Grant of letters of administration/Succession Law/

What are they?

Grant of letters of administration refers to the authority given by the court to a person in order for them to administer the estate of a person who may have died without writing a will, or if he did, did not name an executor or the named executor is unable to act as such for whatever reason. The Letters of administration are granted by the court to permit and authorize the administrator to deal with the management and distribution of a deceased person’s property.

The procedure for applying for grant of representation is set out in section 51 of the Kenyan Law of Succession Act and Rule 7 to 14 of the Probate and Administration Rules.

Qualification for applying the letters of administration

Anyone qualifies to apply for the letters of administration if he/she is an adult of sound mind and not bankrupt.

The court has wide discretion on whom to appoint as administrator. However, the Law of Succession Act gives an order of preference to guide the court as follows: 

• Surviving spouse or spouses, 
• children, father, mother, brothers and sisters and any child of the deceased’s brothers or sisters, 
• other relatives, 
• the Public Trustee, 
• and creditors.

Under intestacy, the law stipulates that up to four administrators can be appointed. Therefore, where there are more than four such eligible applicants, it is upon the beneficiaries to agree which four will be appointed as the suitable administrators. Most important to note is that the appointed administrators have no advantage over the other beneficiaries when it comes to distribution of the property.

The documents to be filed when applying for grant for letters of administration

In the first instance, one has to be eligible to apply for the grant as stipulated in section 66 of the Law of Succession Act which sets out the order of priority. In the instance many of them qualify, any of them can apply for grant but this is set to maximum of four only as prescribed in section 56(1) (b) of the Act. The application for letters of administration is in the form of a petition, and the applicant is known as a petitioner.

The Law of Succession Act has prescribed forms which are required to form the petition for letters of administration. In the instant case therefore the petitioner should fill in application forms attached with the requisite fees to the High Court Deputy Registrar who will examine the documents and present them before the judge who will grant. The petitioner shall file the following forms:

1. Form P & A form 80 (petition for letters of administration intestate)
2. Form P & A form 5 (affidavit)
3. Form P & A form 12 (affidavit of means)
4. Form P & A form 11 (affidavit of justification of proposed suits)
5. Form P & A form 57 ( guarantee of personal sureties)
6. Death certificate (mandatory)
7. Form P & A form 38 (consent form)

It will then be advertised in the Kenya gazette as a succession cause for a thirty (30) day period whereby any objections from persons who feel entitled to the estate. Objections are lodged by way of petition and they suspend the advertisement until their determination. If there is no objection after thirty days the person whose name appeared on the cause gets a temporary grant for the administration of deceased’s estate which lasts for six months during which this person is referred to as ‘personal representative’ and cannot distribute the estate of the deceased but collects and preserves the assets of the deceased.
After six months have elapsed from date of deceased’s death, one can petition the court for confirmation of grant of letters of administration. Notice of petition or application for grant must be given to every entitled person except for limited grant.

References
Law of Succession Act, CAP 160
Probate and Administration Rules

 

Environmental Law Notes

This section covers environmental law in Kenya under the Kenya Environment Management and Co-ordination Act.

Topics covered under environmental law-

• The right of every Kenyan to a clean environment
• Functions of NEMA
• Law on waste management
• Management of hazardous chemicals and substances
• Water management
• Regulation of pest control
• Control of radioactive substances
• A brief introduction to Kenya environmental law

The Kenya Environmental law describes the legal rules in Kenya relating to the environment, and more broadly the social, economic, philosophical and jurisprudential issues raised by attempts to protect, conserve and reduce the impacts of human activity on the Kenyan environment.

The topic may be divided into two major subjects: pollution control and remediation, and resource conservation, individual exhaustion. The limitations and expenses that such laws may impose on commerce, and the often unquantifiable (non-monetized) benefit of environmental protection, have generated and continue to generate significant controversy.

Given the broad scope of the environmental law, no fully definitive list of environmental laws is possible. The following discussion and resources give an indication of the breadth of law that falls within the "environmental" metric.

Sources of Kenya Environmental law
There are a number of diverse sources of Kenya environmental law:

• International law – Both international customary law and international conventions function as sources of Kenya environmental law.
• Common law – A variety of common-law rules, derived from neighbor law, for example, and the law of nuisance, are of significance as sources of environmental law. The dictum sic utere tuo ut alienum laedas ("use your own so as to cause no harm") furnishes one instance.
• Constitution of Kenya – The Constitution now informs and underlies the entire legal system in Kenya. Of prime importance is the Bill of Rights, with its explicit provision for environmental rights.The Constitution provides a framework for the administration of environmental laws.
• Statute law – Environmental law is also derived, fairly obviously, from national and provincial legislation, and from local by-laws.
• Customary law – Custom functions to some degree as a source of environmental law.

Historical development of Kenya environmental law



Environmental law in Kenya generally comprises the rules and doctrines arising from common law, provisions of constitutions, statutes, general principles and treaties that deal with protection, management and utilization of natural resources and the environment. The aims of environmental law are:-
a) To facilitate environmental management by providing rules and regulations for environmental conservation and preservation. In facilitating environmental management we get to know how institutions for environmental management are created, how rules are created to resolve environmental conflicts, and what are the acceptable standards of conduct and behavior when interacting with the environment.

b) To facilitate sustainable development.
The sources of environmental law in Kenya include the constitution, framework law, sectoral statutes, regulations, judicial decisions, customary law, treaties, general opinions of international law and qualified writings among other sources.
The environmental law originally arose out of English Common law and such law sought to uphold individual property rights as well as protect common property such as rivers, air, and sea. Remedies for injuries sustained as a result of the environmental breach were pursued privately whereas in other areas, public authorities were held to account for the same. Criminal law was also used by the state to punish individuals for breaches, for example, the law of public nuisance, trespass and arson.
The industrial revolution led to regulations to protect public health and control water pollution. These regulations were however localized at that time. It is this industrial development that gave impetus to the growth of national laws when in the 1960s countries saw the need to enact specific laws to regulate the environment starting with Brazil which enacted the laws on the environment in 1967.
Environmental law, therefore, developed from case law to what it is today.

RIGHT TO A CLEAN ENVIRONMENT
Every person in Kenya is under Kenya laws entitled to a clean and healthy environment and has the duty to safeguard and enhance the environment. The entitlement to a clean and healthy environment under the Kenya laws includes the access by any person in Kenya to the various public elements or segments of the environment for recreational, educational, health, spiritual and cultural purposes. If a person alleges that the entitlement has been, is being or is likely to be contravened in relation to him, then without prejudice to any other action with respect to the same matter which is lawfully available, that person may apply
to the High Court for redress and the High Court may make such orders, issue such writs or give such directions as it may deem appropriate to—
(a) prevent, stop or discontinue any act or omission deleterious to the environment;
(b) compel any public officer to take measures to prevent or discontinue any act or omission deleterious to the environment;
(c) require that any on-going activity be subjected to an environmental audit
(d) compel the persons responsible for the environmental degradation to restore the degraded environment as far as practicable to its immediate condition prior to the damage; and
(e) provide compensation for any victim of pollution and the cost of beneficial uses lost as a result of an act of pollution and other losses that are connected with or incidental to the foregoing.
The High Court shall be guided by the following principles of sustainable development;
(a) the principle of public participation in the development of policies plans and processes for the management of the environment;
(b) the cultural and social principles traditionally applied by any community in Kenya for the management of the environment or natural resources in so far as the same are relevant and are not repugnant to justice and morality or inconsistent with any written law;
(c) the principle of international co-operation in the management of environmental resources shared by two or more states;
(d) the principles of intergenerational and intragenerational equity;
(e) the polluter-pays principle; and
(f) the precautionary principle.

