There are a number of developments in financial reporting. Below we consider a few of these matters.

Convergence of accounting standards

The accounting watchdogs are keen to harmonise financial reporting across the globe. There a number of convergence efforts that are ongoing for instance to ensure that the UK Accounting Standards, US Generally Acceptable Accounting Standards (US GAAPs), and International Financial Reporting Standards (IFRSs) are unified. A number of improved IFRSs have been released synchronize the IFRS and US GAAPs. This is aimed at enhancing comparability of financial statements with the increased wave of globalisation. It is hoped that when these initiatives are complete, financial statements will be prepared using a uniform approach across the globe.

Reporting on key audit matters

International Standard on Auditing (ISA) 701 has brought a number of changes in the audit report and most importantly the need for auditors to highlight the Key Audit Matters (KAM) in their audit report. Some of the areas that need to be communicated include areas that involved significant judgment on the part of the auditor, areas that posed significant difficulty to the auditor during the audit more so in obtained appropriate, relevant and sufficient evidence as well as circumstances that might have caused the auditor to change the planned audit approach for instance due to deficiencies in internal control. These matters will be communicated as a separate line item in the audit report. The audit report should clearly state that the auditor has not modified the opinion in respect of KAM and that no opinion has been formed on each of these matters.

Impact of new companies Act

A new Companies Act (The Companies Act, 2015) became into law in Kenya on 11^th September 2015. It brings a variety of changes in the manner in which a company is managed and run. For instance, no differentiation is made between an executive and independent directors. Further, an auditor could also be a body corporate. It also brings about the concept of a statutory auditor. One of the likely contentious issues is the need for quoted companies to include a directors’ report and the auditable part of the directors’ remuneration report in their annual report. The Act has also defined a small company as one that has turnover of less than Kes 50 million, net assets of less than Kes 20 million and less than 50 employees. Small companies are exempted from auditing requirements. The tax regulator is however unlikely to accept unaudited financial statements when a company is filing its returns.

New and amended accounting standards

IASB continuously reviews accounting standards to enhance financial reporting. The following is a highlight of a number of changes that are effective for financial years beginning 1 January 2016, 1 January 2017 as well those effective from 2018.

There are minimal changes that are effective from 1 January 2016 such as the revision of IFRS 5, IFRS 7, IFRS 10, IFRS 11, IFRS 12, IFRS 28. There are also amendments of IAS 1, IAS 16, IAS 19, IAS 27, IAS 34, IAS 38, and IAS 41. Most of these changes include clarifications of matters.

Effective 2017, there are a number of improvement in standards such as IAS 7 where reporting entities are required to undertake a reconciliation of borrowings from opening to closing and IAS 12 to clarify that unrealised gains and losses on debt instruments represent temporary differences and therefore deferred tax arises.

Effective 2018 and beyond, there are new standards that will become effective such as IFRS 9 and IFRS 15 whereas IFRS 16 will be effective from 2019. IFRS 15 introduces a raft of changes in revenue recognition whereas IFRS 16 changes accounting for lease by removing the class of operating leases and considering that all leases are finance leases. On the other hand, IFRS 9 changes the concept of impairment from an incurred loss model to an expected loss model.

Adoption of integrated financial reporting

Reporting entities appreciate the fact that other than reporting on financial matters, it is critical to provide additional information to users of annual reports. Consequently, the concept of integrated financial reporting has emerged. This involves disclosure of corporate governance practices as well as social and environment impacts of a business. Regulatory authorities such as the Capital Markets Authority (CMA) have encouraged adoption of integrated reporting. For instance, the Code of Corporate Governance for Issuers of Securities to the Public published by CMA in 2015 mandates public institutions to adopt integrated reporting. This is aimed at enhancing transparency in financial reporting. Whereas this is not a requirement for other entities, adoption of integrated reporting is a positive move towards providing users of annual reports with adequate information regarding a business. Your business will improve its outlook to external parties such as potential investors and lenders by simply adopting integrated financial reporting. We could assist you in this journey.