck off.
(l) Resolution For Voluntary Winding Up
A company may be put into voluntary liquidation:
i. By ordinary resolution: where any period fixed for the duration of the company has
expired or any event upon which the company is to be dissolved has happened;
ii. By special resolution: for any reason whatsoever. s.271;
The resolution must be advertised in the Kenya Gazette and in a newspaper within 14 days
s.272, and the winding up is deemed to commence from the passing of the resolution s.273.
(m) Effect of Resolution
The consequences of the resolution to wind up are:
i. The company must cease to carry on its business except so far as is necessary for the
beneficial winding up thereof s.274
ii. The corporate state and powers of the company continue until it is dissolved s.274,
iii. A transfer of shares without the liquidators's sanction and any alteration in the status of the
members is void s.275,
iv. There is no automatic stay of proceedings against the company, but the court has a
discretion to do so on the application of the liquidator or a creditor or contributory s.301
v. Invoices, letters, etc, must state that the company is being wound up s.329
vi. The directors' powers cease, unless their continuance is sanctioned by the liquidator or the
company in the case of a members' voluntary winding-up, or the creditors or the committee
of inspection in the case of a creditors' voluntary winding-up ss.278, 290,
vii. The company's employees are automatically dismissed if the company is insolvent (Fowler
v Commercial Timber Co.); otherwise probably not.
(n) Members' Voluntary Winding Up
The company may be wound up by the members themselves without reference to the creditors, if
the company is solvent.
1. Declaration of solvency
To do this all the directors, or a majority if more than two, must make a statutory declaration
of solvency to be filed with the registrar within the 30 days preceding the resolution to wind
up. This must state that the directors have made a full inquiry into the company's affairs and
have formed the opinion that the company will be able to pay its debts in full within a period
not exceeding twelve months of the commencement of winding up, and it must embody a
statement of the company's assets and liabilities practicable date s.276.
2. Appointment of liquidator
The liquidator is appointed and his remuneration fixed by the members in general meeting
s.278, and any vacancy is filled in the same way s.279. He must advertise his appointment in
the Gazette and notify it to the registrar within 14 days s.299. The court has power, if
necessary, to appoint and remove a liquidator s.298. The liquidator has similar powers to
those in compulsory winding up, and also the power to make calls and convene meetings
s.297.
3. Further meetings
If the winding up continues for more than a year, the liquidator must convene a meeting of
the company at ` the end of that and each further year, and lay before it an account of his
conduct of the winding up during the preceding year s.282.
4. Dissolution
When the winding up is complete, the liquidator must call a final meeting of the company by
one month's notice in the Gazette and in a local newspaper, and lay before it an account of
the winding up and the disposition of the company's property. He must send a copy of this
account and a return of the holding of the meeting within a week thereof to the registrar, and
after a further three months the company is automatically dissolved s.283: but the court may
declare the dissolution void within the next two years s.338.
2. Recovery of property
The following steps may be taken to recover the company's property:
a. A private examination many be held by the court of any person thought capable of
giving information as to the company's property or affairs s.263
b. Public examination of a promoter or officer may be held on a further report by the
Official Receiver s.265: (see paragraph g,3 above)
(The above steps are only available in a compulsory liquidation).
c. If it appears that the company has carried on business with intent to defraud creditors or
for any fraudulent purpose, the court many order any person who were knowingly
parties to the fraud to be personally liable without any limitation of liability for such
debts of the company as the court may direct s.323.
d. Misfeasance proceedings may be brought against any promoter, officer, manager or
liquidator for the recovery of money or property or the contribution of a just sum to the
company's assets s.324.
3. Disclaimer
