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CPA PART I SECTION 1 Financial Accounting Commercial Law Entrepreneurship and Communication SECTION 2 Economics Management. DONT GO ANYWHERE ELSE. KASNEB CPA COURSE is divided into 18 units and what worries me is that average price of kes per subject. Download free KASNEB notes CPA, ATD, CS, CCP, CIFA, CCP, DCM, CICT, DICT, CPSP-K notes, revision kits and past papers in Kenya. softcopies and.


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Output increases from to i. Increasing returns 2. The word scarcity as used in economics means that; All resources are scarce in the sense that there are not enough to fill everyone's wants to the point of satiety. The tax so paid by the employer on behalf of the employee becomes beneit chargeable to tax on the employer. Protection Policy Where a government has a policy of protecting some industries or commodities produced in a country, taxes may be imposed to implement such a policy.

The details of this are in chapter 7. Customs and excise duty — This is tax imposed on import or export of commodities. The details of this tax are in chapter 7. Stamp duty — This is tax that is aimed at legitimizing transactions. It is imposed on S T U D Y increase of share capital, transfer of shares, mortgages, charges, the transfer of property among others. The details of this tax are in chapter 8.

Rent is paid to the Central Government on some land leases while rates are paid to the Local Authority based on the value of property. This is discussed further in Chapter 8.

Notes pdf cpa

Such ines and penalties are also the income of the government. The income that arises from such property is also another source of public revenue. The income will arise from payment of rents, royalties, or sale of produce. The taxes are levied for various purposes as follows: Raising Revenue The main purpose of imposing taxes is to raise government income or revenue.

Taxes are the major sources of government revenue. The government needs such revenue to maintain the peace and security in a country, to increase social welfare, to complete development projects like roads, schools, hospitals, power stations, etc.

Economic Stability Taxes are also imposed to maintain economic stability in a country. In theory, during inlation, the government imposes more taxes in order to discourage the unnecessary expenditure of the individuals.

On the other hand, during delation, the taxes are reduced in order to encourage individuals to spend more money on goods and services. The increase and decrease in taxes helps to check the big luctuations in the prices of goods and services and thus maintain the economic stability.

Protection Policy Where a government has a policy of protecting some industries or commodities produced in a country, taxes may be imposed to implement such a policy. Heavy taxes are therefore imposed on commodities imported from other countries which compete with local commodities thus making them expensive.

The consumers are therefore encouraged to buy the locally produced and low priced goods and services. Social Welfare Some commodities such as wines, spirits, beer, cigarettes, etc. S T U D Y To discourage wide consumption of these harmful commodities, taxes are imposed to make the commodities more expensive and therefore out of reach of as many people as possible.

Fair Distribution of Income In any country, some people will be rich and others will be poor due to limited opportunities and numerous hindrances to becoming wealthy. Taxes can be imposed which aim to achieve equality in the distribution of national income. The rich are taxed at a higher rate and the amounts obtained are spent on increasing the welfare of the poor.

That way, the taxes help to achieve a fair distribution of income in a country. Allocation of Resources Taxes can be used to achieve reasonable allocation of resources in a country for optimum utilization of those resources. The amounts collected from taxes are used to subsidise or inance more productive projects ignored by private investors. The government may also remove taxes on some industries or impose low rates of taxes to encourage allocation of resources in that direction.

Increase In Employment Funds collected from taxes can be used on public works programmes like roads, drainage, and other public buildings. If manual labour is used to complete these programmes, more employment opportunities are created 1. A complex and dificult to understand tax system may produce a low yield as it may discourage the tax payer's willingness to declare income.

It may also create administrative dificulties leading to ineficiency. However, this may not be equitable as some people will not pay tax. Certainty The tax should be formulated so that tax payers are certain of how much they have to pay and when. The tax should not be arbitrary. The government should have reasonable certainty about the attainment of the objective s of that tax, the yield and the extent to which it can be evaded.

There should be readily available information if tax payers need it. Certainty is essential in tax planning. This involves appraising different business or investment opportunities on the basis of the possible tax implications. It is also important in designing remuneration packages.

Employers seek to offer the most tax eficient remuneration packages which would not be possible if uncertainty exists. Convenience The method and frequency of payment should be convenient to the tax payer e. This may discourage tax evasion. For example, it may be dificult for many tax payers to make a lump- sum payment of tax at the year-end. For such taxes, the evasion ratio is quite high. The system should produce the highest possible yield at the lowest possible cost both to the tax authorities and the tax payer.

The tax system should ensure that the greatest possible proportion of taxes collected accrue to the government as revenue. Taxable Capacity This refers to the maximum tax which may be collected from a tax payer without producing undesirable effects on him. A good tax system ensures that people pay taxes to the extent they can afford it. There are two aspects of taxable capacity. S T U D Y If an individual, having regard to his circumstances and the prevailing economic conditions pays more tax than he should, his taxable capacity would have been exceeded in the absolute sense.

Relative taxable capacity is measured by comparing the absolute taxable capacities of different individuals or communities. Neutrality Neutrality is the measure of the extent to which a tax avoids distorting the workings of the market mechanism. It should produce the minimum substitution effects.

The allocation of goods and services in a free market economy is achieved through the price mechanism. A neutral tax system should not affect the tax payer's choice of goods or services to be consumed.

Productivity A tax should be productive in the sense that it should bring in large revenue which should be adequate for the government.

This does not mean overtaxing by the government. A single tax which brings in large revenues is better than many taxes that bring in little revenue.

Elasticity or Buoyancy By elasticity we mean that the government should be capable of varying increasing or reducing rates of taxation in accordance to the circumstances in the economy, e. Excise duty, for instance, is imposed on a number of commodities locally manufactured and their rates can be increased in order to raise more revenue.

However, care must be taken not to charge increased rate of excise duty from year to year because they might exert inlational pressures on the economy. Flexibility It means that there should be no rigidity in taxation i. Such that certain old taxes are discouraged while new ones are introduced.

The entire tax structure should be capable of change. Diversity It means that there should be variety or diversity in taxation. That the tax base should be wide S T U D Y enough so as to raise adequate revenue and also the tax burden is evenly distributed among the tax payers. A single tax or a few taxes may not meet revenue requirements of the state. There should be both direct and indirect taxes.

Equity A good tax system should be based on the ability to pay. Equity is about how the burden of taxation is distributed. The tax system should be arranged so as to result in the minimum possible sacriice. Through progressive taxation, those with high incomes pay a large amount of tax as well as a regular proportion of their income as tax. Equity means people in similar circumstances should be given similar treatment horizontal equity and dissimilar treatment for people in dissimilar circumstances vertical equity.

