SPECIMEN FINANCIAL STATEMENTS

KENYA SME LIMITED

ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31ST DECEMBER 2017

Note 1: This specimen provides an illustrative set of financial statements for a private company, not subject to the
Small Companies Regime, prepared in accordance with the International Financial Reporting Standard
for Small and Medium-sized Entities (IFRS for SMEs) (as amended in 2015) and the reporting
requirements of the Kenyan Companies Act, 2015. The illustration is in respect of a company that was
already complying with the amended version of the IFRS for SMEs in the previous year.

The IFRS for SMEs defines SMEs as entities that:

a) Do not have public accountability, and
b) Publish general purpose financial statements for external users,
and paragraph 1.5 of the standard states that if a publicly accountable entity uses the IFRS for SMEs, its
financial statements shall not be described as conforming to the IFRS for SMEs.

The specimen is intended as guidance for members of ICPAK. The specimen is not an interpretation of
the IFRS for SMEs, and where necessary, reference should be made to the standard. The presentation
format is not the only acceptable form of presentation and other forms of presentation may be acceptable
provided that they comply with the presentation and disclosure requirements of the IFRS for SMEs.

The Institute acknowledges the key contribution by RSM Eastern Africa in preparing this specimen.

Note 2: The specimen does not cover the following Sections of the IFRS for SMEs:
- 9. Consolidated and separate financial statements
- 12. Other financial instruments issues
- 15. Investments in joint ventures
- 19. Business combinations and goodwill
- 24. Government grants
- 26. Share-based payment
- 31. Hyperinflation
- 34. Specialised activities

Note 3: Each item in the specimen financial statements is referenced (on the left) to the applicable presentation
and disclosure requirements of the IFRS for SMEs and the Kenyan Companies Act, 2015. The following
reference format has been used in this specimen:
9.26: refers to paragraph 9.26 of the IFRS for SMEs as amended in 2015
CAs653: refers to the reporting requirements in section 653 of the Kenyan Companies Act, 2015
BP: refers to best reporting practice adopted in Kenya
DV: disclosure voluntary

Note 4: Text within square brackets ([…]) represents guidance that does not form part of the Specimen Financial
Statements.

Note 5: This specimen is applicable only for financial years ending on or after 15th June 2017.
 Kenya SME Limited
Annual report and financial statements
For the year ended 31st December 2017

CONTENTS
PAGE

Company information 1

Report of the directors 2

Statement of directors' responsibilities 3

Report of the independent auditor 4-5

Financial statements:

3.17(b) Profit and loss account 6

3.17(a) Balance sheet 7

3.17(c) Statement of changes in equity 8

3.17(d) Statement of cash flows 9

3.17(e) Notes 10 - 23

Alternative presentation:

Statement of income and retained earnings Appendix I

 Kenya SME Limited
Company information
For the year ended 31st December 2017

CAs654(1) Board of directors ………………………………..

………………………………..
………………………………..
………………………………..
………………………………..

BP Company secretary ……………………………….

……………………………….
……………………………….

Registered office L.R. No. ……………………..

…th Floor, …………. Building
…………………. Street/Road
P.O. Box ……………….
Nairobi,
Kenya.

Independent auditor ………………………………..

Certified Public Accountants
………………………………..
………………………………..
P.O. Box ……………….
………………………………..
Kenya.

BP Principal bankers ………………………………..

………………………………..

BP Legal advisers ………………………………..

………………………………..

1
 Kenya SME Limited
Report of the directors
For the year ended 31st December 2017

CAs653 The directors submit their report together with the audited financial statements for the year ended 31st
December 2017.

Directorate

CAs654(1) The directors who held office during the year and to the date of this report are set out on page 1.

Principal activities

CAs654(1) The principal activities of the company are …………………………………………………………..

Recommended dividend

CAs654(3) The directors recommend the approval of a final dividend of KSh ............ (2016: KSh ............).

[Or]
The directors do not recommend the declaration of a dividend for the year.

Business review

CAs655(3) [This section shall include: (a) a fair review of the company's business; and (b) a description of the
principal risks and uncertainties facing the company. It should be a balanced and comprehensive analysis
of the development and performance of the business of the company during the company's financial year
and the financial position of the company at the end of the year, consistent with the size and complexity of
the business.]

CAs655(6) [The review should include (to the extent necessary for an understanding of the development, performance
or position of the company's business): (a) an analysis using financial key performance indicators; (b) if
appropriate, an analysis using other key performance indicators (including information relating to
environmental matters and employee matters); and (c) references to, and additional explanations of,
amounts included in the company's annual financial statements.]

Statement as to disclosure to the company's auditor

CAs657(2) With respect to each director at the time this report was approved:
(a) there is, so far as the person is aware, no relevant audit information of which the company's auditor is
unaware; and
(b) the person has taken all the steps that the person ought to have taken as a director so as to be aware of any
relevant audit information and to establish that the company's auditor is aware of that information.