The liquidator may disclaim onerous property consisting of:
1. Land burdened with onerous covenants;
2. Stocks and shares;
3. Unprofitable contracts, or
4. Other property which is not saleable by reason of the liabilities attaching thereto;
and thereupon all the rights, interests and liabilities of the company in relation to the property
are determined as from the date of disclaimer.
The liquidator may disclaim in writing at any time within twelve months after
commencement of the winding up, or such extended period as the court may allow.
This right is lost if a person interested in the property applies in writing for him to decide
whether he will disclaim or not; in this case the liquidator must give notice of disclaimer
within 28 days of receiving the application, unless the court extends the time.
The court's consent is not required to the disclaimer except in the case of certain leases.
Any person interested in property disclaimed may apply to the court for an order vesting the
property in himself.
Any person injured by the disclaimer may prove in the liquidation to the extent of his loss.
(s) Contributories
In compulsory winding up, the court must settle a list of contributories, distinguishing
between present (A List) and past (B list) members s.252: written notice must be given by
the liquidator to every person on the list by leave of the court or committee of inspection
ss.255, 268. The court may dispense with settlement of the list of contributories if it appears
that it will not be necessary to make calls on or adjust the rights of contributories s.252.
In voluntary winding up the liquidator settles the list and normally follows the above
procedure.
(t) Distribution of Assets
1. Proof of debts
If the company is insolvent, the rules in bankruptcy as to provable debts, secured creditors,
interests, mutual dealings, annuities and contingent claims apply ss. 309, 310: if the company is
solvent all claims enforceable at the commencement of winding up are provable. In
compulsory liquidation the rules in bankruptcy as to the method of proving debts apply: formal
proof is not necessary in voluntary liquidation.
2. Preferential debts
These are almost the same as in bankruptcy, with the addition that any person who has
advanced money for the payment of wages has the same priority as the person receiving
payment out of the advance would otherwise have had s.311. The "relevant date" for
calculating these debts is the date of the resolution to wind up, or the date of the winding-up
order or of the appointment of a provisional liquidator. There are no pre-preferential debts in
liquidation, and the only deferred debt is interest in excess of 6 per cent per annum.
The preferential debts in bankruptcy include the following:
a. Local rates and amounts deducted as P.A.Y.E. from employees' pay accruing due during
the twelve month preceding the commencement of the winding up;
b. Up to one year's arrears of any other assessed taxes;
c. Wages and salary due to employees (but not directors) for work done during the four
months preceding the winding-up up to Shs 4,000 per employee;
d. All government rents not more than one year in arrears;
e. Employer’s National Social Security Fund due during the previous twelve months;
f. Any amounts, which have accrued before the winding up due to employees is respect of
any compensation under the Workmen's Compensation Act.
3. Dividends
In compulsory liquidation, the rules are the same as in bankruptcy, except that they are
payable "as and when" there are assets available. In voluntary liquidation dividends are paid
without formality at the discretion of the liquidator.
4. Unclaimed assets
Money representing unclaimed dividends or undistributed assets must, after six months, be
paid into the Companies Liquidation Account: any person who later claims the assets may
apply to the O.R. for payment, which will be made on certification by the liquidator: any
property of a dissolved company (unless held on trust for some other person) vests in the
government as bona vacantia s.340 subject to the Crown's right of disclaimer s.341. The
books and papers of the company may be disposed of as directed by the court, the members
or the creditors, but the court may order their preservation for up to five year from
dissolution s.332.
Bankruptcy Accounts: The Statement of Affairs and Deficiency Account
i. The Statement of Affairs
The statement of affairs sets out:
(a) The various assets of the debtor, at the values they are expected to realize;
(b) The creditors, classified according to their "priority".