There are three alternative principles that may be applied in the equitable distribution of the tax burden: The beneit principle b. The ability to pay principle c. The state is regarded as a market and taxes are treated as a payment for the goods and services provided by the state. According to the principle, the provision of government goods and services, will, like the provision of private goods and services be dictated by market demand.

This provision is inadmissible as it goes against the aims of taxation, which are also the duties of the government in a market economy, namely the redistribution of income and the clearing of market imperfections. In addition, the principle may have application in limited areas where a close relationship between government expenditure and beneit to the tax payer can be identiied.

For example road licenses charges are paid by the owners of vehicles who are the road users. However, even in such instances, the road users may not obtain beneit from such payment if the revenue so raised is not applied for the beneit of road users. The Ability to Pay Principle This is concerned with the equitable distribution of taxes according to the stated taxable capacity T E X T of an individual or to some criterion of ability to pay.

This is in keeping with one of the principal aims of taxation, namely the distribution and stabilization objectives. S T U D Y The dificulty in the application of this theory is in determining the criterion of the ability to pay. Three propositions have been advanced; income, wealth and expenditure. Should individuals be taxed according to their income, wealth or expenditure? A wealth-based tax may be useful in the redistribution of income and wealth but may not provide suficient revenue by itself.

An expenditure tax ensures that both income and wealth are taxed, when they are spent. Most tax regimes would, therefore, be partly income-based and partly expenditure based. The Cost of Service Principle This is the cost to the authority of the services rendered to individual tax payers. Tax is a payment for which there is no "quid pro quo" between the tax authority and the tax payer; the tax payer does not necessarily have to receive goods and services equivalent to the tax paid. For this reason, the principle cannot be applied in relation to services rendered out of the proceeds of taxes e.

Rather, it may be applied for such services as postal, electricity, or water supply where the price of these services are ixed according to this principle, i. These are: Direct Taxes A direct tax is one whose impact and incidence are on the same person.

The impact of a tax is its money burden. A tax has impact on the person on whom it is legally imposed. The incidence of a tax is on the person who ultimately pays the tax whether or not it was legally imposed on him. Therefore a direct tax is one which is paid incidence by the person on whom it is legally imposed impact. Examples are Pay As You Earn, corporation tax among others. An indirect tax can be shifted or passed on, as opposed to a direct tax which cannot.

Examples are taxes on commodities such as a sales tax, duty and excise tax. S T U D Y A tax is not held to be indirect merely because it is collected from one person and paid by another. Taxes are also classiied according to how the marginal rates of tax vary with the level of income as explained herein below. Progressive Taxes A tax is progressive when the marginal rate of tax rises with income. A good example of a progressive tax in Kenya is the income tax on individuals. Regressive Taxes A regressive tax is one where the rate of tax falls as income rises.

Here, the poor are called upon to make a greater sacriice than the rich. Digressive tax These are taxes that call upon the higher income earners to contribute less than their due contribution compared to the lower income earners. Or b There is progression up to a certain point beyond which the rate becomes proportional. Tax versus base of tax Taxes can be classiied on the basis of the object of taxation i. For example: Income tax - tax based on income Turnover tax - tax based on income from business Sales tax - tax based on expenditure Wealth tax - tax based on wealth.

Progressive taxes are favoured for their redistribution of income. In a free market economy, the allocation of goods and services is achieved via the price mechanism, according to demand which is backed by purchasing power. The price mechanism fails because production of goods and services is not raised to the socially desirable level.

Individuals would not be able to satisfy even their basic wants if they do not have the ability to purchase those goods. For example, no entrepreneur will set up private schools or hospitals in remote poverty stricken areas because of lack of demand. T E X T The government intervenes to correct the market imperfection by taxing heavily the relatively afluent via a progressive income tax system, in order to fund the provision of essential goods and services at subsidized rates or at zero prices to all.

This will be examined later under the effects of taxation. They are economical in collection. For example, with income tax the collection is done through employers who are unpaid "tax collectors". Direct taxes, if progressive, can be made to fall equitably on all tax payers having regard to their relative abilities to pay.

Indirect taxes tend to be regressive; i. Direct taxes are relatively more certain in quantity as opposed to indirect taxes e. They are usually less inlationary than indirect taxes. Usually indirect taxes are imposed on goods thus raising the price of goods through forward shifting. The cost of living rises and this may trigger off serious confrontations between workers and employers, as the workers seek salary increases.

If the employers grant such increases, it will lead to higher costs of production and prices. Higher prices will affect workers leading to a damaging wage-price spiral. Indirect taxes have fewer collection points leading to administrative eficiency. They are not lexible hence not adaptable to differing circumstances. They cannot be varied so quickly as indirect taxes and therefore, it takes longer for changes to take effect in the economy.

Indirect taxes as opposed to direct taxes lack announcement effect i. Direct taxes have direct effect on income and therefore may act as a deterrent to effort and enterprise. On the other hand, indirect taxes, although resulting in higher prices, encourage enterprise as people are induced to work harder so as to afford articles desired.

Higher levels of income tax reduce the incentive to save. On the other hand, high levels of indirect taxes may encourage saving when goods become unaffordable, and purchasing of goods is delayed in the hope that tax will later be reduced. Some forms of direct taxes are paid annually as a lump sum. It may be dificult for the tax payer to ind a lump sum and it gives opportunities for evasion by the submission of fraudulent returns of income.

New KCC Ltd. This is referred to as backward shifting. The tax could be shifted partly forward to the consumers and partly backwards to the farmers. Tax Burden There are four aspects of tax burden, namely: The direct burden; b. The indirect burden; c. The money burden; d. The real burden. The total direct money burden of a tax is its yield to the government. For every shilling of tax received by the treasury there corresponds a shilling of direct money burden T E X T upon someone.

The payment of tax constitutes a sacriice of economic welfare or utility to the tax payer. The sacriice is relatively greater, for example, to a poor man who parts with a shilling S T U D Y than to a rich man paying the same amount.

This is referred to as the direct real burden of tax. A tax on a commodity which is shifted forward to the consumers has the effect of raising its price. This may force the consumers to partake less of that commodity. The reduced consumption is the indirect real burden of the tax.

