By Jim McFie, a Fellow of ICPAK
I often repeat that Kenya made the decision to adopt International Accounting Standards (IASs), now International Financial Reporting Standards (IFRSs), in 1997. I do so because “facts” are important. In today’s world, it is difficult to find the truth about many things. The process of finding the reason why matters are as they are is often more complex than many simple-minded people think. Thinking is not an easy process. Sometimes the truth is difficult to accept: if a person is ready to accept the truth, it may force him or her to do or say something completely contrary to his or her feelings, or to the opinions of those around him or her – and they may feel offended because, for them, the lie is more favourable financially, in being accepted by others or purely from a status point of view. But I get ahead of myself. Let us go back to Kenya’s adoption of IASs. The Council of the Institute of Certified Public Accountants of Kenya (ICPAK) decided that it would cease developing Kenyan Accounting Standards for a number of reasons. In particular, it had become clear to the Council of ICPAK that developing homegrown standards was not putting its limited resources to best use: the document communicating the Council’s decision to the members of ICPAK read: “Updating Kenyan Standards to comply with International Standards and to cover areas which are not covered currently is a monumental task. The Institute just does not have the resources, human or financial, to carry out this task to a satisfactory level of proficiency; and even if it did, what purpose would this serve? Council believes that an effort to update Kenyan Standards will merely reproduce International Standards under a different name. In the circumstances therefore, the resources available to ICPAK could be put to better use if they were used to interpret International Standards, to assess their implication on local practice and, where necessary, to issue technical bulletins and local guidance on those Standards”. This statement by the Council of ICPAK is important because young people may not be aware of these very valid reasons why ICPAK decided to drop Kenyan Accounting Standards.
Kenya adopted International Accounting Standards in full with effect from 1 January 1999. It simultaneously adopted International Standards on Auditing (ISAs). For all accounting periods commencing on or after 1 January 1999, members of ICPAK are required to prepare the accounts of companies (whether quoted, public or private), parastatals and organizations such as co-operative societies, partnerships, sole traders, non-trading concerns such as sports clubs and charities, and estates and trusts in accordance with IFRSs. A 2014 Master of Business Administration (MBA) piece of research recommended that all companies in Kenya should adopt IFRSs based on the paper’s finding that Nairobi Securities Exchange (NSE) companies’ reporting quality has improved as a result of adopting IFRSs. The researcher was unaware that what he proposed was already a requirement for every member of ICPAK. However, a 2019 MBA research project was highly critical of the financial reporting of NSE listed companies. Copyright restrictions prevent me from quoting from the research: but when one reads the findings of this research, one wonders whether the researcher really examined the financial reporting properly and whether his methodology was sound.
There was a change in the IFRS accounting requirement for Small and Medium-sized Entities (SMEs) in 2009. ICPAK formally adopted the IFRS for SMEs following Council’s approval at its October 2009 meeting. All entities that meet the definition of an SME may adopt the standard; such entities are at liberty to apply the full IFRSs as well. Public interest entities (PIEs) must apply the full IFRSs.
The financial statements of Government entities are now required to be prepared in accordance with International Public Sector Accounting Standards (IPSASs) with full adoption of accrual accounting by the financial year commencing 1st July 2026.
Earlier this year I was speaking to a former partner of PricewaterhouseCoopers. He mentioned that when he examines some current sets of financial statements, the audit report is in the format followed before what is laid down in International Statement of Auditing (ISA) 700 (Revised), “Forming an Opinion and Reporting on Financial Statement (Effective for audits of financial statements ending on or after December 15, 2016)”. Some of my students, in their assessments on my teaching, state that they should be given a lot of practice in writing out audit reports. If they were to read ISA 700 properly, they probably would not write that statement. Little do they know that ISA 700 is very prescriptive and almost prepares the audit report for you. Paragraphs 21 to 49 deal with the report itself and repeat again and again the word “state” or a similar word. Let us look at paragraphs 21 to 28 of the ISA (remember that the word “shall” means “must”): “Title: 21. The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor. Addressee: 22. The auditor’s report shall be addressed, as appropriate, based on the circumstances of the engagement. Auditor’s Opinion: 23. The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading ‘Opinion’. 24. The Opinion section of the auditor’s report shall also: (a) Identify the entity whose financial statements have been audited; (b) State that the financial statements have been audited; (c) Identify the title of each statement comprising the financial statements; (d) Refer to the notes, including the summary of significant accounting policies; and (e) Specify the date of, or period covered by, each financial statement comprising the financial statements. 25. When expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use one of the following phrases, which are regarded as being equivalent: (a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework]; or (b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework]. 26. When expressing an unmodified opinion on financial statements prepared in accordance with a compliance framework, the auditor’s opinion shall be that the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework]. 27. If the reference to the applicable financial reporting framework in the auditor’s opinion is not to IFRSs issued by the International Accounting Standards Board (or the IFRS for SMEs) or IPSASs issued by the International Public Sector Accounting Standards Board, the auditor’s opinion shall identify the jurisdiction of origin of the framework. Basis for Opinion: 28. The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that: (a) States that the audit was conducted in accordance with International Standards on Auditing; (b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the ISAs; (c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements. The statement shall identify the jurisdiction of origin of the relevant ethical requirements or refer to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code); and (d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion”.
This same partner corrected me appropriately when I said that the auditor could use the phrase “In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with IFRSs” in place of “In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with IFRSs”. Some audit firms use the former wording. The partner reminded me that Section 727 of the Kenya Companies Act 2015 states: “(3) The auditor shall clearly state in the (auditor’s) report whether, in the auditor´s opinion, the annual financial statements—give a true and fair view . . . of the financial position of the company (or group) as at the end of the relevant financial year, and of the profit or loss of the company (or group) for the financial year”.
Many entities in Kenya rent premises rather than owning them. If an entity uses full IFRSs, it must follow what is laid down in IFRS 16 Leases: this states that for an operating lease “A lessee, at the commencement date, must measure the lease as a right-of-use asset at cost”. Paragraphs 24 to 60 of IFRS 16 deal with all the different possibilities of accounting for and disclosing the facts about the operating lease. Accounting for operating leases can be complex and time consuming. The beauty of using the IFRS for SMEs is that rent paid by the SME for an operating lease is a simple expense, as was the case before IFRS 16 was promulgated by the IASB.
It is important for members of ICPAK to remember that a consequence of being a member of the Institute is that it carries obligations. In order to know what those obligations are, one has to keep up to date: a very good way of doing this is to attend the events organized by ICPAK.