The balancing figure on the statement of affairs is the estimated deficiency as at the date at
which it was prepared.
For a sole trader, one statement of affairs will be prepared to include all assets and liabilities,
whether private or business.
For a partnership, a statement of affairs is prepared in respect of the partnership assets and
liabilities - called the joint estate. A separate statement is also prepared for each partner,
showing his personal assets and liabilities. Any surplus on a separate estate becomes an
asset of the joint estate and vice versa.
The pro-forma statement of affairs sets out the order in which assets are shown.
The order in which liabilities are discharged is:
1. Secured creditors, out of the proceeds of their security;
2. Costs and expenses of the bankruptcy; (these are not included in the Statement of
Affairs because they have not been incurred at the date at which it is prepared);
3. Pre-preferential creditors (see paragraph 6.24 above);
4. Preferential creditors (see paragraph 6.24 above);
5. Unsecured creditors;
6. Deferred creditors (see paragraph 6.24 above);
7. Any balance to the debtor.
ii. The Deficiency Account
Purpose of deficiency account
The purpose of the deficiency account is to explain the deficit shown on the statement of affairs.
The deficiency account opens with the surplus of assets over liabilities of the bankrupt, one year
before receiving order. This figure consists of the capital account of his business plus his net
private assets at that date.
Items contributing to deficit:
The following items will be shown on the right-hand side of the deficiency account as being items
contributing to the deficit:
1. Losses during the period as per the profit and loss account;
2. Bad debts;
3. Drawings and household expenses;
4. Estimated losses on the realization of assets:
a. Stock
b. Machinery
c. Property
d. Other assets.
Items reducing the deficit:
Items reducing the deficit would include:
(a) Profits from trading;
(b) Estimated profit on the realization of assets.
Notes:
(a) Where an examination question fails to give you a balance sheet at the date of the receiving
order, you should draw up a "rough" balance sheet to provide the basis for agreeing the
deficiency shown in the statement of affairs with that in deficiency account.
(b) Preparation of the statement of affairs and the deficiency account is based on "double entry"
principles.
i.
Items not in the balance sheet must have a debit and credit within the statement of affairs
and deficiency account.
ii. Where the estimated realizable value of an asset differs from its book value i.e. the value
at which it appears in the balance sheet given or computed as in (i) above, the difference
must be reflected in the deficiency account.
a. An estimated loss is put on the right-hand side;
b. An estimated surplus is put on the left-hand side.
c. A landlord may recover by distress rent outstanding in respect of the period, not
exceeding six months, and prior to adjudication (date debtor declared bankrupt). If
the landlord distrains he effectively removes assets to satisfy the outstanding rent and
can therefore be considered in the same category as a secured creditor. Do NOT
assume distraint unless the question clearly states this course of action. In other cases
treat the rent outstanding as an ordinary creditor.
d. Deferred creditors do not become entitled to any dividend at all until the unsecured
creditors have received payment in full; however include them in the unsecured
creditors in the Statement of Affairs and put in a note on the Statement of Affairs. If
there is any surplus, the deferred creditors will rank against it to the full extent of their
debts before any return is made to the debtor. This point is seldom relevant to
examination problems.
ACCOUNTS REQUIRED
This can be summarized depending on the nature of the situation. In a receivership you may be
required to prepare a receivers receipt and payments. In the process of liquidation you have
various reports. They can be summarized as follows:
Pro-forma Statement of Affairs of a Company in Compulsory or Creditors’ Voluntary
Liquidation
STATEMENT OF AFFAIRS AS AT…….
Assets not Est.
specifically Realisable
Pledged:
Values
(Sh)
Balance at bank xx
Investments xx
Trade debtors xx
Stock-in-trade xx
Fixed Assets xx
xx
Assets specifically
Pledged
Est. Due to Deficiency Surplus to
Realisable secured unsecured last (sh)
(sh)
Values crs (sh)
(sh)
Asset 1 Xx Xx xx xx
Asset 2 Xx Xx xx xx
Xx Xx xx xx
Estimated Surplus from assets specifically pledged xx