In the illustration above, the dealer would pay the tax to the government even before the commodity is sold and the tax recovered from the consumers. Some time will elapse, occasioning an opportunity cost to the dealer equivalent to the interest he could have earned on the money paid to the tax authorities. This constitutes the indirect money burden of the tax. Other examples of indirect money burden of tax would include tax consultancy fees, and the cost of remitting tax.

Tax Incidence The incidence of a tax is the direct money burden of the tax. It deals with who ultimately pays the tax. From the illustration given above the incidence of the tax collected from the dealer is: Wholly on the consumer if, as a direct result of the tax, the price of the commodity rises by at least the full amount of the tax; 2. Partly on the dealer if the price rises by an amount less than the full amount of the tax. The Importance of Tax Incidence There are numerous objectives of taxation.

An eficacious tax system must be designed having regard to the possible incidence of the taxation. For example, if a tax is imposed on cigarette sales in order to discourage smoking and hence cut expenditure on health, it must be ascertained whether the smokers will be affected "adversely" by the tax.

The importance of tax incidence can be summarised as follows: Incidence and effects of a tax distinguished T E X T Incidence of a tax is its direct money burden equal to the total tax collections going to the treasury. Effects of a tax refer to its real burden both direct and indirect e. Incidence of a tax leads to the effect of the tax. It is the incidence of a tax that may be shifted.

If adverse effects result from the operation of a given tax system, it can be held that the taxable capacity has been exceeded in an absolute sense. If one person contributes more than his due proportion of tax, it may be held that his taxable capacity has been exceeded in the relative sense.

Taxable capacity depends on the ability to pay tax and also on the ability of the government to collect the tax. Ability to pay mainly depends on the per capita income in excess of the subsistent requirements. The ability of the government to collect taxes depends on the administrative eficiency and effectiveness. This is the case at least in the absolute sense.

If the tax is for ighting famine, drought, disease and the results are evident then tax payers are more willing to contribute towards such popular causes but if the public funds are raised to maintain expensive emoluments for civil servants then the taxable capacity will shrink.

A popular government can stimulate the spirit of the people and prepare them for great sacriice. The budget is an important instrument that every government uses to deine the direction of its national policy, the cost implications of government programmes, and the possible sources of revenues during a iscal year. Budgetary objectives include: Though the concept of the budget as an indicator of performance is relatively new in many developing countries, it is steadily gaining ground with the advent of an increasing demand for transparency and accountability in government action plans.

The role of taxation in achieving budgetary objectives includes: Raise revenue The revenue is required to pay for the goods and services which the government provides.

These goods are of two types — public and merit goods. Public goods, such as defence and police are consumed collectively and no one can be prevented from enjoying them if he wishes to do so.

These goods have to be provided by governments. Merit goods, such as education and medical care, could be, and often are, provided privately but not necessarily in the amounts considered socially desirable and hence governments may subsidize the production of certain goods. This may be done for a variety of reasons but mainly because the market may not relect the real costs and beneits of the production of a good.

Thus, the public may be subsidized because the market does not take account of all the costs and beneits of the public transport system. Economic stability These are imposed to maintain economic stability in the country. During inlation, the government imposes more taxes in order to discourage the unnecessary expenditure of the individuals. During delation, taxes are reduced in order to enable the individuals to spend more money. In this way, the increase or decrease helps to check the big luctuations in the prices and maintain economic stability.

Fair redistribution of income A major function of taxation is to bring about some redistribution of income. First, tax revenue provides the lower income groups with beneits in cash and kind.

Second, the higher income groups, through a system of progressive taxation, pay a higher proportion of their income in tax than the less well-off members of the society.

Pay interest on National debt Taxes are also levied by the government to pay interest on national debt. Optimum allocation of resources Taxes are also imposed to allocate resources of the country for optimum use of these resources. The amounts collected by the Government from taxes are spent on more productive projects. It means the resources are allocated to achieve the maximum possible output in the given circumstances.

Protection policy S T U D Y Taxes are also imposed to give protection to those commodities which are produced in the country.

The government thus imposes heavy taxes on the import of such commodities from the other countries. In the view of these taxes, the individuals are induced to buy local products.

Social welfare The government imposes taxes on the production of those commodities which are harmful to human health e. Fiscal policy is made up of: Public debt, public expenditure and public revenue as the major instruments. The major source of public revenue is tax hence taxation policy is an important part of iscal policy. The objectives of iscal policy in a developing country such as Kenya are: Where government estimate expenditure is greater than the revenue, a deicit budget arises.

If estimate revenue is greater than the expenditure the budget is referred to as a surplus budget. A budget is prepared on an annual basis, presented by the Minister of Finance before Parliament for approval. A budget may be of two kinds: The main sources of revenue for the revenue budget include: S T U D Y Budgetary Policy This is the sum total of all measures designed to achieve clearly designed budgetary objectives with a view to regulate the economy.

Budget as an instrument of planning A budget is an instrument of development planning. In a planned economy, a budget is a plan of national resources and output capacity. It is the overall regulator of all the determinants of economic growth. A budget can encourage or discourage private expenditure. Government budget can be used to increase the rate of capital accumulation and economic growth.

Budget ensures sound inance in light of the ever increasing responsibility of the requirements for spending. Note; the government uses both iscal and monetary instruments in order to achieve budgetary objectives. Budgetary polices may be separately designed to answer particular needs of uses iscal and monetary instruments to achieve this.

With no excess reserves in banks, there will be a decline in the total money supply and hence interest rates will rise. Decreased bank balances will reduce bank credit and the resultant high interest rate reduces private borrowing and investment, a delationary effect on aggregate economic activity results. Where the government operates a budget deicit, then such deicit has to be inanced through: This approach will expand the money supply and drive interest rates down.

It will induce an expansionary inluence on the level of economic activity S T U D Y Long term strategies in reducing budget deicit include: The problem with this strategy is that there is the cost of servicing the loan as well as inal repayment of the loans which can be a burden to the state. Indirect taxes would be more favourable. The PAC will scrutinize the performance of funds which are meant for public investments. There is no direct beneit expected for this contribution.

Direct taxes 2. Indirect taxes. Progressive taxes: Regressive taxes iii. Digressive taxes iv. The most simple tax system is where there is a single tax. Certainty T E X T The tax should be formulated so that tax payers are certain of how much they have to pay and when. That the tax base should be wide enough so as to raise adequate revenue and also the tax burden is evenly distributed among the tax payers.