FUNCTIONS OF NEMA
The National Environment Management Authority(NEMA) is an authority in established under Kenya laws in Kenya whose object and purpose are to exercise general supervision and coordination over all matters relating to the environment and to be the principal instrument of Government in the implementation of all policies relating to the environment.
The functions of NEMA under Kenya laws are to —
(a) co-ordinate the various environmental management activities being undertaken by the lead agencies and promote the integration of environmental considerations into development policies, plans, programmes and projects with a view to ensuring the proper management and rational utilization of environmental resources on a sustainable yield basis for the improvement of the quality of human life in Kenya;
(b) take stock of the natural resources in Kenya and their utilization and conservation;
(c) establish and review in consultation with the relevant lead agencies, land use guidelines;
(d) examine land use patterns to determine their impact on the quality and quantity of natural resources;
(e) carry out surveys which will assist in the proper management and conservation of the environment;
(f) advise the Government on legislative and other measures for the management of the environment or the implementation of relevant international conventions, treaties, and agreements in the field of environment, as the case may be;
(g) advise the Government on regional and international environmental conventions, treaties and agreements to which Kenya should be a party and follow up the implementation of such agreements where Kenya is a party;
(h) undertake and coordinate research, investigation, and surveys in the field of environment and collect, collate and disseminate information about the findings of such research, investigation or survey;
(i) mobilize and monitor the use of financial and human resources for environmental management;
(j) identify projects and programmes or types of projects and programmes, plans and policies for which environmental audit or environmental monitoring must be conducted;
(k) initiate and evolve procedures and safeguards for the prevention of accidents which may cause environmental degradation and evolve remedial measures where accidents occur; 1999 Environmental Management and Co-ordination No. 8
(l) monitor and assess activities, including activities being carried out by relevant lead agencies, in order to ensure that the environment is not degraded by such activities, the environment is not degraded by such activities, environmental management objectives are adhered to an adequate early warning on impending environmental emergencies is given;
(m) undertake, in co-operation with relevant lead agencies, programmes intended to enhance environmental education and public awareness about the need for sound environmental management as well as for enlisting public support and encouraging the effort made by other entities in that regard;
(n) publish and disseminate manuals, codes or guidelines relating to environmental management and prevention or abatement of environmental degradation;
(o) render advice and technical support, where possible, to entities engaged in natural resources management and environmental protection so as to enable them to carry out their responsibilities satisfactorily;
(p) prepare and issue an annual report on the state of the environment in Kenya and in this regard may direct any lead agency to prepare and submit to it a report on the state of the sector of the environment under the administration of that lead agency;
(q) perform such other functions as the Government may assign to the Authority or as are incidental or conducive to the exercise by the Authority of any or all of the functions
provided under the Environmental Management and Coordination Act.


LAW OF WASTE MANAGEMENT
The management of waste always requires an understanding of the concept of waste.
Definition of Waste: waste under Kenya laws is an item or substance which has no utility value to the holder of the item. By the same token waste may well have some value to somebody else or to the same person in a different context. Therefore whether or not an item is considered to be or not to be waste must be determined from the point of view of the person who has control or is in possession of that particular item. An item which is waster is not the same thing as an item that does not have value. Waste items always have value and it is only that its value to the holder is less than the cost to the holder of retaining possession of it. Therefore the holder always faces an inherent temptation to dispose of the item at least cost to himself or to herself.
The first choice of disposal of a waste item is into the environment i.e. a cigarette smoker will puff away until they get to the butt end of the cigarette and then they have the Pavlov’s instinct of letting it drop from their hands and will drop it anywhere and for this reason waste presents an environmental problem because the holder does not see the need to invest resources in disposing the item. Where the holder is not able to dispose of it in the environment, the holder will hand over that item to the person who is willing to take the item. Such a person may well be prepared to pay for the item for the reason that the intending possessor of the item may well see utility value in the item. But the key thing is that the holder is disposing of the item rather than the person acquiring it is paying for it so the price that the holder imposes for the item will typically not represent the true economic value of the item. In an auction, for instance, one sets a reserve price which represents what one perceives as an item’s economic value. At times the holder is even prepared to pay for somebody to take away this item.
So waste presents an environmental management problem, the theory of managing waste is captured in an approach to management known as cradle to grave management or ‘lifecycle management’. Cradle to Grave Management presents an approach that looks at an item from its inception to its disposal, the approach looks at the entire lifecycle of the item.
Lifecycle Management introduces management principles at each stage of the life of the item. At production, the management approach is to reduce or minimize waste. After production in use the approach is to reuse waster and on disposal, the approach is to recycle. Reduction of waste is basically the principle that the production process should result
1. In an item which potentially will generate little waste
2. The production process itself should give rise to as little waste as possible.


If in the process of producing an item the maker of the item is also generating a lot of waste. The idea is to minimize waster, there are people who argue that minimization of waster cuts costs.
Having generated the item, the idea is that the item itself should be an item that is capable of reuse which basically means putting the item back to use in the same form. A good example is a beverage bottle. These are items that can be used again in the same form. In order to encourage reuse, the management uses a deposit and return the system to encourage reuse. Replacement of this particular item like cans for bottles leads to a waste management problem.


MANAGEMENT OF HAZARDOUS CHEMICALS AND SUBSTANCES
There are two kinds of sources of pollution of the environment under Kenya law:

1. Point sources of Pollution

2. Non-Point sources – referred to as diffuse sources of pollution

POINT SOURCES OF POLLUTION
Point sources of pollution under Kenya laws are sources which are fixed and the pollution from which is predictable and known in advance. The epitome of point sources of pollution is the waste drain. The ways in which point sources of pollution are managed is through firstly the establishment of standards to be met by the pollutants which are to be discharged from those point sources. In order to regulate that point source, the permit or license is issued for that particular activity. For example, if one wishes to run a factory that will discharge pollutants through a pipe, then you apply for a permit and the permit will indicate what the factory must meet. Discharge of affluence is a normal part of economic activity and it is handled by issuing permits and handling it so it falls to manageable standards.

NON POINT SOURCES OF POLLUTION
Non-point sources of pollution under Kenya laws refer to sources of pollution whose origin is unpredictable and diffuse, they arise from unpredictable events or circumstances one does not know until the pollution occurs at which particular point the pollution will occur. The example of a non-point source of pollution is an accident involving a petrol tanker. Until the accident occurs one doesn’t know where it occurs. Use of pesticides on crops is another example when it rains the rains wash pesticides into the river and no one knows when it will happen.

The method of dealing with the non-point source of pollution is through prescribing preventive measures. These are measures designed to ensure that the activity is undertaken in such a way as to minimize or prevent altogether the occurrence of pollution or the extent of environmental damage arising from the pollution.

Hazardous chemicals and substances are chemicals and substances which contain characteristics which contain a danger to humans and the environment. We have listed the characteristics under Section 91 of the Environmental Management and Coordination Act contains a list of characteristics that make substances hazardous, these are that the substances are corrosive, carcinogenic, flammable, toxic, persistent, explosive or radioactive. Until that characteristic or the substance leads to environmental damage, the danger remains latent, latent means that it exists but has not yet manifested itself. It is for these reasons that these substances represent diffuse sources of pollution that is because you can live with them but something may occur that makes environmental damage become a reality.

