KASNEB CPA Advanced flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

IFRS 15 five-step model

Identify the contract with the customer, identify distinct performance obligations, determine the transaction price, allocate that price to the obligations, and recognise revenue when or as each obligation is satisfied.

Goodwill on consolidation

Consideration transferred plus non-controlling interest plus fair value of any previously held interest, less the fair value of the identifiable net assets acquired. Residual goodwill is not amortised but tested annually for impairment.

Right-of-use asset

A lessee recognises a right-of-use asset and lease liability at the present value of lease payments. The asset is depreciated over the lease term and the liability accretes interest, producing a front-loaded expense profile.

Expected credit loss model

Expected credit loss equals probability of default times loss given default times exposure at default. Twelve-month losses apply to healthy assets; lifetime losses apply once credit risk has increased significantly or the asset is impaired.

Recoverable amount

Under IAS 36, the higher of an asset's fair value less costs of disposal and its value in use. An impairment loss arises only when carrying amount exceeds this recoverable amount.

DuPont analysis

Decomposes return on equity into net profit margin, total asset turnover and the equity multiplier. It shows whether returns come from profitability, operating efficiency or financial leverage.

Deferred tax asset recognition

A deferred tax asset on deductible temporary differences and unused losses is recognised only to the extent that future taxable profit will probably be available against which the benefit can be realised.

Sufficient appropriate audit evidence

Sufficiency is the quantity of evidence; appropriateness is its relevance and reliability. Evidence obtained directly by the auditor from independent external sources is more reliable than client-generated internal documentation.

Key audit matters

Matters selected from those communicated to those charged with governance that were of most significance in the current audit. Communicating them does not modify the audit opinion.

Material uncertainty going concern

Where the going concern basis is appropriate but a significant doubt exists and disclosures are adequate, the auditor reports a separate material uncertainty section without modifying the opinion. Inadequate disclosure requires a qualified or adverse opinion.

Performance materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed overall materiality. Commonly set at 50% to 75% of overall materiality.

Sampling risk

The risk that the auditor's conclusion from a sample differs from the conclusion that would be reached by testing the entire population. It decreases with larger samples; non-sampling risk is unaffected by sample size.

Management override risk

ISA 240 requires auditors to treat the risk of management override of controls as a significant risk, mandating journal entry testing, retrospective review of estimates and evaluation of unusual significant transactions.

Component materiality

In a group audit, the materiality level set for a component, always below group materiality, so that aggregate undetected and uncorrected misstatements across components are unlikely to exceed group materiality.

Capital gains tax

A tax on the net gain from transferring property situated in Kenya, computed as transfer value less adjusted cost and allowable incidental costs. Unquoted shares and land are the main chargeable assets.

Input tax versus output tax

Output tax is VAT charged on a business's taxable supplies; input tax is VAT paid on purchases. Only input tax relating to standard-rated or zero-rated supplies is recoverable; exempt supplies block recovery.

Thin capitalisation rule

A restriction on deducting interest on excessive related-party debt, historically a 3:1 debt-to-equity ratio and later an earnings-based interest cap. It aims to prevent profit stripping through debt funding.

Instalment tax

Corporate income tax paid in four equal instalments of 25% of estimated annual tax during the year of income, with any balance settled when the annual self-assessment return is filed.

Wear and tear allowance

A capital allowance replacing depreciation for tax purposes, claimed on the qualifying cost of machinery and equipment at prescribed class rates. Accounting depreciation is added back in full.

Withholding tax on dividends

Tax deducted at source by a company when paying dividends. Kenya applies a lower rate to resident shareholders with a substantial holding and a higher rate to non-resident shareholders.

Contribution margin

Sales revenue less variable costs. Contribution per unit divided into fixed costs gives break-even units, and the contribution-to-sales ratio gives break-even revenue.

Target costing

Target cost equals the competitive market price less the desired profit margin. The resulting cost gap must be closed through design, value engineering and process redesign before production begins.

Throughput accounting ratio

Return per bottleneck hour (throughput divided by bottleneck hours) divided by cost per bottleneck hour. Ratios above one indicate a product is profitable on the constrained resource.

Residual income

Divisional profit less an imputed interest charge on divisional capital employed. It aligns divisional decisions with corporate goals because any project earning above the cost of capital increases residual income.

Learning curve formula

y = ax^b, where y is cumulative average time per unit, a is time for the first unit, x is cumulative output and b = log(learning rate) divided by log 2.

Balanced scorecard perspectives

A performance framework measuring financial, customer, internal business process, and learning and growth perspectives, linking leading operational indicators to lagging financial outcomes and overall strategy.

Weighted average cost of capital

The weighted average of the after-tax cost of debt and the cost of equity, using market value weights. It is the discount rate for projects of average risk and the hurdle rate for investment.

Capital asset pricing model

Required return equals the risk-free rate plus beta multiplied by the market risk premium. Beta captures systematic risk; unsystematic risk is diversified away and attracts no premium.

Modigliani-Miller with tax

With corporate tax and riskless debt, levered firm value equals unlevered firm value plus the tax rate times the value of debt, because interest expense is tax deductible.

Cash conversion cycle

Inventory days plus receivable days minus payable days. It measures how long cash is tied up in operations, and shortening it releases funds and lowers the financing requirement.

Gordon growth model

Cost of equity equals next year's dividend divided by current ex-dividend price, plus the constant growth rate. Growth equals the retention ratio multiplied by the return on retained earnings.

Self-interest threat

An independence threat where a financial or other interest in the client inappropriately influences the auditor's judgement, for example holding shares in the audit client or dependence on fees.