A direct tax is one which is paid incidence by the person on whom it is legally imposed impact. Examples are income tax and corporation tax. Advantages of direct taxes 1. The cost of living rises and this may trigger off serious confrontations between workers and employers, T E X T as the workers seek salary increases.

S T U D Y Question Three The beneit theory This dictates that tax is apportioned to individuals according to the beneit they derive from government activity and spending. The questions are listed in this format: Taxation 1: June Question 3 Question four a Distinguish between forward and backward shifting of a tax 2 marks b Briely explain the extent to which the following taxes can be shifted. June Question 2 Total: In this T E X T chapter, we identify the various incomes to be taxed.

In addition, we shall study how to compute tax of partnerships and body corporates. Further, we will look at the expenses that are allowable and not allowable against income of a taxable person. In the next chapter we will look at the taxation of speciic sources of income of a taxable person. It applies both to individuals and companies as discussed herein below.

Taxable income - This is income of a person that is subject to tax under the taxation Acts. It includes, employment income, business income, income arising from rights granted for use of property among others.

This chapter is highly examinable. This will help the accountant in ensuring compliance with the tax law. It is worth examining the charging section in detail. It is the same as calendar year. Income tax is charged for each year of income. The year of income should be distinguished from the accounting year. There is a date to which accounts of a business are prepared each year, and this date would indicate the accounting year end.

The accounting year ending on 31 December would coincide with the year of income. Other accounting year-ends would however fall in a given year of income and the proit or loss per the accounts would be for that year of income. For example, an accounting date ended 30 May would fall to be treated as the year of Income Taxable income The Act does not deined income, but taxable income is said to include gains or proit from various sources, for example: A taxable person does not include a partnership.

A partnership is not taxed on its income, but the partners are taxed on their share of proit or loss from the partnership. Resident and non-resident persons There are conditions for being a resident in case of an individual and also in case of a body of persons.

T E X T i Has a permanent home in Kenya and was present in Kenya for any period during the year of income under consideration; or ii Has no permanent home on Kenya but was present in Kenya for a period or S T U D Y periods amounting in total to days or more during the year of income under consideration; or iii Has no permanent home in Kenya but was present in Kenya for any period during the year of income under consideration and in the two preceding years of income for periods averaging more than days for the three years.

Days in Kenya Year Gatonye Moseti 1 1 3 1 Total days Average for the three years days days Gatonye was a resident in as the average days for the three years is more than days.

Moseti was not a resident in as the average days for the three years at is not more than days. Kenya includes the air space which is a distance up in the sky considered to be part of Kenya. It also includes the Territorial waters which is a distance into the sea considered to be part of Kenya. The Act has listed the income upon which tax is charged. The income which is taxed is income in respect of: Each item of taxable income will be examined in detail to see the various components that make up the particular item of income.

A number of such non-taxable incomes come to mind such as: Dowry 2. Gifts - however, tip arising from employment are taxable 3. Harambee collections 4. Inheritance 5. Charity sweepstake winnings 6. Premium bonds winnings 7. Income or interest on post ofice savings bank account 8. Proit on selling isolated assets T E X T 9. Honoraria The income of a registered pension fund or trust scheme or provident funds. Monthly or lumpsum pension granted to a person who is 65 years of age or more.

That part of the income of the president of the republic of Kenya that is exempt e. Allowances to the speaker, deputy speaker and MP payable to them under the National Assembly remuneration Interest up to Sh. With effect from June , interest up to Sh , is qualifying while the excess is non qualifying. Income of parastatals bodies Cost of passage to and from Kenya of a non-citizen employee borne by the employer.

The income of agricultural bodies The income of any local authorities Interest on any tax reserve certiicates issued by the Kenya Government. However, under Turnover Tax TOT regulations, a taxable person has been deined to include a partnership. Non taxable persons and institutions T E X T 1. The President: That part of the income of the President derived from salary, duty allowance and entertainment allowance paid or payable to him from public funds in respect of or by virtue of his ofice as President.

The income of: Charitable organizations as deined by the Act. The income other than income from investment of an amateur sporting association. Proits or gains of an agricultural society accrued in or derived from Kenya from any exhibition or show held for the purposes of the society, which are applied, solely to those purposes, and the interest on investments of that society.

The income of any local authorities 7. Interest on any tax reserve certiicates issued by the Kenya Government 8. The income of any registered pension scheme. The income of any registered provident fund.

The income of any registered trust scheme. The income from the investment of an annuity fund deined in Sec. Pensions or gratuities granted in respect of wounds or disabilities.

Interest paid on loans granted by the Local Government Loans Authority. The income of a non resident person who carries on the business of air transport provided the country where that person is resident offers the same facility to Kenya residents in the similar business. The income of a registered individual retirement fund. The income of a registered home ownership savings plan. Interest up to a maximum of ShSh , per individual earned on housing bonds with: The loss from one speciied source can only be off-set against future income from the same speciied source.

There are Corporation rates of tax applicable to companies legal persons and there are individual rates of tax applicable to individuals natural persons Corporation Rates of Tax The corporation rates of tax apply to legal persons such as companies, trusts, clubs, estates, co-operatives, associations etc. The applicable tax rate will depend on the percentage of the issued share capital listed at the Nairobi Stock Exchange.

The liability on wife's employment income, wife's professional and wife's self employment income is calculated separately but assessed together with that of the husband's income. However, the wife can opt to be taxed on her income and as such ile a separate assessment. The relief reduces tax payable by an individual. General Application: The relief does not apply to non-resident individuals or to companies.

NB Premiums paid for an educational policy with a monthly period of at least 10 years shall qualify for this relief. Withholding tax is applicable on payments to both residents and non-residents. Such payments include dividends, interest, royalties, management and professional fees and agency, consultancy and contractual fees. The importance of deducting withholding tax is that it makes tax collection easy and it also ensures that some incomes do not escape taxation. The withholding tax should be viewed as income tax paid in advance.

A person making payments of incomes subject to withholding tax is legally required to deduct the withholding tax or the tax at source at appropriate rates before effecting the payment and: For any given year of income, the payee is assessed S T U D Y on gross income and is given credit for the tax paid at source except in cases where the withholding tax is the inal tax.

The withholding tax rates are as follows: The tax is subjected to payments made to non-resident telecommunication service S T U D Y f providers and is based on gross amounts. Various reduced rates of withholding tax apply to countries with double tax relief treaties with Kenya. The incomes of the non-residents are taxed gross, that is, no expenses are allowed against the income.