In Kenya a diverse range of laws deals with the management of hazardous chemicals and substances. They include the Pest Control Products Act Cap 346 of the Laws of Kenya, the Pharmacy and Poisons Act which is Cap 244, Radiation Protection Act Cap 243 of the Laws of Kenya, act the Petroleum Act Cap 116 Laws of Kenya, Fertilisers and Animals foods Act Cap 145, the Foods, Drugs and Chemicals Act Cap 254, the Environmental Management and Coordination Act of 1999 has introduced a parallel system for managing hazardous chemicals and substances. All of these laws are product specific which means that each of them focuses on a certain category of products but the principles on which they are based are similar in every case. The objective is preventive and it is an international principle that provides for Classification, Packaging and Labelling Products. Classification, Packaging Labelling is a principle of management of hazardous chemicals and substances applied internationally which means that whether in Europe or Africa the principles are the same. The extent to which they respected however is different depending on where one is.


WATER MANAGEMENT
This includes management of water resources and provision of water supplies. In the past the law relating to water management in Kenya was contained in the Water Act Cap 372 Laws of Kenya. In 2002 the Water Act was repealed and replaced by new law which is presently known as the Water Act 2002 and does not have a Chapter number. This came into effect in March 2003 by which Water Act Cap 372 was repealed. Kenya’s statutory law on management of water resources is based on the common law and under the common law the land owner is presumed to own everything on the land upto the sky and down to the centre of the earth and this is a principle found in the course of property interest in land. At the same time the common law considers running water air and light to be things the property of which belongs to no person but the use to all persons. This principle is articulated in the case of Liggins V Inge 131 E.R 263. Although the common law considers that the landowner owns everything on land a landowner has no property in running water air and light. What is land ownership gives him is a natural light to the use of running water air and light. The Natural light is considered to be incidental to the land ownership. The land owner whose land abuts on a water course is known as a riparian owner. A riparian owner is considered to have a natural right to water. With respect to riparian ownership the principle is articulated in Stockport Waterworks Corporation V. Potter 159 ER 545. A right to water is the ability to exercise as of right the right which is available to all members of the public to use running water. None riparian owners can only exercise the right to use running water under an agreement with a riparian owner. An agreement providing for access over riparian land is known as an easement. In the absence of an easement non-riparian owner will be committing a trespass if he attempted to exercise the right to use running water. Because the right to use riparian water is shared by all riparian owners, its use must be reasonable. No one owner may use the water in a way which prejudices the right of other riparian owners. The principle of reasonable use is articulated in the case of Embrey v Owen 155 ER 579. The extent of the riparian owners right to water and the scope of reasonable use can be reduced to 3 rights:
1.Right of Access and Navigation
2.Right to the Natural quantity of the water in the water course;
3.Right to the Natural quality of the water in the water course;
These 3 are known as the riparian rights. The right to navigate the tidal river belongs to all members of the public ( a tidal river is a river that is influenced by the movement of the waves so typically a tidal river is salty River Tana in Kenya is a tidal river). The reason for the rights belonging to all members of the public is because the ownership of the land beneath a tidal river is vested in the State whereas the ownership of the land beneath a non-tidal river is vested in the riparian owner. The tidal part of the river is therefore accessible to any member of the public whereas the other part of the river is only accessible to the riparian owner. Only a riparian owner has a right of access to his land which enables him to embark and disembark on the non-tidal part of the river. This principle was established in the case of Lyon v Fishmongers Co. [1876] 1 A.C. 662 this is a case that arises out of fishing in the North Sea and the Fishmongers Company wanted a place on which to land after fishing but the particular sport on which they had established their key turned out to be non-tidal so the owner was denying them to embark or disembark on it. The riparian owners right to quantity enables him to abstract, divert, obstruct or impound the water. The water abstracted may be used for ordinary domestic purposes such as drinking, cooking and washing or it may be used for purposes such as irrigation which the common law considers to be extraordinary purposes. Where the riparian owner uses the water for ordinary purposes, there is no restriction in the quantity that he/she may abstract even if the abstraction exhausts all the water in the river. This principle is articulated in the case of McCartney v Londondery & Lough Swilley Railway Co. [1904] A.C. 301 Where the riparian owner uses the water for extraordinary purposes, the use is restricted to the extent that it is subject to the right of other riparian owners. Any use which prejudices the use by a lower riparian owner is considered to be unreasonable. Basically is a riparian owner A is using the water for irrigation, if it prejudices the right of G to use water for ordinary purpose he is said to prejudice the use of water by G. This principle is articulated in the case of Swindon Waterworks Co. v Wilks & Berks Canal Navigation Co. [1875 7 LR 697.
Under the common law the riparian owner is not allowed to use riparian water for foreign purposes. Foreign purposes means use of water outside of the riparian land. Any such use is considered as unreasonable even if it does not prejudice the use of any other riparian owner. The riparian owners right to quality entitles the riparian owner to the flow of water past his land in its natural state of purity and deteriorated by noxious matter discharged into it by others. This principle is articulated in the case of Jones v Llanwrst Urban District Council [1911] 1 Ch. D 393 The principle of riparian ownership is the principle of water resources management which operated under the common law. under this the management of water resources was based on balancing the competing demands of neighbouring riparian owners. As per the common law the riparian owner owns the land upto the midian line of the river but our statute specifically the Agriculture Act prohibits the riparian owner from cultivating up to 2 meters of the river. Under the Physical Planning Act the Local Authority can prohibit cultivation of the river beds. The common law principles have however been incorporated into statute law even if with modifications and the current statute governing water resources management is the water Act Cap 2002 which was enacted in July 2002 and came into effect in March 2003. The Water Act 2002 provides for the management, conservation, use and control of water resources. Secondly it provides for the acquisition and regulation of rights to use water and for the regulation of water supply and sewerage services. The Water Act has divided the management of the resource and the provision of the suppl


REGULATION OF PEST CONTROL PRODUCTS
PEST CONTROL PRODUCTS ACT Cap 346
This Act regulates the import/export manufacture distribution and use of products which are used for the control of pests and of the organic function of plants and animals. These are products used to control pest (pesticides) this is an Act that regulates the import/export and use of pesticides. The Act establishes the Pest Control Products Board and makes it the function of the Board to register pest control products. It requires that every person who desires to register a pest control product shall make an application to the Board. The Board may refuse to register the product if its use would lead to unacceptable risk or harm to
1. Things on or in relation to which the pest control product is intended to be used; or
2. To public health, plants, animals or the environment.
CLASSIFICATION
The Act establishes 3 classes of pest control products
1. A restricted class – a class of products which present significant environmental risks and these are products which are intended for use in aquatic and forestry situations; a good example was the Cyprus Trees being destroyed by aphid, spraying all the Cyprus trees would pose a problem to the environment since it was so widespread.
2. Commercial Class – class with environmental effects which are limited to a specific region.
3. Domestic Class – this is a class of products for which


(i) No special precautions are required in use
(ii) No equipment are required for inhalation hazard
(iii) No irreversible effects from repeated exposure.
(iv) Disposal of Containers can be safely done by placing it in the garbage bin; and
(v) The package sizes are limited to amounts that can be safely used and stored by consumers.