CAs725 Terms of appointment of the auditor

[Name of audit firm] continues in office in accordance with the company's Articles of Association and Section
719 of the Companies Act, 2015. The directors monitor the effectiveness, objectivity and independence of the
auditor. The directors also approve the annual audit engagement contract which sets out the terms of the
auditor's appointment and the related fees. The agreed auditor's remuneration of KSh xxx has been charged to
profit or loss in the year. [Regulations in respect of this disclosure are yet to be issued by the Cabinet
Secretary.]

By order of the board

…………………………………..
Director/Company Secretary

Nairobi …………..…………………... 2018

2
 Kenya SME Limited
ICPAK Statement of directors' responsibilities
For the year ended 31st December 2017

CAs635 The Kenyan Companies Act, 2015 requires the directors to prepare financial statements for each financial year
CAs628 that give a true and fair view of the financial position of the company as at the end of the financial year and of
its profit or loss for that year. It also requires the directors to ensure that the company keeps proper accounting
records that: (a) show and explain the transactions of the company; (b) disclose, with reasonable accuracy, the
financial position of the company; and (c) enable the directors to ensure that every financial statement required
to be prepared complies with the requirements of the Companies Act, 2015.

The directors accept responsibility for the preparation and presentation of these financial statements in
accordance with the International Financial Reporting Standard for Small and Medium-sized Entities and in the
manner required by the Kenyan Companies Act, 2015. They also accept responsibility for:
i) designing, implementing and maintaining such internal control as they determine necessary to enable the
presentation of financial statements that are free from material misstatement, whether due to fraud or error;
ii) selecting suitable accounting policies and applying them consistently; and
iii) making accounting estimates and judgements that are reasonable in the circumstances.

Having made an assessment of the company’s ability to continue as a going concern, the directors are not aware
of any material uncertainties related to events or conditions that may cast doubt upon the company’s ability to
continue as a going concern.

The directors acknowledge that the independent audit of the financial statements does not relieve them of their
responsibilities.

Approved by the board of directors on ………………………………….. 2018 and signed on its behalf by:

……………………………………
Director

3
 Kenya SME Limited
ISA 700 Report of the independent auditor to the members of Kenya SME Limited
For the year ended 31st December 2017

Opinion
We have audited the accompanying financial statements of Kenya SME Limited (the company), set out on
pages 6 to 23, which comprise the balance sheet as at 31st December 2017, the profit and loss account and
statements of changes in equity and cash flows for the year then ended, and notes, including a summary of
significant accounting policies.
CAs727 In our opinion the accompanying financial statements give a true and fair view of the financial position of the
company as at 31st December 2017 and of its financial performance and cash flows for the year then ended in
accordance with the International Financial Reporting Standard for Small and Medium-sized Entities and the
requirements of the Kenyan Companies Act, 2015.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities
under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the company in accordance with the International
Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together
with the ethical requirements that are relevant to our audit of the financial statements in Kenya, and we have
fulfilled our ethical responsibilities in accordance with these requirements and the IESBA Code. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other information
ISA 720 The directors are responsible for the other information. Other information comprises the information included
in the Annual Report, but does not include the financial statements and our auditor's report thereon.

Our opinion on the financial statements does not cover the other information and we do not express any form
of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.

Directors' responsibility for the financial statements

The directors are responsible for the preparation and fair presentation of the financial statements that give a
true and fair view in accordance with the International Financial Reporting Standard for Small and Medium-
sized Entities and the requirements of the Kenyan Companies Act, 2015, and for such internal control as the
directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company's ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the company or to cease operations,
or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.

4
 Kenya SME Limited
ISA 700 Report of the independent auditor to the members of Kenya SME Limited
For the year ended 31st December 2017

Auditor's responsibilities for the audit of the financial statements (continued)

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional
scepticism throughout the audit. We also:
· identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations or the override of internal control.
· obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the company's internal control.
· evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
· conclude on the appropriateness of management's use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions
that may cast significant doubt on the company's ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditor's report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of the auditor's report. However,
future events or conditions may cause the company to cease to continue as a going concern.
· evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.

Report on other matters prescribed by the Kenyan Companies Act, 2015

CAs728 In our opinion the information given in the report of the directors on page 2 is consistent with the financial
statements.
CAs730(2) [If, in reporting on the financial statements the auditor forms the opinion:
a) That the company has not kept adequate accounting records; or
b) The company’s financial statements are not in agreement with the company’s accounting records;
the auditor shall state that opinion in this section of the report.]

ICPAK The engagement partner responsible for the audit resulting in this independent auditor's report was [F] CPA
CAs735
[name of partner] , Practising Certificate No. ....

CAs735 ……………………………….
Certified Public Accountants
Nairobi

………………………………….. 2018
[Note: this specimen applies only to companies not required to include key audit matters in the auditor's
report, and only to financial years ending on or after 15th June 2017. It is illustrative of an 'unmodified'
opinion given in accordance with ISA 700.]