The withholding tax must be remitted to the Domestic Taxes Department within 20 days of its being deducted. There is no further tax for the non-resident after the withholding tax is paid as far as Kenya is concerned. The tax is referred to as Income tax.

Every employer is legally required to operate a PAYE deduction system.

FREE kasneb CPA,CS,ATD,CIFA,CICT NOTES

The main features of the PAYE system are: PIT was re-introduced with effect from 1. The PIT deducted for individuals, co-operative societies and partnerships is inal tax. Where the PIT is the inal tax, the agricultural income does not require to be returned to the Domestic Taxes Department. For companies, however, the PIT is treated as income tax paid in advance and is used to reduce the company's tax payable for the year. This means that companies with agricultural produce are taxed on net proit or loss and they get credit for the PIT as tax paid in advance.

However, tax due date has been harmonized to be on 20th day of month following month of deduction of the tax. As highlighted above, there are various speciied sources of income. In this section, we will highlight the taxation of individuals receiving business income and employment income. Trade means buying and selling for gain; Profession means professional practice such as by a doctor, lawyer, accountant etc; Vocation means a calling or career; Adventure would include smuggling and poaching; Concern would mean any commercial enterprise.

Business may be carried on for a short time or a full year. The period a business is carried on is irrelevant in taxing the income gains or proits and so the use of the phrase "for whatever period" of time business is carried on. The Act charges tax on gains or proits from any business. One person may carry on illegal business and another one may carry on a legal business.

Both would be taxed on gains or proits from business as the Act is not concerned with the legality of the business when it comes to taxing the business income gains or proit. The following items whenever they arise will form part of the gains or proits from business: A good example of this is a transporter who transports goods from Mombasa to Kigali trading in Kenya and then transports goods from Kigali to Kampala and to Mombasa trading outside Kenya. This arises where business has ceased and the machinery in a class of wear and tear is sold for more than the written down value.

Wear and tear computation Class III T E X T Sh Sale proceeds business ceased 35, Written down Value 30, Balancing Charge taxable income S T U D Y 5, This concept will be clear to you later in the course when dealing with the calculation andclaim for wear and tear deduction, which at this point may be viewed as the standard depreciation for tax on machinery used for business.

This arises where business is continuing and all the machinery in a class of wear and tear is sold for more than the written down value. For example, the same igures as in 5 above can be used: Wear and tear computation Class III Sh Sale proceeds business continuing 35, Written down Value 30, Trading receipts taxable income 5, 7 An amount of realized foreign exchange gain. If the foreign exchange gain is not realized, it is not taxable.

The remuneration is the reward or pay for work or service rendered, for example, in the case of a minister, civil servant, company directors, company secretary, accountant, clerk, engineer, and all those commonly referred to as employees. An employer will include: This is the system of deducting tax, monthly, when the employer is paying emoluments. Gains or proits from employment or service rendered will include cash T E X T as well as non-cash payments. The bills in this case would be in the name of the employee who is responsible for meeting the expenses.

The examples of such expenses would include house rent, grocery bill, electricity bill, water bill, school fees, insurance premium etc.

When these are paid to employees as mere reimbursements refunds of expenses of employer, they are not taxable employment income. As reimbursement refund they must be documented, that is claimed with supporting documents.

A resident is therefore taxed on worldwide employment income. A non-resident person is therefore taxed on income from service rendered to a resident person. These are taxed if they aggregate total in value to Sh 36, or more in a year of income. The beneits that are taxed are: The Commissioner of Domestic Taxes has quantiied the value of the beneits as shown below.

An employee is taxed on the cost of providing the beneit or the quantiied value of the beneit, whichever is higher. If there is no quantiied value, the higher of the market value and the cost is taken. The Commissioner of Domestic Taxes has quantiied the value of some beneits as shown below. The employee is taxed on the market value or the cost of providing the service, whichever is the higher, except in the cases of telephone, furniture, and electricity from a generator to agricultural employees.

T E X T iv Motor car provided by employer. The Commissioner of Domestic Taxes CDT has quantiied the value of the beneit on the basis of the engine capacity rating. Saloon, Hatch Backs Capital allowances: Over - cc 14, , Pick-ups, Panel Van Industrial buildings 2. Reduced rates of beneits i Water 2, ii Electricity 10, Low interest rate employment beneit: The beneit is the difference between the interest charged by the employer and the prescribed rate of interest.

Other beneits: T E X T Other beneits, for example servants, security, staff meals etc are taxable at the higher of fair market value and actual cost to employer.

The employer may own the house or lease it from other parties. To determine the amount of housing beneit, the employees are classiied into six groups and the value of the housing beneit will depend on this classiication: Rent paid by the employer. Note Fair market rental value should be taken to mean the amount of rent the premises would attract if it were loated in the open market for the purposes of leasing. The valuation should be carried out by an independent registered land valuer i.

No relation with the employer. Any cases of doubt should be referred to the local Income Tax Ofice for advice. Motor Car, House Servants etc. Employer pays the Landlord Sh 35, per month i. Calculation for Quarters Basic Salary - Sh. Beneits - Ksh. This beneit can be brought to charge as follow: This beneit arises from the difference between the prescribed rate and the interest rate charged by the employer for loans provided by the employer on or before 11th June This beneit is taxable on the employee.

Such a beneit is taxable on the employer at the corporation Tax Rate. Example Loan Amount Sh. Educational fees for dependants of low income employees paid or foregone by an educational institutional employer are not taxable on either the employer or the employee.

A low income employee is deined as one earning not more than Sh. Effective date: An amount received as compensation for termination of a contract of service whether or not provision is made in the contract for payment of that compensation is a taxable beneit on the employee. The taxable amount will be calculated as follows: Compensation of Sh. Required Establish the amount of the compensation that will be assessed to tax showing clearly the years to which it relates.

Muchiri had a contract for an unspeciied term providing for payment of Sh , as compensation in the event of termination. Required Establish the amount of the compensation that will be assessed to tax showing clearly the years to which it relates the spread.

Contract is for unspeciied term and provides for compensation Mr. Muchiri Determination of the assessable amount of compensation Sh Rate of earning p. Olenkeri had a contract for unspeciied term that had no provision for payment of compensation upon termination of employment. The contract is terminated on 31st Dec and Sh 1. Year , Year , Year , Assessable or taxable amount 1,, Tax free remuneration There are certain instances where an employer wishes to pay his employee salaries negotiated net of tax.