The best examples are insecticides i.e. doom.
PACKAGING
The law requires that the package shall be sufficiently durable and be designed and manufactured to contain the product safely under practical conditions of storage, display and distribution.
LABELLING
The act of labelling requires that every pest control product which is sold or made available must have a label and the label must show the following 14 things.
1. Name of the product;
2. Information on the nature and degree of hazard inherent in it;
3. Statement directing the user to read the label;
4. The common name of the active ingredients;
5. Contents of the active ingredient; active ingredient has both a common and scientific name so that the buyer may know;
6. Registration number of the product;
7. Net content;
8. Name and postal address of the registrant;
9. Directions for use of the product;
10. Information on the hazardous of handling storage display, distribution and disposal of the product including instructions on procedures to alleviate the hazard, the contamination and disposal of the product and the empty package;
11. Information identifying any significant hazard to things on or in relation to which the product is intended to be used or to public health, plants, animals or the environment;
12. First aid instructions;
13. The toxicological information essential to the treatment of a person who is poisoned for example antidotes, symptoms of poisoning and the ingredient that may affect the treatment;
14. A notice that it is an offence to use or store the product under unsafe conditions.
15. Package should bear a cautionary symbol, the cautionary symbols are also standard there is a symbol for poison or danger, there is a symbol for corrosivity which is a test tube with a hand sticking inside and crossed out, symbol for in-flammability which is fire, a symbol for explosivity.
The Act also requires that the premises for manufacturing formulating, packaging selling or storing the product must be licensed. The premises shall be of suitable design layout and construction to ensure the health of workers and to avoid contamination of the environment. The person who owns, operates or is in charge of the premises shall have adequate knowledge of the chemistry, toxicology, efficacy and general use of the product being dealt with and of the handling precautions of the products within the premises.


CONTROL OF RADIO ACTIVE SUBSTANCES


THE RADIATION PROTECTION ACT
This Act controls the import/export possession and use of radio active substances and irradiating apparatus (equipment which emit radio activity). Basically radiation occurs because of the impact of ultra violet light.
The Act provides that
(i) no one shall knowingly without a licence manufacture or otherwise produce
(ii) sell or otherwise deal with,
(iii) have in his possession for use,
(iv) import or cause to be imported,
(v) export or cause to be exported any radio active substance or irradiating apparatus.


Application for a licence shall be made to the Radiation Protection Board which is established under the Act. The Minister is required to prescribe precautions to be taken to prevent injury being caused by ionising radiation to the health of persons employed in places where radio active substances are manufactured, produced, treated, stored or used or where irradiating apparatus is used or where other persons are likely to be exposed to harmful radiation. He is also required to prescribe methods of disposal for radio active waste products and the transport, storage and use of radio active material. Finally to prescribe maximum working hours of persons working with radio active material.

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ACCOUNTING FOR LAWYERS: THEORETICAL FRAMEWORK OF ACCOUNTING

 THEORETICAL FRAMEWORK OF ACCOUNTING 

Accounting – Process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information. 

 

CONCEPTUAL FRAMEWORK 

It is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, functions and limits of financial accounting and financial statements. 

 

Also, conceptual framework can be defined as a statement of Generally Accepted Accounting Principles, which form the frame of reference for financial reporting. 

From the above definition, we can deduce that:

i.Conceptual framework forms a basis for development of new accounting standards and the evaluation of those standards that are already in existence. 

ii.It forms the theoretical basis for determining which events should be accounted for and how they should be communicated to the users. 

 

ADVANTAGES OF CONCEPTUAL FRAMEWORK

i.A conceptual framework provides a written constitution for the professional standard committee to set standards in a coherent manner. 

ii.Provides a framework of reference for those who prepare financial statements. 

iii.The preparation of financial statements requires knowledge of specific accounting techniques and the exercise of judgment.  A conceptual framework may be useful in distinguishing between areas of judgments and areas where rules should be followed. 

iv.The existence of a conceptual framework might win the confidence of the users of financial statements by increasing their understanding on how and why they have been produced. 

v.Without a conceptual framework some standards could concentrate too much into income statement or too much into balance sheet. 

 

DISADVANTAGES OF CONCEPTUAL FRAMEWORK 

i.It is uncertain whether a single conceptual framework can be devised to meet the needs of all the users of accounting information. 

ii.Accounting conventions that underlie financial some areas in reporting cannot be proved to be correct; they depend on consensus.  Without consensus there cannot be an agreed conceptual framework and it may not be possible to achieve consensus on wide issues. 

iii.Whilst it may be argued that it would be desirable for the PSC to develop the standards in accordance with an agreed conceptual framework, in reality it may not happen.  The development of accounting standards may be influenced by factors other than the conceptual framework e.g. existing practice and political pressures. 

 

STEPS IN THE DEVELOPMENT OF THE STRUCTURE OF THE TYPICAL CONCEPTUALFRAMEWORK

i.Identify user groups and discuss their needs; determine primary users for whom financial statements are prepared.

ii.List desirable qualitative characteristics of information provided in the financial statements. 

iii.Define elements (i.e. assets, gains, equity, expenses, revenue, liabilities, loses, investments by owners, distributions to owner, and comprehensive income) to be included in the financial statements.  

iv.Specify recognition criteria to determine when elements should be recognized in the financial statements. 

v.Specify measurements basis for elements recognized in the financial statements.

 

ISSUES DEALT WITH BY FRAMEWORK 

The conceptual framework of accounting deals with a number of issues which includes:  

i.Objectives of financial statements.

ii.The qualitative characteristics that determine usefulness of information in financial statements.

iii.Definition, recognition and measurements of the elements from which the financial statements are constructed. 

iv.Concept of capital and capital maintenance.

v.Users of the financial information. 

THE CONCEPTUAL FRAME WORK OF ACCOUNTING

Objectives of financial statements 

Financial reporting is not an end itself but it is intended to provide information that is useful in making business and economic decisions.  It follows that it is necessary to determine who the users are and to explore the sort of decision, which they have to take. 

Therefore, the objective of financial reporting is to provide information about economic resources of an enterprise, the claims to those resources (obligation to transfer resources to other entities and owners’ equity) and the effects of transactions, events and circumstances that change resources and claims to those resources.

 

Also financial reporting can be defined as the process of communicating, identifying economic information and economic report of resources and performance of the reporting entity useful to those having right to such information.

 

Such financial information will meet needs of most of the users but it has shortcomings in that:

i.It is based on past events.

ii.Financial statements sometimes contain non-financial information.

USERS OF ACCOUNTING INFORMATION 

i.Share holders – These are people who have contributed capital to the business and are interested in the performance of the business or reporting entity. 

ii.Investors – Are those people who are willing to invest e.g. by way of buying shares in the reporting companies and are interested with the performance and financial position of the companies. 

Others include:

i.Employees 

ii.Lenders 

iii.Creditors 

iv.Government 

v.Income department e.g. Kenya Revenue Authority in Kenya.

vi.General society

vii.Customers.

 

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS 

Appropriateness of accounting policies should be judged against the following objective

i.Understandability – Users should be made to understand financial statements.  The assumption made is that they have enough knowledge to understand well-presented accounts.  This does not mean that complex issues should be left out in accounts. 

ii.Relevance – Information is relevant if it would influence economic decisions and it would be able to do that if it has predictive value or confirmatory value.

• Predictive value – Information with predictive value will help users to assess what is likely to happen in future. 
• Confirmatory value – Information with confirmatory value would help user to confirm or correct previous predictions, which they have made. 

NB: In many, if not most, cases information will have both confirmatory and predictive value. 

3. Reliability – Information is said to be reliable when it is free from material error and can be depended upon by users of accounts to represent faithfully that which it either purports to represent or could reasonably be expected to represent.  In order for information to be reliable it must posses certain subsidiary characteristics.  They include: 

• Faithful representation: It must faithfully represent what it purports to represent so that, for example, the substance of a transaction must be portrayed when this differs from its legal form. 
• Neutral: means unbiased; this means that accounting information should not be subject to deliberate or systematic bias. 
• Complete: this means including all the information necessary for faithful representation

4. Comparability – Users must be able to compare an enterprise financial statements in the following ways: 

a.           Overtime trend analysis (past performance)

b.          Other enterprises (firms in the industry within which the reporting entity operates)

c.           Reporting entity budgeted or projected performance with the actual performance.

