KASNEB CPA Advanced cheat sheet

IFRS 15 revenue: (1) identify the contract, (2) identify distinct performance obligations, (3) determine transaction price, (4) allocate price to obligations, (5) recognise revenue when/as each obligation is satisfied.

IFRS 3 goodwill = consideration transferred + non-controlling interest + fair value of previously held interest − fair value of net identifiable assets acquired; measure NCI either at fair value or proportionate share of net assets.

IAS 36 impairment test: compare carrying amount with recoverable amount, which is the HIGHER of fair value less costs of disposal and value in use; allocate any impairment first to goodwill, then pro rata to other assets.

IFRS 16 lessee: measure the lease liability at the present value of unavoidable lease payments discounted at the incremental borrowing rate; the right-of-use asset = liability + initial direct costs + prepayments − lease incentives.

IFRS 9 expected credit loss = probability of default × loss given default × exposure at default; 12-month ECL applies to stage 1 assets, lifetime ECL to stage 2 (significant increase in credit risk) and stage 3 (credit-impaired).

IAS 12 deferred tax: temporary difference × enacted or substantively enacted tax rate; recognise a deferred tax asset only where taxable profit will probably be available against which it can be used.

IAS 21 translation of a foreign operation: assets and liabilities at closing rate, income and expenses at transaction-date rates, and all exchange differences in other comprehensive income, recycled to profit or loss on disposal.

DuPont decomposition: return on equity = net profit margin × total asset turnover × equity multiplier (assets ÷ equity); it isolates profitability, efficiency and gearing drivers of ROE.

IFRS 10 control requires all three elements: power over the investee, exposure or rights to variable returns, and the ability to use that power to affect the amount of those returns.

Audit evidence under ISA 500 must be both sufficient (quantity) and appropriate (relevance and reliability); evidence from independent external sources and from the auditor's own inspection is more reliable than client-generated evidence.

Overall materiality is normally a benchmark percentage of profit before tax (about 5%), total revenue (about 1%) or total assets (about 0.5%–1%); performance materiality is set at roughly 50%–75% of overall materiality to cover undetected misstatements.

ISA 701 key audit matters are those, selected from matters communicated to those charged with governance, that were of most significance in the audit; reporting them does not modify the opinion and is not a substitute for a qualified conclusion.

ISA 570 going concern: if the going concern basis is appropriate but a material uncertainty exists and disclosure is adequate, the auditor includes a separate 'Material Uncertainty Related to Going Concern' section rather than modifying the opinion.

ISA 240 presumes a fraud risk in revenue recognition and always treats management override of controls as a significant risk, requiring journal-entry testing and review of accounting estimates for bias.

Sampling risk is the risk that the auditor's conclusion based on a sample differs from that reached by testing the whole population; non-sampling risk arises from human error, wrong procedures or misinterpretation and is not reduced by increasing sample size.

In group audits under ISA 600 (revised), component materiality is set below group materiality, and the group engagement team must be involved in component risk assessment, direction and supervision, and in evaluating the work of component auditors.

Independence threats under the IESBA Code are self-interest, self-review, advocacy, familiarity and intimidation; where a threat is not at an acceptable level, apply safeguards or eliminate the activity, and document the conclusion.

ISA 315 (revised) requires the auditor to identify risks of material misstatement at the financial statement and assertion levels, split into inherent risk factors on a spectrum, and to determine significant risks requiring special audit consideration.

Taxable income of a business = accounting profit + disallowable expenditure (e.g. capital items, private expenses, fines) − allowable deductions − capital allowances; tax is then computed using the rate applicable to the taxpayer's status.

Capital allowances replace depreciation for tax: wear-and-tear on machinery, industrial buildings deduction, and investment deduction are claimed on qualifying cost, with depreciation in accounts added back in full.

VAT is a credit-invoice tax: output tax on taxable supplies minus input tax on purchases; only standard-rated (16%) and zero-rated supplies allow input tax recovery, while exempt supplies do not.