ESTIMATED TOTAL ASSETS xx
Gross Liabilities
Liabilities
(sh)
Xx Secured creditors (Fixed charge)
Xx Preferential creditors (xx)
Estimated surplus for unsecured creditors and xx
Creditors secured by a floating charge.
Xx Secured creditors (Floating charge) (xx)
Estimated surplus for unsecured creditors xx
Unsecured creditors:
Xx -Trade creditors xx
Xx - Bank overdraft xx
Xx - Contingent liabilities xx
Xx - Unsecured deficiency on pledged assets xx
Xx xx
Estimated deficiency as regards unsecured (xx)

creditors
Issued and called up share capital (xx)
ESTIMATED DEFICIENCY AS REGARDS
MEMBERS
xx
Pro-Forma “Deficiency or Surplus Account”

DEFICIENCY OR SURPLUS ACCOUNT
Items contributing to deficiency (or reducing surplus) Shs shs

1) Excess of capital and liabilities over assets 3 years
before winding up (if any) xx
2) Dividends and bonuses declared xx
3) Net trading losses xx
4) Losses other than trading losses written off xx
5) Estimated realization losses xx
6) Other items contributing to deficiency xx
xx
Items reducing deficiency (or contributing to surplus)
7) Excess of assets over capital and liabilities 3 years
before winding up order (if any) xx
8) Net trading profits xx
9) Profits and income other than trading profits xx
10) Other items reducing deficiency or contributing surplus xx
xx
DEFICIENCY AS PER STATEMENT OF AFFAIRS xx
Example 1
A compulsory winding up order was made on 31 st December 2015 a compulsory order for
winding up was made against XYZ Ltd. The following particulars were disclosed:
Book value estimated to produce

Shs shs
Cash at hand 10,000 10,000
Debtors 40,000 36,000
Land and buildings 600,000 480,000
Furniture and fittings 200,000 200,000
Unsecured creditors 200,000
Debentures;
Secured on land and building 420,000
Secured by floating charge 100,000
Preferential creditors 60,000
Share capital (3,200 shares
Of shs 100 each) 320,000
Estimated liability for bill discounted was shs 60,000, estimated to rank at shs 60,000. Other
contingent liabilities were shs 120,000, estimated to rank shs 120,000.
The company was formed on 1st January 2013, and had made loses of shs 250,000.
Required
Prepare a statement of affairs and the deficiency account as on that date
Example 2
Filisika Ltd. is insolvent and is in process of filing for relief under the provisions of the
Bankruptcy Act. The company has no cash and its balance sheet currently shows creditors of
Sh.48 million. An additional Sh.8 million is owed in connection with various expenses but these
amounts have not yet been recorded. The company’s assets with an indication of both book value
and anticipated net realizable value as at 30 September 2009 as follows:
Book Value Expected NRV

Sh. ‘000’ Sh. ‘000’
Land 80,000 75,000
Buildings 90,000 60,000
Accumulated depreciation (38,000) -
Equipment 110,000 20,000
Accumulated depreciation (61,000) -
Investments 10,000 18,000
Stocks 48,000 36,000
Debtors 31,000 9,000
Other assets 5,000 -
275,000 218,000
1. Filisika Ltd. has three debentures payable, each with a difference maturity date:
 Debentures one due in 5 years – Sh.120 million, secured by a mortgage lien on Filisika’s
land and buildings.
 Debenture two due in 8 years – Sh.30 million secured by Filisika’s investments.
 Debenture three due in 10 years – Sh.35 million, unsecured.
2. Of the creditors owed by Filisika Ltd. Sh.10 million represents salaries to employees.
However, no individual is entitled to receive more than Sh.4,000. An additional Sh.3 million
is included in this liability item that is due to the Kenya Government in connection with
taxes.
3. The shareholders equity balance reported by the company at the current date is Sh.42 million:
composed of ordinary share capital of Sh.140 million and a deficit of Sh.98 million.
4. If the company is liquidated, administrative expenses of approximately Sh.20 million would
be incurred.
Required:
A statement of affairs and deficiency or surplus account for Filisika Ltd. to indicate the expected
availability of funds if the company is liquidated as at 30 September 2009.
Example 3
Hasara Ltd makes its accounts each year 31 October and has been trading at a loss. On 31
October 2002, a resolution for a voluntary liquidation was passed. The balance sheet as at
that date was as follow
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’

11,000
Non Current assets
2,750
Freehold property
13,750
Plant and machinery
8,750
Current assets:
13,375
Stock
125
Debtors
22,250
Cash
3,750
Creditors 500 (15,500) 6,750
Interest payable (5% debentures) 20,500
Paid up capital:
10,000 10% cumulative preference shares of Sh.500 each 5,000
fully paid
12,500
25,000 Ordinary shares of Sh.500 each fully paid
2,500
10,000 Ordinary shares of Sh.500 each. Sh.250 paid.
20,000
Revenue reserves: profit and loss account (9,500)
Non Current liabilities: 10,000
5% debentures 20,500
1. The debentures are secured by a floating charge on the asset and undertaking of the company.
2. The bank overdraft is secured by a fixed charge on the company’s freehold property.
3. The preference shares carry a right to a fixed cumulative dividend of 10% per annum up
to the date of liquidation and a repayment of Sh.500 per share in priority to all other
classes of shares. No dividend has been paid on the preference shares for two years.
4. The creditors include:
Sh.
‘000’
Directors fees for one year 1,000
Rates for six months to 31 October 2002 125
Manager’s salary for October 2002
Wages for 15 employees
Pay As You Earn (PAYE)
5. The assets realized the following amounts:

Freehold property 12,500
Plant and machinery 2,000
Stock 6,250
Debtors 12,250
6. The expenses of liquidation amount to Sh.125,000 and the liquidator’s remuneration was
fixed at Sh.500,000.
Required:
The liquidator’s statement of account showing in order of priority, the payments made and the
computation of any calls to be made.
Example 4
Nagala supermarket Ltd. deals in imported goods which are paid for in foreign exchange.
Following the recent depreciation of the Kenyan shilling the company has incurred exchange
losses on trade debtors and its business has become generally uncompetitive and consequently
forcing the company into a voluntary liquidation on 1 November 2007:
As at 1 November 2007:
1. The company had a bank loan of Sh.625,000 which was secured on furniture and fittings. The
furniture and fittings realised Sh.1,000,000.
2. Assets not specifically pledged realised Sh.4,250,000.
3. Liquidation expenses amounted to Sh.187,500.
4. Salaries payable to messengers for the last three months amounted to Sh.22,500, Sh.60,000
was four months salary payable to clerks.
5. Unsecured trade creditors were Sh.1,092,500.
6. The share capital comprised of 10,000 8% preference shares of Sh.100 each and 25,000
ordinary shares of Sh.100 each.
7. Calls in arrears were: Sh.25 on 10,000 ordinary shares
: Sh.40 on 8,000 ordinary shares
: Sh.50 on 7,000 ordinary shares
Required:
The liquidator’s statement of receipts and payments with the appropriate support schedule. (15 marks)
TOPIC FIVE
ABSORPTION AND RECONSTRUCTION OF COMPANIES
Introduction
There are many reasons for making changes to a company’s capital structure and these range
from those which are virtually cosmetic to those where the company’s capital base has almost
disappeared.
At one end of the spectrum is the share split, which increases the number of shares in issue but
does not change the total share capital.
A company that has large reserves, which it does not intend to distribute, may wish to tidy up its
balance sheet by making a bonus issue from these reserves. This involves a transfer between
reserves and share capital, thus signaling clearly that the permanent capital of the company has
increased and reducing the value of each of the expanded number of shares.
DEFINITION OF KEY TERMS
Capital Reorganizations - this is a plain reorganization involving the internal alterations of a
company’s capital, usually to make the company more appealing, for the issuing of new capital
to raise funds and/or to avoid liquidation. Such a re-organization will leave the company in
existence but with a different capital structure with the old shareholders and possibly some
creditors having different rights.
Capital Reconstruction - these are capital change schemes involving the formation of a new
company with a different capital structure to salvage the assets of the existing company, which is
then wound up.
Capital reduction – utilizes the credit released in a reduction of the share capital to write down
asset values and write of accumulated losses

External reconstruction – formation of a new company to take over all or part of the assets and
liabilities of a company possibly in financial difficulties.
A company is empowered by section 63 to alter the provision of its memorandum which relates
to its authorized capital.
The power is exercisable if:-
(i) The articles confer the authority to alter its capital.
(ii) The company holds a general meeting for the purpose of altering the capital.
(iii) The alteration is authorized by an ordinary resolution.
Mode of Alteration
Section 63(1) provides the various modes of altering its capital:-
(a) Increasing its share capital by issuing new shares.
(b) Consolidate and divide all or any of its share capital into shares of larger amount than the
existing ones.
(c) Convert all or any of it’s fully paid up shares into stock or reconvert that stock into fully
paid up shares of any denomination.
(d) Subdivide its shares into shares of smaller amount than is fixed by the memorandum.
(e) Cancel the shares which have not been taken by any person and diminish the amount of its
share capital. This mode of alteration is called “diminution” of capital.
Under Section 63, no alteration of capital can be valid unless:-
(i) It is authorized by the articles of association.