 

FINANCIAL POSITION, FINANCIAL PERFORMANCE AND CHANGES IN FINANCIAL POSITION

1.      Financial Position (Balance Sheets)

It is affected by the following information

1.      Economic resources controlled – help to predict the ability to generate cash.

2.      Financial structure – To predict the borrowing need, dividend policies and likely success in saving new finance.

3.      Liquidity and solvency – Predict whether financial commitment will be met as they fall due. 

2.               Financial performance – Income statement 

Users want to know about profitability or the performance of the reporting entity.

Performance – Profit is the measure of performance or it can be used as a basis for other measures e.g. earning per share.  This depends on measurement of income and other expenses, which in turn depend on the concept of capital and capital maintenance adapted. 

3.               Changes in the financial position - Cash flow used to assess the enterprises investing, financing and operating activities. 

This will show the enterprises ability to provide cash and how that cash is used. 

 

Measurement of the elements of financial statements 

According to the I.A.S.C framework, measurement is the process of determining the monetary amount at which the elements of the financial statements are to be recognized and carried in the balance sheet and in the income statement. It involves selection of a particular basis of measurements.  This includes: 

1. Historical costs – assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them.  
2. Current costs – This is the amount of cash equivalent that will have to be paid if the same or an equivalent was acquired currently.
3. Realistic value – The amount of cash or cash equivalent that could be currently obtained by selling an asset. 
4. Present value – The discounted future cash flow from an asset. 

 

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Concepts of capital 

a.               Financial concept – Money invested or the purchasing power can be seen as net assets.

b.               Physical concept (operating capability concept) – Productive or operating capacity of an enterprise based on units of output produced i.e. volume of goods and services capable of being produced. 

 

CONCEPTS OF CAPITAL MAINTENANCE 

a.               Financial capital maintenance concept – Profit is earned if net assets at the end of a period exceed net assets at the beginning of a period excluding any distributed capital and contribution from owners during the period. 

b.               Physical concept – Profit is earned only if the physical productive capacity of the enterprise at the end of the period exceeds the physical productive capacity of the enterprise at the beginning of the period if you exclude distribution to and contribution from owners during the period. 

 

FUNDAMENTAL ACCOUNTING CONCEPTS, ACCOUNTING BASES AND ACCOUNTING POLICIES 

In accounting usage of terms such as accounting principles, practices conventions or procedures have often been treated as interchangeable.  However, there exists difference between the terms.  The terms are explained below. 

Fundamental concepts: They are broad basic assumptions, which underlie the periodic financial accounts of the business enterprises.  The following are fundamentals accounting concepts:

I.Going concern concept: - This concept assumes that the enterprise will continue in operational existence for the foreseeable future i.e. the profit and loss account and balance sheet assume no intention or necessity to liquidate or curtail significantly the scale of operation.  To abandon this concept means that assets will be valued on a realizable value basis.  Criticism of this concept includes: - 

• It is not necessarily true that firms do not cease trading.  Therefore, balance sheet valuation based on the concept may give investors an incorrect view of the assets particularly when firms cease trading shortly after the last published balance sheet due to various circumstances.
• It is misleading to suppose that the going concern concept applies equally to the continuity in the firm’s operations in a particular sector or as regards a particular product.  In this respect, the going concern concept finds no support in any other formal study of economic behaviour.  
• The concept preludes the consideration of the alternative courses of action and prevents the provision of the relevant accounting information for this purpose.

II.Accrual concept: - The concept requires that effects of transactions and other events are recognized when they occur and not when cash or cash equivalent are received or paid and they are recorded in accounting records and reported in the financial statements for the period to which they relate.  The importance of accrual basis is users to get information about past performance involving cash and also information about obligations to pay cash in future and resources, which represent cash to be received in future. 

 

ACCOUNTING STANDARDS

1.  Sources of authority 

2. Legislation e.g. cost accounting 

3. The stock exchange 

4. Accounts principles and conventions 

5. Accounting standards 

 

INTERNATIONAL HARMONIZATION 

Need for:

1.      Investors – They would want to compare financial results of costing both nationally and internationally.  Differences in accounting practice acts as a barrier to such cross border analysis. 

2.      Multinationals

• They would have better access to foreign funds 
• Material control would be improved because harmonization helps internal communication of financial information.
• Appraisal of foreign enterprises for takeovers and managers.
• It would be easier to conform to the reporting requirements of the overseas stock exchange.
• Consolidation of foreign subsidiaries and associated companies would be easier. 
• May reduce their audit cost.
• Transfer of accounting staff across borders would be easier. 

3.      Government – particularly of developing countries

By use of the same accounting standards, governments may be able to control multinationals.

4.               Tax authorities – It would become easiest to calculate tax liability on income received from overseas.

5.               Regional economic groups 

It would aid regional economic groups as the members would understand one another’s accounting practices.

6.               Large international auditing firms  

 

 

FUNDAMENTAL ACCOUNTING ASSUMPTIONS AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

Introduction 

The basic objective of accounting is to provide information useful in making economic decisions. It is therefore of vital importance that the information be relevant, reliable, clearly understandable and comparable. There is therefore need for a well defined body of accounting assumptions and principles to offer guidance in the preparation of financial statements and reports.

Fundamental accounting assumptions are the factors that are taken for granted in explaining the conceptual structure of accounting. The accounting principles on the other hand constitute the ground rules for financial reporting and are referred to as ‘the Generally accepted accounting principles (or GAAP)’. They are broad in nature and have been developed by accountants in an effort to meet the needs of the users of financial statements.

Accounting assumptions and principles are not like physical laws; they do not exist in nature awaiting discovery by man. Rather, they are developed by man in light of what man considers to be the most important objectives of financial reporting. In many ways generally accepted accounting principles are similar to the rules established for an organized sport, such as football or basketball. For example, accounting principles, like sports are rules:

• Originates from a combination of tradition, experience and financial decree.
• Require authoritative support and some means of enforcement.
• Are sometimes arbitrary
• May change over time as shortcomings in the existing rules come to light 
• Must be clearly understood and observed by all participants in the accounting process.

An important aspect of accounting assumptions and principles and principles is the need for consensus within the economic community. If these assumptions and principles are to provide a useful framework for financial reporting they must be understood and observed by the participants in the financial reporting process. 

 

FUNDAMENTAL ACCOUNTING ASSUMPTIONS 

 

The Accounting Entity assumption

An accounting entity is any economic unit which controls resources and engages in economic activities. An individual, a business enterprise whether organized as a proprietorship, partnership or corporation, governmental agencies, non governmental organizations  and all non profit making entities are all accounting entities regardless of the form of the organization. The accounting entity of concern is assumed to be separate and distinct from all other entities regardless of the form of the organization.  The affairs of the accounting entity are distinguished even from those of its owners and information is compiled for the entity alone.  The accounting and reporting process is concerned with the transactions and events that affect each accounting entity as a separate and distinct entity from others.

 

The ‘Going concern’ or Continuity Assumption.

In accounting for an accounting entity, it is to be assumed that the accounting entity will continue in operation for the foreseeable future.  It is assumed that the accounting entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.  This assumption provides the foundation for accrual accounting. When the accounting entity ceases to be a going concern, the accounting approach changes from accrual to realization and liquidation.

 

The Periodicity Assumption.

The results of an accounting entity would be most accurately measurable at the time when the entity liquidates.  Users of accounting information, however, cannot wait indefinitely for such information.  The periodicity or time assumption implies that the assumed indefinite life of the accounting entity can be divided into artificial time periods.  Accountants, therefore, measure the operating progress and changes in economic position at relatively short time intervals during this indefinite life.  Users of financial statements need periodic measurements for decision-making purposes.