In such cases, the employer bears the burden on behalf of those employees. The tax so paid by the employer on behalf of the employee becomes beneit chargeable to tax on the employer. Limiting of beneits Where a beneit is enjoyed for a period of less than a year, the taxable value of the beneit is proportionately reduced to the period enjoyed.

For example, if an employee was provided with furniture for three months in , he would be taxed on one quarter of the beneit as follows: Expenditure on passage for expatriates only.

This is expenditure on traveling between Kenya and any other place outside Kenya borne by the employer for the expatriate employee and family. Conditions for qualifying for passage: However, an expatriate employee does not lose the free passage by changing jobs in Kenya. The expatriate may fail to qualify for passage if he engages in commercial activities in addition to employment. Where cash is paid for passage and the employee does not travel or in fact uses the money for personal expenses, then the cash sum is taxable on the employee.

Medical Expenses: Where an employer has a written plan or scheme, or by practice provides free medical services to all the employees non-discriminative , the value of such medical expenses is a non-taxable beneit for employees and whole time service directors. However, for the non whole time service directors the medical beneit is limited to Sh.

Where there is no medical scheme or plan for all employees, the payment of any medical bills is a taxable cash payment to the beneiciary.

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It is permissible to have different schemes for different categories of employees. Fringe beneit 4. Beneits in kind whose value does not exceed Sh. A director other than whole time service director is excluded from any tax free medical scheme. However, w. The amount of contribution by an employer, on behalf of an employee, to a pension T E X T fund or scheme whether the fund is registered with the Commissioner of Domestic Taxes or not.

With effect from Educational fees paid by the employer for the employee as long as such fees are taxed on the employer disallowable expense. Expenses that are deductible against employment income: Where the mortgage interest paid is less than the maximum, the actual interest paid is claimed.

Where the mortgage interest paid is more than the maximum, only the maximum can be claimed. The mortgage interest is also deductible against other incomes and will appear later on in the list of speciic expenses deductible against taxable income. If any person occupies the premises for residential purposes for part of a year of income, the allowable deduction shall be limited to the period of occupation.

The irst 4 inancial institutions mentioned in the fourth schedule to the Income Tax Act are: The salaries are however taxed. Dividend is the amount of proit of a company which it pays to its share-holders in proportion to their share holding in any particular year. T E X T It is income in the hands of the recipients. The following are deemed to be payments of dividend to those receiving: S T U D Y a In a voluntary winding up of a company, amounts distributed as proits whether earned before or during winding up, whether paid in cash or otherwise.

The dividend is taken to be the greater of nominal or redeemable value e. The payment of Sh. The difference Sh. This constitutes the inal tax i. Dividends are treated as income of the year in which they are received. Interest This means interest payable in any manner in respect of any loan, deposit, debt, claim, or other rights or obligations, e. Interest is assessed on a cash basis, which means that it is taxed when received not when earned if not paid. T E X T Interest income exempted from taxation: The interest of up to Shs.

The "qualifying interest" here means interest received by an individual which does not exceed Sh , in any year of income in respect of housing development bonds held by that individual with a inancial institution licensed under the Banking Act or a Building Society registered under the Building Societies Act and which has been approved to issue housing development bonds. The housing development bonds are issued by a inancial institution on payment of money and the money earns interest.

The money raised through issue of housing development bonds is supposed to help in housing development. Normally, the retiring employee is paid a lump sum on retirement, and thereafter, a stated amount per month for life or for a stated period.

A provident fund is also created by contributions from employee or from employer or both. An employee, on leaving employment is paid a lump sum from the fund depending on the contributions made to the fund. First Sh. No portion of the income is exempted. All the income from business carried on partly outside and partly inside Kenya is deemed to be income derived from Kenya, and is taxed in Kenya. For a resident individual, income from employment or service rendered inside or outside Kenya is deemed to be income derived from Kenya, and is taxed in Kenya.

For a non-resident individual, income from employment or services rendered to a resident employer inside Kenya is deemed to be income derived from Kenya, and is taxed in Kenya. The income of a married woman living with her husband is deemed to be the income of the husband and is taxed on the husband except as provided for below.

The speciied produce which are subject to PIT are gross sales of maize, wheat, barley, S T U D Y rice, sugar cane, pyrethrum, tobacco leaf, tea leaf, coffee, raw cashew nuts, pigs, raw cotton, hides and skins. They are, therefore, not required to compute farming income if their income is only from speciied produce subject to PIT.

The income of a married woman living with her husband is deemed to be the income of the husband and is taxed on the husband. However, when calculating the tax on the husband, the wife's employment income, and the wife's professional income have speciied treatment.

The wife's income can be from any source e. Note 2. With effect from 1 January , the income of a married woman will not be treated as the income of her husband provided she opts to ile a separate return.

A married woman will be treated as living with her husband and her income taxed on the husband unless: Wife's Employment Income and self-employment income. For purposes of calculating tax payable, wife's employment and self employment income qualifying for separate taxation is segregated from the husband's income and the tax on it separately calculated at wife's employment income rate, which is the same as individual rate of tax.

The wife's income will not qualify for separate taxation if she is employed by any of the following: Self employment income for a married woman means business by the wife where husband is not a partner nor employs the wife. The professions whose income qualify for separate taxation are accountancy, medical, dental, legal, survey, architecture, veterinary medicine and engineering.

Those who qualify are the professionals registered under the respective professional bodies e. The wife's loss is also deemed to be the loss of the husband.

The deicit at the time of marriage becomes the husband's deicit to be off-set against future income of the wife which is taxed on the husband. In case of more than one wife, income is still deemed to be the husband's.

Where the husband fails or is unable to pay tax due, the Commissioner of Domestic Taxes can collect a portion of the tax from the wife which relates to her income taxed on the husband.

Note 4. GAAP, before considering non-authoritative guidance from other sources. The Codification contains only accounting guidance, and not guidance on auditing or tax preparation. The Codification is applicable only to U. Net sales: They include: Gross Sales a. Accounting and legal fees - Sales discounts b. Rent for office space d. Insurance 2. Cost of Goods Sold under periodic inventory system: Cost of goods available-for-sale 5. Selling expenses: Cost of goods purchased: Advertising Gross purchases b.

Freight and transportation- - Purchase discounts out e. Sales salaries and Cost of goods purchased commissions d. Depreciation of sales Cost of goods purchased is equipment e. Therefore, e. Uncollectible accounts purchase discounts reduce cost expense bad debt expense of goods sold. General and Administrative f. Warranty expense expenses: Shipping supplies and expense General and administrative expenses relate to day-to-day h.