5
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

3.17(b)(i) PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER 2017
5.2(a)
2017 2016
3.23(d) Note KSh'000 KSh'000

5.5(a) Revenue 4

5.9 Cost of sales

5.9 Gross profit

5.9 Other income 5

5.9 Selling and distribution expenses

5.9 Administrative expenses

5.9 Other operating expenses

5.5(b) Finance costs 6

5.9 Profit/(loss) before tax 7

5.5(d) Tax (expense)/income 8

3.19 Profit/(loss) for the year

5.11 [Note 1: The format illustrated above aggregates expenses according to their function (cost of sales,
distribution, administrative etc). Alternatively, expenses may be aggregated according to their nature (raw
materials and consumables, employee salaries and other benefits, depreciation and amortisation,
impairment, etc).]

5.4(b) [Note 2: The format illustrated is appropriate only for entities with no 'other comprehensive income'. The
IFRS for SMEs requires only four types of 'other comprehensive income':
- some gains or losses arising on translating the financial statements of foreign operations
- some actuarial gains and losses
- some changes in fair values of hedging instruments
- changes in the revaluation surplus for property, plant and equipment.

If any of the above are applicable, the entity should present either a single 'statement of comprehensive
income' or an 'income statement' and a 'statement of comprehensive income'.]

6
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

4.1 BALANCE SHEET AT 31ST DECEMBER 2017

2017 2016
Note KSh'000 KSh'000
EQUITY
4.11(f) Share capital 10
4.3, CA Share premium 10
4.11(f) Retained earnings
Proposed dividends 9
4.2(r) Total equity
4.4 Non-current liabilities
4.2(m) Borrowings 11
4.2(p) Post-employment benefit obligation 12

Total non-current liabilities

REPRESENTED BY
4.4 Non-current assets
4.2(e) Property, plant and equipment 13
4.2(ea) Investment property at cost less depreciation and impairment 14
4.2(g) Intangible assets 15
4.2(j) Investment in associate 16
4.2(c) Investment in quoted shares 17
4.2(o) Deferred tax asset 18

4.4 Current assets

4.2(d) Inventories 19
4.2(b) Trade and other receivables 20
4.2(n) Current tax recoverable
4.2(a) Cash at bank and in hand

4.4 Current liabilities

4.2(l) Trade and other payables 21
4.2(n) Current tax payable
4.2(p) Provision for warranty obligations 22
4.2(a) Borrowings 11
4.2(p) Current portion of post-employment benefit obligation 12

4.3 Net current assets/(liabilities)

32.9 The financial statements on pages 6 to 23 were approved for issue by the board of directors on
CAs652
…………………... 2018 and were signed on their behalf by:

……………………
Director

7
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

6.3 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2017

Share Share Retained Proposed

Note capital premium earnings dividends* Total
KSh'000 KSh'000 KSh'000 KSh'000 KSh'000

At 1st January 2016

6.3(c)(i) Profit/(loss) for the year
6.3(c)(iii) Dividends:
- Final for 2015
- Interim for 2016 9
32.8 - Proposed final for 2016* 9

At 31st December 2016

At 1st January 2017

6.3(c)(i) Profit/(loss) for the year
6.3(c)(iii) Shares issued for cash 10
6.3(c)(iii) Dividends:
- Final for 2016 9
- Interim for 2017
32.8 - Proposed final for 2017* 9

At 31st December 2017

32.8 * [Presenting proposed dividends as a segregated component of retained earnings (as illustrated above) is
optional.]

3.18 [Note: if the only changes to equity during the periods presented arise from profit or loss, payment of
dividends, corrections of prior period errors, and changes in accounting policies, an entity may present a
single statement of comprehensive income and retained earnings instead of separate statements of
comprehensive income and changes in equity (see Appendix I).]

8
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

7.3 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31ST DECEMBER 2017
3.17(d)
2017 2016
Note KSh'000 KSh'000
7.1 Cash flows from operating activities
7.7(a) Profit for the year
7.8(b) Adjustments for:
Tax expense
Depreciation of property, plant and equipment 13
Impairment of property, plant and equipment 13
Depreciation of investment property 14
Amortisation of intangible assets 15
Fair value (gain)/loss on quoted shares 17
7.13 Unrealised exchange (gain)/loss
Provision for post-employment benefit obligations 12
Gain on sale of equipment
Dividend income 5
Interest expense 6
7.8(a) Changes in operating assets and liabilities:
Decrease/(increase) in trade and other receivables
Decrease/(increase) in inventories
Increase/(decrease) in trade payables

Cash generated from operations

7.15 Interest paid
7.17 Income tax paid

7.3 Net cash from operating activities

7.1 Cash flows from investing activities

7.5(c) Purchase of quoted shares 17
7.15 Dividends received on quoted shares
7.15 Dividend received from associate
7.5(b) Proceeds from sale of equipment
7.5(a) Purchases of equipment 13

7.3 Net cash used in investing activities

7.1 Cash flows from financing activities

7.6(e) Payment of finance lease liabilities 11
7.6(d) Repayment of borrowings
7.16 Dividends paid

7.3 Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at start of year

Cash and cash equivalents at end of year 23

9
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

3.17(e) NOTES

1. General information
3.24(a) Kenya SME Limited (the company) is domiciled in Kenya where it is incorporated under the Kenyan
3.24(b)
Companies Act, 2015 as a private company limited by shares. The address of its registered office and
principal place of business is .............. . The principal activities of the company are ............... .
8.5 2. Basis of preparation and summary of significant accounting policies