VAT returns and payment are due by the 20th day of the month following the tax period; late filing and late payment attract penalties and interest under the Tax Procedures Act.

Capital gains tax is charged on the net gain (transfer value less adjusted cost and allowable incidental costs) on the transfer of property situated in Kenya, including unquoted shares and land.

Resident companies pay corporation tax at 30% while non-resident branches pay 37.5%; dividends attract withholding tax at 5% for residents holding less than 12.5% and 15% for non-residents.

Thin capitalisation limits interest deductibility on related-party debt; the rule has moved from a fixed debt-to-equity ratio to an interest cap referenced to earnings - apply the version in force for the year of income.

Instalment tax is paid in four equal instalments of 25% of the estimated annual tax by the 20th day of the fourth, sixth, ninth and twelfth months, with the balance settled when the return is filed.

Business losses are carried forward and offset against future profits of the same business; the 10-year restriction was relaxed, so confirm the carry-forward rule applicable to the year of income.

Break-even units = fixed costs ÷ contribution per unit; contribution = sales − variable costs; margin of safety = (budgeted sales − break-even sales) ÷ budgeted sales.

Relevant costing includes only future incremental cash flows: exclude sunk costs and committed fixed costs, include opportunity costs and incremental fixed costs, and treat depreciation as irrelevant unless it reflects actual cash tax effects.

Target cost = competitive market price − target profit margin; the cost gap is closed through design, value engineering and process improvement rather than post-hoc cost cutting.

Throughput accounting: throughput = sales revenue − direct material cost; throughput accounting ratio = return per factory hour ÷ cost per factory hour, and the bottleneck resource governs product priority.

Residual income = divisional profit − (imputed interest rate × divisional capital employed); unlike ROI it encourages managers to accept projects earning above the cost of capital.

Learning curve: y = ax^b where b = log(learning rate) ÷ log 2; cumulative average time falls by a constant percentage each time cumulative output doubles.

The balanced scorecard measures four perspectives - financial, customer, internal business process, and learning and growth - linking operational measures to strategy, not just lagging financial results.

Activity-based costing assigns overhead via cost drivers (number of set-ups, machine hours, orders) and is most valuable where products are diverse and overheads are large relative to direct costs.

Minimum transfer price = variable cost + opportunity cost of the transferred unit; where spare capacity exists the opportunity cost is zero, so the minimum is variable cost.

WACC = Ke × E/(D+E) + Kd × (1 − t) × D/(D+E); use market values for weights and the marginal cost of new finance for investment appraisal.

CAPM: Ke = Rf + β(Rm − Rf); beta measures systematic risk only, and unsystematic risk is diversified away and not rewarded.

Modigliani–Miller with corporate tax: the value of the levered firm = value of the unlevered firm + (tax rate × value of debt), because interest is tax deductible.

NPV discounts incremental after-tax cash flows at the WACC and is the preferred appraisal rule; IRR is the rate giving NPV = 0 and can mislead with non-conventional or mutually exclusive cash flows.

Gordon growth model: Ke = D1 ÷ P0 + g, and ex-dividend equity value = D1 ÷ (Ke − g); g = b × r where b is the retention ratio and r the return on retained funds.

Cash conversion cycle = inventory days + receivable days − payable days; a shorter cycle releases cash and reduces the financing requirement.

The IESBA conceptual framework requires identifying threats to independence and objectivity from five categories - self-interest, self-review, advocacy, familiarity and intimidation - and addressing them by elimination, safeguards or refusal.

Agency theory: separating ownership from control creates conflicts (perquisite consumption, risk aversion, short-termism), mitigated by performance-linked pay, share options, monitoring boards and transparent reporting.

Business valuation approaches: discounted free cash flow using FCFF discounted at WACC, dividend growth models for minority holdings, and market multiples such as price-to-earnings or EV/EBITDA.