Postage and stationery business-operation expenses and i. In fact, except for the different terms used, the com- putation and manner of presenting a retrospective application and a restatement are essentially the same. Prior Period Adjustments: These are rare events that are recorded as direct adjustments to retained earnings rather than as income-statement elements. The correction of errors in previously issued financial statements is an example of a prior-period adjustment.

Prospective application: A change should be accounted for in the period of change if the change affects only that period. Alternatively, a change should be accounted for in both the period of change and in future periods if the change affects them both. Change in accounting principle Retrospective application, except when it is impracticable to determine. Prospective if impracticable to determine Change in accounting estimate Prospective Application Change in reporting entity Retrospective Application.

This does not include a change from an accounting principle that is not generally accepted to one that is generally accepted. The latter would be classified as an error correction. Acceptable Change in Accounting Principle An entity may change the accounting principle used only if: The change is required by a newly issued codification update, or b. The entity can justify its use of the alternative accounting principle because it is preferable.

A preferable change is one that will result in a more reliable and relevant presentation of the financial statements. Effects of Change A. Direct effects of a change in accounting principle The direct effects of a change are recognized in prior periods.

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An example of a direct effect is an adjustment to an inventory balance due to a change in the inventory-valuation method. Related changes, such as an effect on deferred income tax assets or liabilities, are also examples of the direct effects of a change in accounting principle.

Indirect effects of change The indirect effects of a change are any changes to current or future cash flows that result from making a change in accounting principle. An example of an indirect effect is a change in profit-sharing or royalty payment, based on revenue or net income. Any indirect effects of the change are reported in the period in which the accounting change is made. Indirect effects of a change in accounting principle should be reported in the period in which the account- ing change occurs.

If comparative financial statements are being presented, then the cumulative effect of a change is reported as an adjustment to the beginning-of-year retained-earnings balance of the earliest year presented. This cumulative effect must be reported on a net-of-tax basis.

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Beta Co. In the years from 20x1 to 20x3, it Example appropriately reported income under the completed-contract method. In 20x4, Beta justifiably changed to the percentage-of-completion method. If Beta Co. January 1, 20x1 b. January 1, 20x2 c.

January 1, 20x3 d. January 1, 20x4 Correct answer: The change in method of accounting for long-term construction con- tracts had taken place in 20x4. Thus, if Beta Co. In some questions, examiners may refer to January 1, 20x3 as December 31, 20x2. Therefore, you need to read the question carefully. If non-comparative financial statements are being presented, then the cumulative effect of the change is reported as an adjustment to the beginning-of-year retained- earnings balance.

Example On September 30, year 1, Johnson Co. Johnson Co. The cumulative effect of the change is determined as of January 1, year 1. Reporting Changes in Accounting Principle An entity should report a change in accounting principle through a retrospec- tive application of the new accounting principle to all prior periods, unless it is impracticable to do so.

Under a retrospective application, an entity must report the cumulative effect of the change as a net-of-tax adjustment to the beginning retained earnings of the earliest period presented in the current financial report.

If the cumulative effect of applying the accounting change can be determined, but the period-specific effects on all prior periods cannot be determined, the cumulative effect is applied to the carrying amounts of the assets and liabilities at the beginning of the earliest period to which it can be applied or calculated.

An offsetting adjustment is made to the opening balance of the retained earnings for that period. Impracticable to Determine Cumulative Effect If it is impracticable to determine and calculate the cumulative effect for any of the prior periods, the new accounting principle is applied as if the change was made prospectively at the earliest date practicable.

An example of this occurs when management of an entity decides to change from an acceptable inventory costing method to last-in, first-out LIFO under U. GAAP, and the records of inventory purchases and sales are no longer avail- able for all prior years.

In this case, it is deemed impracticable to apply the retro- spective approach. This is because management would be unable to estimate what the inventory and the cost of goods sold would have been in prior years if the entity had been using the LIFO method.

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Accordingly, the entity applies the new accounting principle i. GAAP, and it is impracticable to determine and calculate the cumulative effect for any of the prior periods, then the change is accounted for prospectively at the earliest date practicable. When the cumulative effect on any prior period is not known, then the concept of consist- ency is sacrificed when accounting for a change in accounting principle.

Examples of a Change in Accounting Principle a. A change in the method of inventory costing e. A change to or from completed contract to percentage of completion c. A change from the individual-item approach to the aggregate approach in applying to inventories the lower of FIFO cost or market d. A change to or from the cost method to the equity method. Changing an estimate is different from making a correction of errors. Changing an esti- mate does not mean that what the company has done in a prior year is wrong.

Rather, it means that management has received more reliable data for an estimate. Accounting esti- mates change as new events occur, as more experience is acquired, or as additional informa- tion becomes available.

Reporting A. Reporting Changes in Accounting Estimates There is no cumulative-effect adjustment to retained earnings Changes in accounting estimates must be accounted for and reported, prospectively, in the period of change, if the change affects only that period, or in the period of change and future periods, if the change affects them both.

The entity should not account for a change in accounting estimate by restating or retro- spectively adjusting the amounts reported in the financial statements of prior periods or by reporting the pro forma amounts for prior periods.

A Change in Accounting Estimate Effected by a Change in Accounting Principle If a change in the accounting estimate is effected by and inseparable from a change in accounting principle, then it is treated as a change in estimate.

An example of a change in estimate that is affected by a change in accounting principle, and that must be reported as a change in accounting estimate, is a change in the method used for depreciation, amortization, or depletion for long-lived, non-financial assets. LAST MINUTE NOTE Whenever it is impossible to determine whether a change in accounting esti- mate or a change in accounting principle has occurred, the change should be considered a change in estimate and should be reported as a component of income from continuing operations.

Changes in accounting estimates are handled on a prospective basis in the period of change and in future periods if the change affects both. Example On January 1, 20x1, Mitchell Co. During 20x4, Mitchell Co. The analysis necessary to account for this change is as follows: The depreciation charge per year after a change in estimate can be calculated as follows: Examples of a Change in Accounting Estimates a.

A change in depreciation, amortization, and depletion method e. A change in the estimated warranty costs or obligations due to technological advances in production c. A change in the estimation of the service lives and salvage values of depreciable assets d.

A change in the estimated quantity recoverable when using the units-of-production depletion method e. A change in the estimation of uncollectible accounts receivable or bad debts f. A change in the estimation of inventory obsolescence. GAAP, a change in reporting entity occurs when a change in the structure of the organization is made and this results in financial statements that represent either a different entity or a changed entity.