3.3 These financial statements have been prepared on a going concern basis and in compliance with the
3.23(d) International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) issued by
3.23(e)
the International Accounting Standards Board. The 2015 Amendments to the Standard were applied (early)
8.5(a)
in 2016. The financial statements are presented in Kenya Shillings (KSh), rounded to the nearest thousand.
The measurement basis used is the historical cost basis except where otherwise stated in the accounting
policies below.
23.30(a) Revenue recognition
23.4 Revenue from sales of goods is recognised when the goods are delivered and title has passed. Revenue from
23.10 sale of services is recognised by reference to the stage of completion of the transaction at the end of the
23.14
reporting period. Revenue is measured at the fair value of the consideration received or receivable, net of
discounts and sales-related taxes collected on behalf of the government of Kenya.
20.25 Rental income from investment properties is recognised on a straight-line basis over the respective lease
term and is included in 'other income'.
23.29(c) Dividend income from investments, including associates, is recognised in the period in which the right to
receive payment has been established, and is included in 'other income'.

Borrowing costs
25.2 All borrowing costs are recognised in profit or loss in the period in which they are incurred.

Income tax
Glossary Tax expense represents the aggregate amount included in profit or loss for the period in respect of current
tax and deferred tax.
Glossary Current tax is the amount of income tax payable or refundable in respect of the taxable profit or loss for the
current and prior periods, determined in accordance with the Kenyan Income Tax Act.
29.8 Deferred tax is determined on differences arising between the carrying amounts of assets and liabilities in
29.27 the financial statements and their corresponding tax bases (known as temporary differences), using tax rates
and laws enacted or substantively enacted at the balance sheet date and expected to apply when the asset is
recovered or the liability is settled.
29.29 The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from
29.30 the manner in which the company expects, at the end of the reporting period, to recover or settle the carrying
amount of its assets or liabilities. However, for investment property that is measured using the fair value
model, there is a rebuttable presumption that the carrying amount of the investment property will be
recovered through sale.
29.16 Deferred tax liabilities are recognised for all taxable temporary differences except those arising on the initial
recognition of an asset or liability, other than through a business combination, that at the time of the
transaction affects neither the accounting nor taxable profit or loss.
29.16 Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be
29.23 available against which temporary differences can be utilised. Recognised and unrecognised deferred tax
assets are reassessed at the end of each reporting period and, if appropriate, the recognised amount is
adjusted to reflect the extent that it has become probable that future taxable profits will allow the deferred
tax asset to be recovered.

10
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

2. Basis of preparation and summary of significant accounting policies (continued)

Translation of foreign currencies

All transactions in foreign currencies are initially recorded in Kenya Shillings, using the spot rate at the date
of the transaction. Foreign currency monetary items at the reporting date are translated using the closing rate.
All exchange differences arising on settlement or translation are recognised in profit or loss.

Share capital, share premium, and dividends

22.10 Ordinary shares are recognised at par value and classified as 'share capital' in equity. Any amounts received
32.8 from the issue of shares in excess of the par value is classified as 'share premium' in equity. Dividends are
recognised as a liability in the year in which they are declared. Proposed dividends are accounted for as a
separate component of equity until they have been declared at an annual general meeting*.

* [This is optional.]

14.12(a) Investments in associates

14.2 14.5 An associate is an entity that is not a subsidiary, over which the company has significant influence.
Investments in associates are accounted for at cost less any accumulated impairment losses.

Financial assets
11.13 Trade and other receivables are initially recognised at the transaction price. Most sales are made on the basis
11.14 of normal credit terms, and the receivables do not bear interest. Where credit is extended beyond normal
11.21
credit terms, receivables are measured at amortised cost using the effective interest method. Debt
instruments such as Treasury bills or corporate bonds are initially recognised at the transaction price
including transaction costs, and subsequently measured at amortised cost using the effective interest method.
11.14(c) Investments in quoted shares are initially recognised at the transaction price and subsequently measured at
fair value with changes in fair value being recognised in profit or loss. Fair value is determined using the
quoted bid price at the reporting date.

At the end of each reporting period, the carrying amounts of trade and other receivables are reviewed to
determine whether there is any objective evidence that the amounts are not recoverable. If so, an impairment
loss is recognised immediately in profit or loss.

Property, plant and equipment

17.31(a) Items of property, plant and equipment are measured at cost less accumulated depreciation and any
accumulated impairment losses.
17.31(b) Freehold land is not depreciated. For all other assets, depreciation is charged so as to allocate the cost of
assets less their residual values over their estimated useful lives, using the straight-line method. The
following annual rates are used for the depreciation of property, plant and equipment:
17.31(c) Buildings 2 per cent
Fixtures and equipment 10-30 per cent
17.23 If there is an indication that there has been a significant change in the useful life or residual value of an
asset, the depreciation of that asset is revised prospectively to reflect the new expectations.
17.30 On disposal, the difference between the net disposal proceeds and the carrying amount of the item sold is
17.28 recognised in profit or loss.