(ii) It is approved by the company at a general meeting.
Increase in Share Capital
The nominal share capital of a company may be increased by ordinary resolution of the company
in the general meeting. The articles usually contains authority to allow the company to increase
its capital, but in case it does not allow, they must be altered by special resolution to this effect.
Under Section 65, where a company has increased its share capital beyond the registered capital,
notice must be given to the registrar within 30 days from the date of passing such a resolution.
Otherwise, the directors and the company knowingly permitting the default will be liable to a
fine of Sh. 100.
(LEGAL ASPECT OF CAPITAL REDUCTION
Reduction of Capital
The law regards capital of a company is something sacred. No action resulting in a reduction of
capital of a company should be permitted unless the reduction is effected:-
(i) Under statutory authority or by forfeiture.
(ii) In strict accordance to the procedure set out in the articles of association. Any reduction
contrary to this principle is illegal and ultra vires.
The general rule is that it is illegal for a company to reduce its capital because such a reduction
would be tantamount to reducing the security available to the company’s creditors. However
section 68(1) authorizes a company to reduce its capital if:-
(a) The company’s articles authorize it to do so. If the articles do not confer the authority
the can be amended by the inclusion therein of the requisite authority.

(b) The company passes a special resolution to that effect.
(c) The court confirms the proposed reduction. This is required to protect the interest of the
company’s creditors.
Reduction of capital may be effected in several ways:-
(i) Where redeemable preference share are redeemed.
(ii) Where shares are perfected for non-payment of calls.
(iii) Where un-issued shares are cancelled.
(iv) Reduction of liability on any of its shares in respect of share capital not paid-up.
(v) Cancel any paid up share capital which is lost or is unrepresented by the available assets,
that is, “diminution”. For example, some of the capital may, in fact have been lost or diminished,
for instance, Sh. 100 shares may represent asset of Sh. 50.
(vi) Pay off any paid up share capital which is in excess of the wants of the company.
Section 68 gives the company the power to reduce its share capital in any way but specifically
mentions ways in which the reduction of capital may be effected in order to extinguish or reduce
the liability on shares not fully paid.
Under Section 69 where a company has passed a resolution for reduction of capital, it must apply
to the courts for an order confirming the reduction. Where the reduction of share capital
involves diminution of liability for unpaid capital or return to any shareholder of any paid up
share capital, the courts may allow all creditors to object to reduction.
The court will settle a list of company’s creditors and hear their objection and the court will
confirm such a reduction if they are satisfied that:-
(i) The creditors’ consent to reduction has been obtained.
(ii) Their debts have been discharged.
(iii) Their debts have been secured by the company.
Liability of Members on Reduction
On reduction of capital, the members of a company whether present or past are not liable beyond
a certain limit. The liability of members is limited to the difference if any between the amount of
the share as fixed by the minute and the amount paid. However, in certain cases, the liability of
the members will not be reduced even though there has been a reduction of capital. If the
company is unable to pay the claim of any creditor entitled to object who was ignorant of the
proceedings for reduction or of their nature and effect and who was not entered on the list of
creditors, then:-
(i) Every member of the company at the date of the registration of the order for reduction will
be liable to contribute for the payment of that claim an amount not exceeding the amount which
he would have been liable to contribute if the company had commenced to be wound up on the
day before that registration.
(ii) If the company is wound up, the courts, on application of such creditor and upon proof of
his ignorance of the reduction, may accordingly settle a new list of contributories who could be
forced to pay as if they were ordinary contributories in a winding up.
Maintenance of Capital
The issued share capital of a company limited by shares is the primary security for the
company’s creditors. A limited company by its memorandum declares that its capital is to be
applied for the purpose of the business. The creditors give credit to a company because of
capital and therefore the capital of the company should not be “watered down”. Many provisions
in the Act attempt to prevent capital being watered down such as making it illegal for a limited
company to issue shares at a discount unless provision of Section 59 is complied with.
Purchase of Own Shares
According to a leading case Trevor vs. Whitworth, it is illegal for a limited company to purchase
its own shares. Such a purchase, if permitted would constitute an indirect reduction of the paid
up capital. It is presumed that whenever a company buys its shares it would do so by utilizing its
paid up capital.
Despite the rule in Trevor v Whitworth, a company may purchase or acquire its own shares in the
following cases:-
(a) Where it is a purchase of redeemable shares,
(b) Where the shares are purchased pursuant to a court order under Section 211 (2) on
application by oppressed members and
(c) Where the shares are forfeited for non-payment of a call.
External reconstruction
Under s. 287 of the Companies Act 1948 a reconstruction can be effected under the following
procedure:-
a) The company resolves to wind up voluntarily