The usefulness of such information rests on the relationship it has to the annual results of opera- tions. Accordingly, each interim period10 should be viewed primarily as an integral part of an annual period. GAAP nor IFRS require the reporting of interim financial infor- mation nor do they mandate which entities should publish interim financial reports11, the frequency of these reports, or how soon these reports must be released after the end of an interim period.

However, both U. GAAP and IFRS provide guidance and prescribe principles for recognition, measure- ment, and disclosure in the interim financial statements. Complete or Condensed Set of Financial Statements Interim financial information may be issued on a monthly or quarterly basis or at other intervals and may take the form of either complete financial statements or summarized, condensed, financial data. Emphasize timeliness over reliability b.

Are relevant because they are capable of making a difference in the decisions made by users c. Should be viewed as an integral part of the annual financial statements d.

Contain either complete or condensed sets of financial statements for an interim period e. Are generally not audited, therefore each page of unaudited interim financial information should be clearly marked as unaudited.

Interim Period: A financial reporting period shorter than a full financial year, typically a quarter or half-year. Interim Financial Report: A financial report that contains either a complete or condensed set of financial statements Accounting Principles and Practices In general, the results for each interim period should be based on the accounting principles and practices used by an entity in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year.

However, under U. GAAP, certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period. Revenues must be recognized during an interim period on the same basis as is followed for the full year.

Costs and Expenses: Costs and expenses for interim reporting purposes may be classi- fied as either of the following: Those costs and expenses that are directly associ- ated with or allocated to the products sold or to the services rendered, for annual reporting purposes, including, for example, material costs; wages, salaries and related fringe benefits; manufacturing overhead; and warranties, which should be similarly treated for interim reporting purposes.

Costs and expenses other than product costs should be charged to income in interim periods as incurred, or be allocated among interim periods, based on an estimate of the time expired, the benefit received, or the activity associated with the periods.

Smith Corp. Costs and expenses other than product costs should be charged to income in interim periods as incurred or be allocated among interim periods, based on the benefit received. The depreciation expense and bonuses to employees provide benefits throughout the year and should be allocated evenly to all interim periods.

The repairs will benefit operations for the remainder of the calendar year. The unanticipated repairs to plant and equipment will benefit the second, third, and fourth quarters. Losses should be recognized in full during the interim period in which the existence of such losses becomes evident. Gains and losses that arise in any interim period sim- ilar to those that would not be deferred at year-end should not be deferred to later interim periods within the same fiscal year.

What portion of the gain should Smith report in its income statement for the third quarter? A company that issues quarterly financial statements incurs an unusu- Example al loss in one of the first three quarters. In which of the following ways would the company report this loss? Only in the annual report b. Entirely in the quarter wherein the loss occurs c. Pro-rated over the remaining quarters of the current year d. Disclosed only by a note in the quarter wherein the loss occurs Correct answer: Income Taxes A.

Estimated annual effective tax rate The tax or benefit 12 related to ordinary income or loss 13 should be computed at an estimated annual effective tax rate. At the end of each interim period, the entity should make its best estimate of the effec- tive tax rate that is expected to be applicable for the full fiscal year. If a reliable estimate cannot be made, then the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate.

The estimated annual effective tax rate should be applied to the year-to-date ordinary income or loss , at the end of each interim period, to compute the year-to-date tax or benefit applicable to ordinary income or loss.

The interim period tax or benefit related to ordinary income or loss should be the difference between the amount so computed and the amounts reported for the previous interim periods of the fiscal year. Smith Co. The quarterly tax Example computations are as follows:. Multiply the year-to-date ordinary income by the estimated annual effective tax rate and subtract the result from the provision previously provided in the previous quarter.

The estimated effective tax rate should reflect the anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax-planning alternatives.

Changes in estimates A change in the estimated effective annual tax rate is accounted for as a change in accounting estimate and should be accounted for in the period in which the change in estimate is made. No restatement of previously reported interim information should be made for changes in estimates. Example Smith Co.

The estimated annual effective tax rate changed from one quarter to another. The quarterly tax computations are as follows: Inventory in Interim Financial Statements Practices vary in terms of determining costs of inventory. While entities should generally use the same inventory pricing methods and make provisions for write-downs at interim dates on the same basis as those used for annual inventory dates, it is appropriate to use following exceptions for interim reporting dates:.

Different inventory methods at interim periods Some entities use estimated gross profit rates to determine the cost of goods sold during interim periods or they use other methods that differ from those used at annual inven- tory dates.

These entities must disclose the method used at the interim date and any sig- nificant adjustments that result from reconciliations with the annual physical inventory. GAAP only Entities that use the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the annual period.

Form 6-K Form 6-K is filed by foreign private issuers to report the occurrence of any material events or corporate changes not previously reported to investors. Form 6-K may be filed, any time during the year, to report the occurrence of any material events.

Reports on Form 6-K typically cover events, including a change in control, a significant acquisition or disposition of assets, a bankruptcy or receivership, or a change in accountants. Regarding interim reporting, the SEC requires only a semi-annual report of non-ad- justed earnings, filed on Form 6-K, if and when firms are required to report interim earnings in their home country.

Reports on Form 6-K that are filed by foreign private issuers generally take the place of reports on Form Q which include unaudited financial reports and current reports on Form 8-K which include disclosure on material events that U.

SEC Regulations A. It contains information regarding the financial statements, including the notes and schedules for both interim and annual statements that must be submitted to the SEC. It contains instructions for filing the non-financial statement forms required by the SEC. These requirements ensure that investors can ascertain the likelihood that past performance is indicative of future performance. It is an open specification that uses XML-based data tags to describe financial state- ments.

These tags identify the contents of each data item. For example, a tag might indicate that a data item represents accounts receivable. XML means extensible markup language and is standard for the electronic exchange of data between businesses and on the Internet.

Under XML, identifying tags are applied to items of data so they can be efficiently processed by computer software. These rules apply to domestic and foreign companies using U. XBRL exhibits enable investors to compare information between companies using analytic software. Securities and Exchange Commission 1. The SEC was created under which of the following acts? The Securities Act of b. The Securities Exchange Act of c. Both the Securities Act of and the Securities Exchange Act of were designed to restore investor confidence subsequent to the stock market crash.

The Act contains accounting and disclosure requirements for the initial offering of a stock or bond.