Investment property
16.2 16.7 Property held to earn rentals or for capital appreciation or both is classified as investment property.
Investment property whose fair value cannot be measured reliably without undue cost or effort is measured
at cost less accumulated depreciation and any accumulated impairment losses.

11
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

2. Basis of preparation and summary of significant accounting policies (continued)

Investment property (continued)

16.1 Depreciation is charged so as to allocate the cost of the property less its residual value over its estimated
useful life of [xx] years, using the straight-line method.

* [This specimen illustrates investment property being accounted for using the cost model. Investment
property whose fair value can be measured reliably without undue cost or effort must be measured at
fair value at each reporting date.]

Intangible assets

18.27 (a) Intangible assets comprise purchased computer software and are stated at cost less accumulated amortisation
& (b) and any accumulated impairment losses. They are amortised over their estimated life of five years using the
straight-line method. If there is an indication that there has been a significant change in amortisation rate,
useful life or residual value of an intangible asset, the amortisation is revised prospectively to reflect the new
expectations.

Leases

20.4 Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and
rewards of ownership of the leased asset to the company. All other leases are classified as operating leases.

20.9 20.11 Rights to assets held under finance leases are recognised as assets of the company at the fair value of the
20.12 leased property (or, if lower, the present value of minimum lease payments) at the inception of the lease. The
corresponding liability to the lessor is included in the statement of financial position as a finance lease
obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation
so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are
deducted in measuring profit or loss. Assets held under finance leases are included in property, plant and
equipment, and depreciated and assessed for impairment losses in the same way as owned assets.

20.15 Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of
the relevant lease.

13.22(a) Inventories

13.4 13.5 Inventories are stated at the lower of cost and selling price less costs to complete and sell. Cost is calculated
using the first-in, first-out (FIFO) method.

Impairment of non-financial assets

27.7 At each reporting date, property, plant and equipment, investment property, intangible assets, and
27.6 investments in associates are reviewed to determine whether there is any indication that those assets have
suffered an impairment loss. If there is an indication of possible impairment, the recoverable amount of any
affected asset (or group of related assets) is estimated and compared with its carrying amount. If the
estimated recoverable amount is lower, the carrying amount is reduced to its estimated recoverable amount,
and an impairment loss is recognised immediately in profit or loss.

27.2 Similarly, at each reporting date, inventories are assessed for impairment by comparing the carrying amount
of each item of inventory (or group of similar items) with its selling price less costs to complete and sell. If
an item of inventory (or group of similar items) is impaired, its carrying amount is reduced to selling price
less costs to complete and sell, and an impairment loss is recognised immediately in profit or loss.

27.29 If an impairment loss subsequently reverses, the carrying amount of the asset (or group of related assets) is
increased to the revised estimate of its recoverable amount (selling price less costs to complete and sell, in
the case of inventories), but not in excess of the amount that would have been determined had no
impairment loss been recognised for the asset (group of related assets) in prior years. A reversal of an
impairment loss is recognised immediately in profit or loss.

12
12
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

2. Basis of preparation and summary of significant accounting policies (continued)

Financial liabilities
11.13 11.14 Financial liabilities are initially recognised at the transaction price (less transaction costs). Trade payables are
obligations on the basis of normal credit terms and do not bear interest. Interest bearing liabilities are subsequently
measured at amortised cost using the effective interest method.

Employee benefits - post-employment benefit obligations

28.19 The liability for post-employment benefit obligations relates to terminal gratuities. All full-time staff, excluding
28.41(a) directors, are covered by the programme. Employees who resign or retire after completing at least ..... years of
service are entitled to ..... days pay for each completed year of service. The company does not fund this obligation
in advance.

28.41(c) The company's obligations, both vested and unvested, to pay terminal gratuities to employees are recognised
28.24 based on employees' service up to the reporting date and their salaries at that date. The net change in the
obligation is recognised in profit or loss.

The company and the employees also contribute to the National Social Security Fund (NSSF), a national defined
contribution scheme. Contributions are determined by local statute and the company's contributions are charged to
profit or loss in the year to which they relate.

Provision for warranty obligations

All goods sold by the company are warranted to be free of manufacturing defects for a period of one year. Goods
are repaired or replaced at the company's option. When revenue is recognised, a provision is made for the
estimated cost of the warranty obligation.

3. Judgements and key sources of estimation uncertainty

8.6 No significant judgements have had to be made by the directors in preparing these financial statements.*

8.7 The directors have, however, had to make key assumptions regarding the recoverable amount of impaired trade
receivables. The recoverable amount of such receivables at the end of the reporting period has been estimated at
KSh .....*

8.7 Estimates made in determining the warranty provision are based on past experience and may change based on the
actual cost of fulfilling the warranties.*

*[This is illustrative and must be tailored to reflect the significant judgements made by the directors and the
key sources of estimation uncertainty.]

23.30(b) 4. Revenue 2017 2016

KSh'000 KSh'000

Sale of goods
Sale of services

5. Other income

Rental income from investment property

11.48(a)(i) Dividends received from investments in quoted shares
14.13 Dividend received from associate
11.48(a)(i) Fair value gain - quoted shares
Gain on disposal of property, plant and equipment

13
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
2017 2016
11.48(b) 6. Finance costs KSh'000 KSh'000
11.48(a)(iv) Interest on bank loan and overdraft
Interest on finance leases
Exchange loss/(gain) on foreign currency borrowings*

25.1(c) * [Such exchange losses/gains should be classified as finance costs only if they relate to borrowing
and can be regarded as an adjustment to interest costs.]