b) A special resolution is passed giving the liquidator authority to sell the undertaking to another
company usually formed for the purpose.
c) When the liquidator sells the undertaking, he will receive shares or other securities in the new
company for distribution to the members and possibly creditors of the old company.
A reconstruction may take place for any of the following objects:-
a) Raising fresh capital by issuing partly paid shares in the new company in exchange for fully
paid shares in the old company.
b) Amalgamating two or more companies.
c) Rearranging capital and rights of members as between themselves.
d) Effecting a compromise with creditors, or the allotment to them of shares or debentures in
settlement of their claims.
Sundry matters
Two cases where capital reduction occurs without consent of the court:-
 Where shares are forfeited.
 Where shares are surrendered to avoid forfeiture
Two cases of apparent capital reduction when in fact no actual reduction occurs:-
 Redemption of redeemable preference shares under 1948 s. 58
 Unmissed shares cancelled under 1948 s.61.CAPITAL REDUCTION - Double entry
Transaction. Debit. Credit.
Amount written off share capital. Share capital account Capital reduction account
Amount written off share premium
(if any). Share premium account Capital reduction account
Amount written off debentures

(if any). Debentures account Capital reduction account
Amount by which company
assets are written down. Capital reduction account Profit and loss account
Debt balance on profit and
loss account written off. Capital reduction account Profit and loss account
Preliminary expenses
written off. Capital reduction account Preliminary expenses a/c
AST FORWARD: In an external reconstruction, the company to be reconstructed sells its less
liabilities to a newly formed company.
The purchase consideration may be in the form of shares in the new company.
From an accounting point of view, an external reconstruction is merely in form of acquisition,
requiring the closing of the vendor’s books and the opening of the purchaser’s books.
Entries in the purchaser’s books are exactly the same as any other acquisition.
Entries in the vendor’s books are dealt with below as there are slight variations in the accounts
although the principals involved remain exactly the same.
CAPITAL REDUCTIONS AND REORGANIZATIONS
Broadly there are three types of circumstances where a company may seek approval for a capital
reduction or reorganization. These are:
(a) Where there is partly paid share capital and the company wishes to reduce the liability for the
unpaid portion.
(b) Where the company has excess capital and wishes to repay part of it.
(c) Where the company wishes formally to acknowledge that capital has been lost typically as a
result of adverse trading or the loss of value of assets.

(These circumstances are discussed and explained on Pages 356-358 - Lewis/Pendrill)
The legal requirements necessary for one to carry out a capital reduction of any of the three types
Given above include:
• Authorization in the articles and
• A special resolution of the company; and
• Confirmation by the High Court (with an opportunity for the creditors to object).
Example 1
Bratsk plc has the following summarized balance sheet:
shs
Net assets 1500
Share capital – shs1 shares 1000
Share premium 200
(Permanent capital) 1200
Distributable profits 300
1500
It purchases 100 shs1 shares for shs160 out of distributable profits.
Required
Summarized journal entries together with the resulting balance sheet are as follows:
Example 2
Chita Limited has the following summarized balance sheet:
shs
Net assets 1500