 

The need for frequent measurement creates many of the accountant’s most challenging problems.  Dividing the life of an enterprise into time segments, such as a year or a quarter of a year requires numerous estimates and assumptions.  For example, estimates must be made of the useful lives of depreciable assets and assumptions must be made as to appropriate depreciation methods.  Periodic measurements of net income and financial position are, thus, at best only informed estimates.  The tentative nature of periodic measurements should be understood by those who rely on periodic accounting information.

 

The Monetary or Unit of Measure Assumption.

The assumption implies that money is used as a standard measuring unit for financial reporting.  The impact of transactions is qualified and assessed in terms of some unit of measure.  In Kenya the monetary unit is the shilling.  It is assumed that the Monetary unit is a stable unit of valued capable of acting as the common denominator of values.  The continuing relative and rapid inflation, however, points to the shillings as an unstable unit of measure.  Inflation introduces a sizeable limitation on financial statements as accurate and precise reflections of operating results and resources position.  Support for this assumption lies in the fat that the monetary unit is relevant, simple, universally available, understandable and useful.

 

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

The Cost principle

Generally accepted accounting principles requires that most transactions and events be recognized in the financial statements at the amount of cash and cash equivalent paid or received or the fair value ascribed to them when they took place.  Historical cost is usually definite and verifiable.  As per this principle, assets are initially recorded at cost. In most cases no adjustment is made to this valuation in later periods; except to allocate a portion of the original cost to expense as the assets expire.  At the time the asset is acquired, cost represents the fair market value as evidenced by the arm’s length-transaction.

 

With the passage of time, the fair market value of an asset may change greatly from its original (historical cost). These changes in the ‘fair market value’ are generally ignored in the accounts and the assets have continued to be shown at historical cost less the portion that has been allocated to expenses.

The cost principle is derived, in large part, from the principle of objectivity.  Those who support the cost principle argue that it is important that users have confidence in financial statements and that this confidence can be maintained if accountants recognize change in assets and liabilities only on a basis of completed transactions.  Objective evidence generally exists to support cost. Current market values, however, often are largely a matter of personal opinion.

The question of whether to values assets at cost or estimated market value is a classic illustration of the “trade-off” between the relevance and the reliability of accounting information.

 

The Revenue Realization Principle

This principle provides guidance in answering the question of when should revenue be recognized.  Revenue is generally recognized when the earning effort is substantially expended or completed.  Revenue is realized when both of the following conditions are met

i.The earning process is essentially complete.

ii.Objective evidence exists as to amount of revenue earned.

 

The Matching Principle

To measure the profitability of an economic entity, revenue is to be matched against costs associated in generating this revenue.  The matching of business enterprise’s expenses (the cost of goods and services to be used to obtain revenue) with its revenue is the primary activity in the measurement of the results of operations for that period.

Costs are matched with revenue is two ways:

1.      Direct association of costs with specific revenue transactions.

2.      Systematic allocation of costs over the ‘useful life’ of the expenditure.

 

The Objectivity Principle

The term objective refers to measurements that are unbiased and subject to verification by independent entities.  The parties involved in any transaction have opposing interests and bargain to arrive at the equilibrium of exchange equivalents.  If a valuation is objective, a disinterested third party within the same facts would come up with the same valuation.  This is generally referred to as an ‘Arms length transaction’.

 

Accountants rely on various kinds of evidence to support their financial measurements but they seek always the most objective evidence available.  Despite the goal of objectivity, it is not possible to divorce completely accounting information from opinion and judgment.  For example, the cost of a depreciable asset can be determined objectively but not the periodic depreciation expenses.  Objectivity in accounting has its roots in quest for reliability.

 

The Consistency Principle.

The principle of consistency implies that there should be consistent treatment of similar or the same items from one accounting period to another.  In principle once an accounting procedure has been adopted for a class of items, it should be consistently applied from period to period.  The principle of consistency does not mean that a company should never make a change if a proposed new accounting method will provide more useful information than does the method presently in use.  Where a significant change has been made, the fact that a change has been made and the shilling effects of the change should be fully disclosed in the financial statements.  Consistency facilitates both comparability and understandability.

 

The Disclosure Principle.

Adequate disclosure means that all materials and relevant facts concerning financial position and the results of operations are communicated to users.  This can be accomplished either in the financial statements or in the notes accompanying the financial statements.  Such disclosure should make the financial statements more useful and less subject to misinterpretation.

 

Adequate disclosure does not require that information be presented in great detail.  It does require, however, the no important facts be withheld.  For example, if a company has been named as a defendant in a large lawsuit, this information must be disclosed.  Other example of information which should be disclosed in financial statements include:

1.      A summary of accounting methods used in the preparation of the statements

2.      Shilling effects of any changes of these accounting methods during the current period.

3.      Any contingent losses that may have material effect upon the financial position of the business.

4.      Contractual provisions that will affect future cash flows, including the terms and conditions of borrowing agreements, employee pension plans, and commitments to buy or sell materials amount assets.

 

Even significant events which occur after the end of the accounting period but before the financial statements are issued may need be disclosed.  These are referred to as ‘Post balance sheet events’.

Naturally, there are practical limits to the amount of disclosure that can be made in financial statements and the accompanying notes.  The key points to bear in mind are that the supplementary information should be relevant to the interpretation of the financial statements.

On reporting the impact of transactions, the economic substance of the transaction takes precedence over the legal (i.e. Substance over Form.)

 

EXCEPTION PRINCIPLE

Materiality.

The term materiality refers to the relative importance of an item or an event.  An item is ‘material’ if it might reasonably influence the decisions of users of financial statements.  Accountants must be sure that all material items are properly reported in the financial statement.

However, the financial reporting process should be cost-effective.  The value of the information should exceed the cost of its preparation.  By definition, the accounting treatment accorded to immaterial items is of little or no value to decision-makers.  Therefore, accountants should not waste time accounting for immaterial items; these items may be treated in the easiest and most convenient manner.  In short, the concept of materiality allows accountants to ignore other accounting principles with respect to items that are not material.

Materiality of an item is relative matter; what is material to one entity may not be material to another entity.

 

Conservatism/Prudence Principle.

The principle holds that where equally acceptable alternatives for valuation exist, the alternative with the smallest yield to avoid exaggeration of economic values should be selected.  This principle is most useful when matters of judgment or estimates are involved and is regarded as a powerful influence against the danger of overstating earnings of financial position. The concept does not mean deliberate understatement of net assets and profits.

 

REGULATIONS AND INFLUENCES ON FINANCIAL REPORTING.

Kenya companies like other companies operating in the developed world have to comply with a wide range of regulations concerning financial reporting.  The regulations have the following basis; -

1.      Legislation

2.      Accounting Standards

3.      Stock Exchange Rules.

 

THE LEGISLATION.

Chapter 486 of the Laws of Kenya, the Companies Act, imposes a requirement for all companies to prepare regular accounts and provides detailed rules on the minimum information which must be disclosed in those accounts.

Section 147 of the Act states in part that “ Every Company shall cause to be kept in the English language proper books of accounts with respect to:-

a.               All sums of money received and expended by the company  and all the matters in

Respect of which the receipts and expenditure takes place;

b.      all sales and purchases of goods by the company;

c.      the assets and liabilities of the company’

 

Further more, a company must comply with the rules stipulated in the specific Acts under which it is operating.  For example, commercial Banks have to comply further with the requirements of the Banking Act and Insurance companies have to comply with the requirements of the Insurance Act.