7. Profit before tax

(a) The following items have been recognised as expenses (income) in

determining profit before tax:
13.22(c) Cost of inventories recognised as expense
Employee benefits expense (see 7(b) below)
Depreciation of property, plant and equipment
27.33(b) Impairment loss on property, plant and equipment (included in
cost of sales)
Depreciation of investment property
11.48(c) Impairment loss on trade receivables
20.16(b) Operating lease rentals
30.25(a) Foreign exchange loss on trade payables (included in cost of sales)

(b) Employee benefits expense [include executive directors]

Wages, salaries and allowances

Retirement benefit costs:
28.41(g)(i) - Net increase in provision for post-employment benefit obligation
28.40 - Defined contribution scheme
28.40 - National Social Security Fund

CAs649 The average number of persons employed during the year, by category, were:

Number Number

Production
Sales and distribution
Management and adminstration

Total

CAs649(2) [The categories are to be determined by management, having regard to the manner in which the
company's activities are organised.]
2017 2016
8. Tax expense KSh'000 KSh'000
29.39(a) Current tax
29.39(c) Deferred tax (Note 18)
29.39(b) Under-provision in prior year
29.39(g) Write down/(reversal of a write down) of a deferred tax asset

Tax expense/(credit)

14
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
2017 2016
8. Tax expense KSh'000 KSh'000
29.40(c) The tax expense for the year differs from the theoretical amount that
would result from applying the statutory tax rate of 30% (2016: 30%) to
profit before tax as follows:.

Profit/(loss) before tax

Tax calculated at the statutory rate of 30%

Tax effect of:
Income not subject to tax
Expenses not deductible for tax purposes
Under-provison in prior year
Change in deferred tax asset not recognised
Tax expense/(credit)

9. Dividends
DV At the forthcoming annual general meeting, a final dividend in respect of the year ended 31st December
2017 of KSh ………… per share amounting to KSh ………… (2016: KSh …….….. per share amounting
to KSh …………… ) is to be proposed. During the year, an interim dividend of KSh ………... per share
amounting to KSh ………….. (2016: KSh ………. per share amounting to KSh ……………) was paid.
The total amount of dividend paid and proposed per share for the year is KSh .......... (2016: KSh ..........)
amounting to KSh .......... (2016: KSh ..........).
4.12(a) 10. Share capital No. of ordinary Issued and fully Share
shares issued paid up capital premium
KSh'000 KSh'000

At 1st January 2016 and 31st December 2016

4.12(a)(iv) Issued for cash in 2017
At 31st December 2017
4.12(a)(i) The total number of authorised ordinary shares is ……………… (2016: …...………..) with a par value of
4.2(a)(iii) KSh …………… each.
4.12(a)(iii) On ………………….., the issued and paid up capital was increased from KSh ……….. to KSh ………..
by an issue for cash of ………… ordinary shares at a price of KSh ……….. per share.
4.12(b) The share premium account, which represents the excess of the price paid for shares over the par value, is
not distributable.

11. Borrowings 2017 2016

KSh'000 KSh'000
Non-current
11.42 Bank loan - fully repayable in 201_, prepayable without penalty
Obligations under finance leases

Current
Bank overdraft
Bank loan
Obligations under finance leases

Total borrowings

15
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

11. Borrowings (continued)

11.46 The bank overdraft and loan are secured by a floating lien over land and buildings owned by the company
with a carrying amount of KSh …………. at 31st December 2017 (2016: KSh …………..).
11.42 The bank loan is denominated in US dollars.
11.42 Interest is payable on the bank overdraft at 200 points above the London Interbank Borrowing Rate
(LIBOR). Interest is payable on the seven-year bank loan at a fixed rate of 5 per cent of the principal
amount.
11.47 The company defaulted in making payments of principal on the bank loan during the year. The amounts
have been paid, together with penalty interest, subsequent to the year-end.

Obligations under finance leases

20.13(c) The company holds one piece of specialised machinery with an estimated useful life of eight years under a
20.13(b) six-year finance lease. The future minimum lease payments are as follows:

2017 2016
KSh'000 KSh'000

Not later than one year

Later than one year but not later than five years
Later than five years

Less: future finance costs inherent in the lease

Present value of minimum lease payments, as above

7.6(e) In the statement of cash flows, payments of finance lease liabilities

represents:

Payments of principal
Payments of interest

12. Post-employment benefit obligation

28.41(e) The company's obligation to pay terminal gratuities, based on employees' years of service and salaries at
the balance sheet date is as follows:
2017 2016*
KSh'000 KSh'000

At start of year
28.41(g) Additional provision made during the year, charged to profit or loss
28.41(e) Benefits paid during the year

At end of year

The obligation is classified as:

Current liability
Non-current liability

Total

28.41 *[Disclosure of comparative figures is voluntary.]