Share premium 200
1500
Chita purchases 100 shs1 shares at their nominal value out of the proceeds of an issue of 80 shs1
shares at a premium of 25p per share.
Required
Summarized journal entries and the resulting balance sheet are as follows:
Example 3
Dudinka Limited has the following summarized balance sheet:
shs
Net assets 1500
Share premium 200
1500
Dudinka Limited purchases 100 shs1 shares that were originally issued at a premium of 20p per
share. The price paid is shs180 and this is financed by the issue of 90 shs1 shares at a premium
of shs1 per share. Part of the premium payable may be financed from the proceeds of the new
issue; the amount is the lower of the original share premium on the shares now being purchased,
shs20 (100 at 20p) and the balance of the share premium account, including the premium on the
new share issue, shs290 (shs200 + shs90), and hence shs20 may be debited to the share premium
account. The balance must come from distributable profits.
Required
Summarized journal entries and the resulting balance sheet:
Example 4
Ivdel plc has the following summarized balance sheet:
shs
Net assets 1500
Share capital – £1 shares 1000
Share premium 200
1500
It purchases 100 shares which were originally issued at a premium of 50p per share. The agreed
price is shs180 and the company issues 40 shares at a premium of shs1 per share to help finance
the purchase. The premium payable on purchase is shs80 and part of this may come from the
proceeds of the new issue and be charged to the share premium account. As explained above, this
amount is the lower of the original premium (shs50) and the balance on the share premium
account after the new issue (shs240). Hence shs50 may be debited to the share premium account
and the balance must be debited to distributable profits.
As part of the purchase price is being met from distributable profits, it is necessary to make a
transfer to capital redemption reserve. Section 170(2) of the Companies Act 1985 requires the
amount to be calculated by deducting the aggregate amount of the proceeds of the new issue
from the nominal value of the shares purchased. In this case the amount of the transfer is
therefore:
Nominal value of shares purchased 100
less Proceeds of new issue
(40 × shs2) 80
Necessary transfer 20
Necessary journal entries and the resulting balance sheet:

BBM 304 Study Notes

Uploaded by

Copyright:

Available Formats

You might also like

BBM 304 Study Notes

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BBM 304 Study Notes

Uploaded by

Copyright:

Available Formats

MOI UNIVERSITY

P.O Box 3900 - 30100, Eldoret- Kenya

TEL: +25405343620, FAX: +25405343047

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE CODE; BBM 304

COURSE TITTLE; ADNANCED ACCOUNTING 1

Prepared by Mr Rodgers Maiyo

12. IFRS 12 Disclosure of interest

CONTINUOUS ASSESSMENT TEST (CAT)- To be submitted in two weeks’ time.

IAS 1: Presentations of Financial Statements

Sh. ‘000’ Sh. ‘000’

Sh. Million Sh. Million

Bank overdraft (interest are payable in the year 20%) 53

6. The tax expense for the year is as follows: Sh. Million

7. Finance lease payable comprise: Minimum Present value

8. Finance costs comprise: Sh. Million

ACCOUNTING FOR BUSINESS COMBINATION (IFRS3)

combination. An example is when an entity (parent company) acquire control of another

determination of goodwill and necessary disclosures.

preparation of consolidated financial statements for business combination, such as group of

1st July 2014.

benefit directly to investors, owner, participant or members.

Acquirer- the entity that acquires control of the acquiree.

IFRS 3 does not apply to:

joint arrangement itself.

 Acquisition of an asset or group of assets that is not a business.

 A combination of entities or businesses under common control.

RECOGNITION AND MEASURE

As of the acquisition date, the acquirer recognizes, separately from goodwill:

 The identifiable assets acquired

 The liabilities assumed

 Any NCI in the acquiree

required to be measured at their acquisition-date fair values

Goodwill is recognized as the excess between:

previously held equity interest in the acquiree

share-based payments and assets held for sale.

Methods of accounting for business combination.

1. Identifying the acquirer. IFRS 10 is used to identify acquirer in B.C

non-controlling interest (formally called minority interest) in the acquiree. Recognition

combination at the date of acquisition are measured at their fair value.

4. Recognition and measurement of goodwill or a gain from a bargain purchase. Goodwill =

consideration transferred + amount of non-controlling interest + fair value of previously

held equity interest – net assets recognized.

Disclosure requirements of business combination.

Disclosure of information about the current business combinations. An acquirer is

are authorized for issue.

Disclosure of information about adjustments of past business combination. An acquirer

AMALGAMATION BUSINESS- Takeovers and mergers of business

1. Acquisition accounting –this method applies to parent and subsidiary situations.

2. Merger method- which is restricted to specific circumstance.

its shares. In this method the following procedures are adopted;

as dividend by the parent.

the statement of financial position at their fair values.

v. Only the post-acquisition profit of the subsidiary should be included in the

consolidated reserve of the group.

Tangible fixed assets 400 120