The accounting obligation imposed upon companies is contained in section 149 of the Companies Act.  Every Company is required to prepare  and submit the following financial statements to the Registrar of Companies and the general body of  shareholders.

a.      Profit and Loss account – Financial performance

b.      Balance sheet-Financial position.

Subsection 1 section 149 (Cap 486) goes on to state that, every balance sheet of a company must give a true and fair view of the state of affairs of the company as at the end of its financial year and every profit and loss account of a company must give a true and fair view of the profit or loss for the financial year.

The phrase “true and fair’’ is important, because it may be possible to comply with the detailed legal requirements with exactness and yet nevertheless produce accounts which, overall, would not strict be regarded as being ‘’true and fair’’ The companies Act, however, has not defined these terms neither have the International Accounting Standards explained the meaning of the same.

G.A, Lee States, ‘’Today ‘’ the true and fair view’’ has become a term of art.  It is generally understood to mean a presentation of accounts, drawn up according to accepted accounting principles, using accurate figures as far as possible, and reasonable estimates otherwise’ and arranging them so as to show, within limits of accounting practice, as objective a picture as possible free from willful bias, distortion, manipulation or concealment of materials facts’.

This implies therefore that it is necessary for the accountant to have recourse to a body of accounting principles that have developed over many years.

Section 149(2) of the Companies Act requires that the balance sheet and profit and loss account of a company must comply with the Sixth Schedule of the Companies act.

 

ACCOUNTING STANDARDS

 

Introduction

The law by its very nature is not dynamic.  It will usually fall behind new ideas and developments and will not always cover the technical aspects of financial reporting.  In addition to the legal stipulations, accounting practice is heavily influenced by the pronouncements issued by professional accounting bodies in the form of Accounting Standards.  Companies not only need to meet the requirements of the law but must also comply with the requirements contained in these statements of Accounting Standards operating in their countries.  In Kenya, these standards were issued by the institute of Certified Public Accountants of Kenya (ICPAK) which is also a member of the International Accounting Standards Committee.

With effect from 1^st January 1999 Kenya adopted International Accounting Standards issued by International Accounting Standards Committee.

 

Definition

Accounting Standards are methods of or approaches to preparing accounts, which have been chosen and established by the bodies overseeing the accounting profession.  They are essentially working rules established to guide accounting practice.  Accounting Standards usually consist of three parts.

·       A description of the problem to be tackled.

·       A reasonable discussion of ways of solving the problem.

·       The prescribed solution.

The purpose of the standards is to reduce the number of acceptable alternative treatments of accounting issues and facilitate comparison of financial statements.

The need for and objectives of Accounting Standards. Need and Objectives of  A/cting Standards;

Financial statements can hardly be said to be useful if they are produced on numerous acceptable bases.  There is great need for uniformity.  In an attempt to reduce the range of choice of accepted accounting approaches to improve the users confidence in the accounting figures and make accounting reports more understandable it was deemed necessary to introduce accounting standards.

The prime objective of accounting standards is to improve the quality and uniformity of reporting and introduce definitive approach to the concept of what is ‘’true and fair’’

 

Advantages and disadvantages of accounting standards.

a.               They provide the accounting profession with useful working rules.

b.               They force improvement in the quality of the work of accountants.

c.               They strengthen the accounts resistance against pressure from directors to use an a

Accounting policy, which may be inappropriate in the circumstances.

d.      They ensure that users of financial statements get more complete and clearer 

Information on a consistent basis from period to period.

e.      They assist in the comparison users may make between the financial statements of 

One organization and another.

f.       They direct financial statements towards establishing the economic trust of the organization performance.

g.      They provide a focal point for debate and discussion about accounting practice

h.               They are a less rigid alternative to enforcing conformity by means of legislation.

Disadvantages:

a.               Accounting Standards are bureaucratic and lead to rigidity.  The quality of the work of accountant is restricted since firms and industries differ and change also environment within which they operate.

b.               The official acceptance of an accounting standards reduces the account’s power 

To resist the use of accounting Standards applications of inappropriate standards when the directors wish to follow it.

3. Accounting Standards reduce the scope for professional judgment of                             

Accountants.  Accountants are thus reduced to technicians rather than being professional.

4. Most users of financial reports are made to believe that financial statements         produced using accounting standards  are infallible.  This is misleading.

e.               Standards have been derived through social or political pressures, which may reduce the freedom or lead to the manipulation of the profession.

f.                Standards inhibit the development of critical thought (why think when the standards are there?).

g.               The more standards there are the more costly the financial statements are to produce.

 

Application of accounting Standard in Kenya

They are intended for application to all financial statements issued by public companies, parastatals and organizations including: co-operative societies, sole proprietorship, no-trading concerns, estates and trusts, and other business entities reporting to the public.

How far have the accounting standards improved the usefulness of accounting information?

a.               Understandability

Standards make financial statements more understandable by requiring increasing disclosure of accounting policies.

b.      Objectivity

Standards are not objective because there is no universally agreed theory of Accounting and a universally accepted Conceptual Framework of Accounting.

c.      Comparability

Standards have definitely improved comparability as they call for consistency and disclosure of the effect of any deviation from the existing practice or standards.

d.      Completeness

Standards help financial statements be more complete as they call for the production of such additional figures as those in the Cash Flow Statements, Statements of Changes in Equity and notes to the financial statement

e.      Relevant

Standards make information more relevant but some standards are said to make financial statements less relevant.

f.       Reliable

There is no reason to believe that Accounting Standards improve reliability of financial statements.

g.      Consistency.

It is useful to the extent that it assists comparability.  With standards there is now greater consistency in the application of accounting concepts and policies.

h.      Timeliness.

The standards have not improved timeliness of accounting reports and may infant have largely contributed to the late production of reports.

i.       Prudence:

Writers as introducing bias into accounts have criticized standards and therefore prudence should not be regarded as a desired characteristic of financial reports.

J.       Economy of presentation.

Standards may infarct call for extra information and therefore result in extra cost.

On the whole, accounting standards setting is an attempt to improve the reporting system and generally, the standards have improved the quality of financial reports.

 

THE STOCK EXCHANGE RULES

Where companies are listed on the stock exchange, they must comply with additional requirements laid down by the stock exchange.  The rules require the provision of both greater and more frequent information than that required by law.  For example, those companies listed on the Nairobi Stock.

Exchange, publish and interim report which contains certain minimum information. The interim report must either be circulated to shareholders or published in at least  one newspaper.

 

ARGUMENTS FOR AND AGAINST THE REGULATION OF THE ACCOUNTING PROFESSION

The question that has been extensively debated  is whether or not the accounting profession should be regulated. This has been argued on the basis that companies have certain incentives that force them to report to interested parties without necessarily making them to do so through regulation. Thus the need to unregulated the accounting profession. The arguments for and against an unregulated the accounting profession are discussed below.

 

Arguments for unregulated Accounting Profession.

1. Agency theory.

The theory argues that since management is engaged in agency contracts with the owners of the company, they must ensure that information is supplied to the shareholders regularly and management since the shareholders would like  to monitor management and such monitoring costs like audit fees may have a direct bearing on the compensation paid to management, is compelled to report regularly so as to enhance their image and compensation. Thus firms will disclose all information voluntarily.

2.               Competitive Capital market

 

Firms have to raise capital funds from a competitive environment in the capital markets. This will compel them to disclose voluntarily so as to attract such funds from investors. It is generally accepted that firms that report regularly in the capital markets have an enhanced image and could

Easily attract funds from investors. Thus firms have an incentive to give regular financial reports otherwise they cannot secure capital at a lower cost. Thus regulating accounting will be imposing rules in a self-regulating profession.