16
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
Land* and Fixtures and
17.31 13. Property, plant and equipment buildings equipment Total
4.11(a) KSh'000 KSh'000 KSh'000
Cost
17.31(d) At start of year
17.31(e)(i) Additions
17.31(e)(ii) Disposals

17.31(d) At end of year

Accumulated depreciation and impairment

17.31(d) At start of year
17.31(e)(iv) Annual depreciation
17.31(e)(v) Impairment
17.31(e)(ii) Less accumulated depreciation on assets disposed
of

17.31(d) At end of year

Carrying amount
At end of year

20.5 *[Leasehold land that meets the criteria for classification as a finance lease, may be included in
property, plant and equipment.]

17.24 During 2017, the company noticed a significant decline in the efficiency of a major piece of equipment
and so carried out a review of its recoverable amount. The review led to the recognition of an impairment
loss of KSh ………….

20.13(a) The carrying amount of the company's fixtures and equipment includes an amount of KSh ………….
(2016: KSh ………….) in respect of assets held under finance leases.

In the statement of cash flows, purchases of property, plant and equipment represent:

2017 2016
KSh'000 KSh'000

Additions, as above
7.19(a) Less: amounts financed through finance leases

4.14 17.26 On 10th December 2017, the directors resolved to dispose of a machine. The machine's carrying amount
of KSh ……….. is included in fixtures and equipment at 31st December 2017. Because the proceeds on
disposal are expected to exceed the net carrying amount of the asset, no impairment loss has been
recognised.
17.32(b) Contractual commitments for the acquisition of property, plant and equipment amounted to KSh ……... at
31st December 2017 (2016: KSh ……...).

17
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
2017 2016
14. Investment property carried at cost less accumulated depreciation KSh'000 KSh'000

Cost
At start of year
Additions
Disposals

At end of year

Accumulated amortisation and impairment

At start of year
Annual amortisation (included in establishment expenses*)

At end of year

Carrying amount
At end of year

18.27 15. Intangible assets - software

Cost
18.27(c) At start of year
18.27(e)(i) Additions
18.27(e)(ii) Disposals

18.27(c) At end of year

Accumulated amortisation and impairment

18.27(c) At start of year
18.27(d) Annual amortisation (included in establishment expenses*)

18.27(c) At end of year

Carrying amount
At end of year

18.28 The intangible asset comprises two items of application software: general ledger, with a carrying amount
of KSh …….... and remaining amortisation period of 2 years; and payroll with a carrying amount of KSh
…....... and remaining amortisation period of 4 years.

* [If the entity classifies its expenses by nature in its income statement, this would say 'included in
depreciation and amortisation expense'.]

16. Investment in associate

DV The company owns 35% of an associate, whose shares are not publicly traded.

2017 2016
DV 17. Investment in quoted shares KSh'000 KSh'000

At start of year
Purchase of shares
Fair value gain/(loss)

At end of year

18
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

18. Deferred tax

29.27 Deferred tax is calculated using the enacted rate of 30% (2016: 30%).

29.40(c) The following are the deferred tax assets (liabilities) recognised by the company:

Credited
At start of /(charged) to
Year ended 31st December 2017 year profit or loss At end of year
KSh'000 KSh'000 KSh'000
Deferred tax asset
Post-employment benefit obligation
Unrealised exchange loss
Tax losses carried forward

Deferred tax liability

Property, plant and equipment

Net deferred tax asset

29.40(f) Deferred tax asset not recognised

Net deferred tax asset recognised

Year ended 31st December 2016

Deferred tax asset

Post-employment benefit obligation
Unrealised exchange loss
Tax losses carried forward

Deferred tax liability

Property, plant and equipment

Net deferred tax asset

Deferred tax asset not recognised

Net deferred tax asset recognised

29.37 The deferred tax assets and liabilities relate to income tax in the same jurisdiction, and the law allows net
settlement. Therefore, they have been offset in the balance sheet.

19
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

18. Deferred tax (continued)

Under the Kenyan Income Tax Act, tax losses are allowable as a deduction only in the nine years
succeeding the year in which they occurred. The tax losses of KSh _____ carried forward will expire as
follows:

Arising in: Tax losses Expiring:

KSh'000

2016 31st December 2025

2017 31st December 2026

Tax losses carried forward

29.40(g) If the whole of the retained earnings as at the reporting date were to be distributed, a further KSh …..
29.33 (2016: KSh …..) of tax would be payable. This liability has not been recognised.

4.11(c) 19. Inventories 2017 2016

13.22(b) KSh'000 KSh'000

4.11(c)(iii) Raw materials

4.11(c)(ii) Work in progress
4.11(c)(i) Finished goods

4.11(b) 20. Trade and other receivables

Trade receivables, net of provision for impairment

Amounts due from related parties (Note 25)
Value Added Tax recoverable
Prepayments

4.11(d) 21. Trade and other payables

Trade payables
Amounts due to related parties (Note 25)
Accrued expenses

11.42 Trade payables at 31st December 2017 include KSh ………… denominated in foreign currencies (2016:
nil).

20
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
2017 2016*
21.14 22. Provision for warranty obligations KSh'000 KSh'000

Changes in the provision for warranty obligations during 2017 were:

21.14(a)(i) At start of year

21.14(a)(ii) Additional accrual during the year
21.14(a)(iii) Cost of warranty repairs and replacement during the year

21.14(a)(i) At end of year

The obligation is classified as a current liability because the warranty is limited to twelve months.