3.                Private contracting opportunities theory.

It has been argued that users who need information may enter into a contract with private organizations that can supply them with such information. This will ensure users get detailed and specific information suiting their requirements instead of the general-purpose information provided by financial report as regulated by the legislation.  Such all-purpose data may be irrelevant to the users’ need. Under such circumstances there is no need to regulate accounting profession.

 

Arguments against unregulated Accounting Reporting.

Arguments in support of accounting regulation are usually based on the doctrine of ‘market failure’. Market failure refers to a situation where the market is unable to efficiently allocate resources because of imperfection that exist in that market or because the way the market is structured is poor.

Market failure occurs when the market is unable to provide information to those who are in need of it. Because of the existence of market failure in providing accounting information, it has been argued that the accounting profession should be regulated so as to serve its users effectively and efficiently.

 

Specific Reasons why market failure occur include the following:

1. The monopoly in the supply of such information in the accounting entity.

 The reporting entity is the enterprise that is in control of the supply of internal information about the entity; this introduces certain imperfections in the supply of such information. There will be restriction in the supply of absolute information about the accounting entity and the information may not be available to those who need it.

Even if suppliers of such accounting information were to charge prices fears have been expressed that such prices will be prohibitive for most users. Further doubts have been expressed on whether firms can supply7 all the necessary information, both positive and negative, especially where such firms operate in a competitive environment. This will be common in countries like Kenya where the capital markets are not well developed.

There is therefore an urgent need to make financial reporting mandatory through a regulatory framework.

 

2. Failure of Financial Reporting and Auditing.

Financial reporting standards have failed to correct instances of public fraud through fraudulent reporting and this has been so because of laxity in  regulating accounting practices. The existence of a variety of methods of doing  one thing and too much flexibility in accounting practice, have enabled the management of firms to manipulate accounts to suit their needs.

 

Auditing itself has been inadequate and not geared towards detection of fraud because auditors hardly ever carry out 100% examination of records and transactions.

There is therefore a serious need to control accounting practice through stringent standardization guidelines. This calls for a regulated accounting profession.

4.               Public good characteristics of Accounting Information.

Accounting information has the characteristics of a public good. The moment accounts are released to one person; the information contained therein cannot be restricted from getting to other persons. This implies that purchasing accounting information through private contracting will be virtually impossible because its supply cannot be restricted and thus they cannot make money out of it and will be difficult to decide on the price to charge.

 

PROBLEMS CREATED BY THE REGULATIONS OF THE ACCOUNTING PROFESSION.

In practice, regulation of any field leads to a misallocation of resources because production is not geared towards the market forces of demand and supply. Regulating the accounting profession has led to the following problems:

 

Standard Overload.

Overstatement of demand for standards, there led to over-production of standards. Many people who contribute during the standards setting may not be active demanders of information to be supplied by such standards and very often, the standard setting committee takes into account the views of such people leading to the misallocation or resources.

This was the case in the United States of America prompting the Security Exchange Comission to ext small companies from complying with certain standard requirements.

 

2. Politicization of Standard Setting 

Regulating is a political process intended to protect the conflicting interests of various user groups. This leads to dilution of accounting standards, as they are compromised by being based on bargaining instead of technical suitability.

 

3. Social Legitimacy.

The standard setting process requires social legitimacy in order to be effective. The regulating bodies should consist of persons presenting various user groups of financial reports.

 

      4.Economic Consequences.

Regulations, sometimes, overburden companies with unnecessary     regulations which might have negative economic consequences. This is especially so when companies devise ways and means of avoiding certain regulations for one reason or another.

 

For instance, when FASB No 13 on accounting for leases was used in America requiring companies to capitalize certain leases and reflect in the balance sheet as both asset and liabilities, companies tended to restructure their leases so as to improve their debt structure. This means incurring unnecessary legal costs due to regulation.

 

ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS AND INTERNAL STANDARDS ON AUDITING (INTERNATIONAL STANDARDS)

 

Background

Back in the early 80s, ICPAK made a decision to develop its own standards in both accounting and auditing (Kenyan Standards). This decision was primarily driven by the young Institutes desire to be associated with truly national standards which addressed the unique circumstances prevailing in Kenya at the time. Those standards borrowed heavily from existing international Standards on auditing and addressed those components which were considered to be most common in financial reporting in Kenya.

 

Since that time, the accounting profession has undergone tremendous change, as have the economies that the profession serves. New alliances and affiliations have taken root and globalization continues unabated. It is against this background that council has decided to adopt International Standards  and to phase out Kenyan Standard in the next two years.

 

Why adopt International Standards?

Council believes that there are compelling reasons why the change to International Standards is necessary:

a.               International trends.

The last few years have seen dramatic developments and changes on  the International Standards setting scene. Along with this has come a rapid adoption of international Standards in a number of countries which previously had their own national standards-take most of Europe and a number of countries in the pacific rim for example International Standards are now virtually accepted as the common yardstick for international reporting, with the only major pockets of resistance being the US and the UK. By the time we start the new millennium, acceptance and use of use of International Standards will be virtually universal. International flows of investment capital and capital instruments across geographical boundaries will add a new impetus to the current push for adoption of International Standards.

b.      Regional Considerations

Kenya is a member of both IFAC and ECSAFA, organizations which strongly support adoption, rather than adaption, of International Standards. With the current trend in which most countries in the region have decided to adopt International Standards, Kenya will be risking its leadership role if it lags behind on this issue.

c.      Local Pressure

Regulators particularly the Central Bank of Kenya and the capital markets Authority) have continuously turned to International Standards rather than Kenyan Standards as an indicator of what the best practice should be. The capital markets Authority is currently in the process of developing disclosures standards for listed companies as well as those seeking to be listed. In doing so the authority is turning to international, rather Kenyan Standards. The institute runs the distinct risk of being marginalized in this important exercise unless it takes initiative on adoption of international Standards.

In addition, the increasing numbers of entities operating in Kenya that are part of a bigger group which reports under a number of jurisdictions has fuelled the pressure for adoption of International Standards.

d.      Resource Limitations

Over the last few years, some major changes have been made to the International Standards as part of the “comparability” exercise. These changes have affected virtually all the Kenyan Standards in force. Following these changes, the existing Kenyan Standards are hopelessly out of date.

Updating Kenyan Standards to comply with International Standards and to also 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 it 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 interprate International Standards, assess their implication on local practice and where necessary, to issue technical bulletins  and local guidance on those standards.

e.      Past Experience

Every Kenyan Standard issued so far is intended to comply with IAS and says so in a paragraph labeled “Compliance with International Standards”. ICPAK has never found it necessary to challenge any International Standards and no Kenyan Standard has ever been designed to deviate from International Standards. This then begs the question as to whether it is worthwhile expending scarce resources and energy in paraphrasing of existing International Standards which leads to no discernible change in substance.

 

Implication On Local Reporting

Council does not anticipate much of a problem in the larger entities in Kenya adopting International Standards- most of this are already in compliance. However, the adoption of International Standards would have an impact on smaller national businesses, but so would a wholesale revision of Kenya Standards.

The question therefore, is how quickly reporting entities operating in Kenya can conform fully with the requirements of International Standards. Council believes that a reasonable transition period is necessary to give reporting entities a chance to conform in a systematic manner

 

Advantages of adopting International Standards.

By adopting International Standards, ICPAK will reap certain benefits:

Kenya will be recognized as a leading International player in cross-border reporting in the region.

The institute will remain on top of events taking place in the accounting and auditing fields, particularly where International players or regulators are concerned.

The scale and voluntary human resources are available to the institute will be relived of Standard development responsibilities and will therefore be available to devote their energy to helping members interpret International Standards and to communicating their implications to technical bulletins.