* [Voluntary disclosure of comparative figures.]

7.2 23. Cash and cash equivalents 2017 2016

7.20 KSh'000 KSh'000

Cash at bank and in hand

Less: bank overdraft

24. Commitments under operating leases

20.16 (c) The company rents several sales offices under operating leases. The leases are for an average period of
three years, with fixed rentals over the same period.

20.16 (a) At year-end, the company has outstanding commitments for minimum lease payments under non-
cancellable operating leases that fall due as follows:

2017 2016
KSh'000 KSh'000

Within one year

Later than one year but within five years
Later than five years

21
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)

25. Related party transactions

33.5 The company's parent, which is also its ultimate controlling party, is ….. Limited. ….. Limited does not
33.9 produce financial statements available for public use. The company sells goods and services to, and buys
goods and services from, its associate and other companies that are related to it through common
shareholding or common directorships, as follows:

i) Purchase of goods and services 2017 2016

KSh'000 KSh'000
33.10(a) - Parent
33.10(b) - Associate
33.10(d) - Other related parties

ii) Sale of goods and services

33.10(a) - Parent
33.10(b) - Associate
33.10(d) - Other related parties

iii) Outstanding balances arising from sale and purchase of

goods/services

Amounts due from related parties (Note 20)

33.10(a) - Parent
33.10(b) - Associate
33.10(d) - Other related parties
Amounts due to related parties (Note 21)
33.10(a) - Parent
33.10(b) - Associate
33.10(d) - Other related parties

33.9(c) There are no impairment provisions held against any related party balances.

33.9(b)(ii) The payments under the finance lease (see Note 11) are personally guaranteed by a principal shareholder of
the company. No charge has been requested for this guarantee.

2017 2016
KSh'000 KSh'000

33.7 iv) Key management personnel (including directors) compensation

CA - 650 v) Directors' benefits and other remuneration

- salaries
- fees
CA - 650(2) - gains made by directors on the exercise of share options
CA - 650(2) - benefits received or receivable under long-term incentive schemes
CA - 650(2) - payments for loss of office
CA - 650(2) - benefits receivable, and contributions for the purpose of providing
benefits, in respect of past services of a person as a director or in
any other capacity while a director
CA - 650(2) - consideration paid to, or receivable by, third parties for making
available the services of a person as director or in any other
capacity while a director

22
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

NOTES (CONTINUED)
2017 2016
25. Related party transactions (continued) KSh'000 KSh'000

CA - 651(1) vi) Directors' advances and credits

At 1st January
Advances and credits granted during the year
Interest charged/(paid)
Amounts re-paid

At 31st December

The advances to directors are unsecured and bear interest at 10% per annum. They are all repayable
within 2 years of the reporting date.

CA - 651(1) vii) Guarantees entered into by the company on behalf of the directors

CA - 651(4) [Describe the nature and terms of any such guarantees, including the maximum liability that
may be incurred and any amount paid or liability incurred by the company for the purpose of
fulfilling the guarantee.]

21.15 26. Contingent liabilities

During 2017, a customer initiated proceedings against Kenya SME Limited for a fire allegedly caused by
a faulty product supplied by the company. The customer asserts that its total losses are KSh ………….
and has initiated litigation claiming this amount.

The company's legal counsel do not consider that the claim has merit, and the company intends to contest
it. No provision has been recognised in these financial statements as the directors do not consider it
probable that a loss will arise.

32.10 27. Events after the end of the reporting period

On ………………. 2018, there was a flood in one of the company's warehouses. The cost of
refurbishment is expected to be KSh ………….. The reimbursements from insurance are estimated to be
KSh …………..

23
3.23(a) Kenya SME Limited
3.23(b) Financial statements
3.23(c) For the year ended 31st December 2017

3.18 STATEMENT OF INCOME AND RETAINED EARNINGS*

5.2(a)
2017 2016
3.23(d) Note KSh'000 KSh'000

5.5(a) Revenue 4

5.9 Cost of sales

5.9 Gross profit

5.9 Other income 5

5.9 Selling and distribution expenses

5.9 Administrative expenses

5.9 Other operating expenses

5.5(b) Finance costs 6

5.9 Profit/(loss) before tax 7

5.5(d) Tax (expense)/income 8

3.19 Profit/(loss) for the year

6.5(a) Retained earnings at start of year

6.5(b) Dividends paid

6.5(e) Retained earnings at end of year

[Note: in this illustration there are no changes in share capital.]

* [Paragraph 3.18 allows presentation of a single 'statement of income and retained earnings' in place of
the profit and loss account and 'statement of changes in equity' if the only changes in equity during the
periods for which the financial statements are presented arise from profit or loss, payment of dividends,
corrections of prior period errors, and changes in accounting policy.]

Appendix I