International Financial Reporting Standards (IFRS) are accounting standards that provide guidance on how businesses should recognize, measure, present and disclose financial information. They promote consistency, transparency and comparability in financial reporting, enabling investors, lenders, regulators and other stakeholders to make informed economic decisions. By requiring relevant and reliable financial information, IFRS also strengthens accountability and confidence in financial statements.
The recent Liberty Life Assurance Kenya Limited tax case demonstrates the importance of distinguishing between accounting adjustments made to comply with IFRS and transactions that have actual tax consequences. The dispute involved Liberty Life and the Kenya Revenue Authority (KRA), which assessed approximately Ksh 162.86 million in corporate tax relating to the 2016–2020 period. KRA argued that certain accounting adjustments represented transfers from the life fund for the benefit of shareholders and were therefore taxable. Liberty Life maintained that the adjustments were accounting entries arising from IFRS compliance and did not represent actual benefits transferred to shareholders.
The Tax Appeals Tribunal found that KRA had not sufficiently demonstrated that the accounting adjustments resulted in a benefit to shareholders and consequently allowed Liberty Life’s appeal and set aside the assessment. The case highlights an important principle: an accounting adjustment does not automatically constitute taxable income. While accounting adjustment may affect reported profit, assets, liabilities or equity, it may not involve cash movement or create a new economic benefit. Tax treatment must instead be determined by reference to the applicable tax legislation and the economic substance of the transaction.
Accounting adjustments may arise from changes in accounting policies, correction of prior-period errors, changes in accounting estimates, fair-value measurements, deferred tax calculations or implementation of new IFRS requirements. Businesses should clearly document significant adjustments, explain the applicable IFRS requirements and assess whether the adjustment represents an actual financial transaction or merely an accounting requirement.
Impact of Changes in IFRS
Changes to IFRS can significantly affect financial reporting, business processes and internal systems. New or revised standards may change the recognition and measurement of assets and liabilities, classification of transactions, revenue and expense recognition, accounting policies, disclosures and comparative information.
For example, IFRS 17 Insurance Contracts introduced significant changes to insurance accounting, requiring insurers to adapt their accounting processes, systems, data collection and financial statement presentation. IFRS 18 Presentation and Disclosure in Financial Statements is another major development and is effective for annual reporting periods beginning on or after 1 January 2027. Businesses should therefore monitor IFRS developments and assess the impact of new requirements well before their effective dates.
Implementation of new standards can present challenges, including the need for employee training, system modifications, additional data collection, management judgment and estimates, preparation of comparative information and changes to internal controls. There may also be significant implementation costs and differences between accounting and tax treatment. Early preparation can help organizations manage these challenges and reduce reporting risks.
Internal Controls, Documentation and Audit
Strong internal controls are essential for ensuring that financial information is complete, accurate and compliant with IFRS. Key controls should include regular monitoring of IFRS developments, maintaining updated accounting policies, reviewing and approving significant journal entries, reconciling accounting records, documenting significant judgments and estimates, segregating duties and regularly reviewing financial statement disclosures. Businesses should also reconcile accounting results with tax computations to identify and explain differences between accounting profit and taxable income.
Auditors play an important role by providing independent assurance that financial statements have been prepared in accordance with the applicable reporting framework and are free from material misstatement. They review accounting policies, significant transactions, supporting documentation, management estimates, internal controls and financial statement disclosures. When new IFRS requirements are introduced, auditors can also help identify areas where clarification or disclosure may be necessary.
Regular IFRS compliance reviews enable businesses to improve financial statement disclosures, strengthen internal controls, reduce audit adjustments and ensure that employees understand current reporting requirements. Businesses should avoid common compliance weaknesses such as relying on outdated accounting policies, failing to monitor IFRS changes, making unsupported accounting adjustments, inadequately documenting significant judgments and treating accounting adjustments as automatically taxable.
Ndakala Advisory LLP supports businesses in strengthening IFRS compliance, financial reporting and related internal controls. The firm assists organizations by reviewing accounting practices, implementing new or revised IFRS standards, developing and updating accounting policies, and providing guidance on complex accounting transactions, estimates, classifications and valuations.
Our firm also helps businesses identify and document differences between IFRS accounting treatment and tax treatment, train finance teams, management and directors, strengthen internal controls and assess accounting adjustments that may be questioned by tax authorities. This support helps businesses maintain appropriate documentation and respond effectively to financial reporting and tax-related risks.
The Liberty Life case demonstrates the importance of distinguishing between accounting adjustments and actual taxable transactions. Businesses should not assume that an adjustment recorded for IFRS purposes automatically creates a tax liability. Instead, each adjustment should be supported by appropriate documentation, linked to the relevant accounting requirements and separately assessed under applicable tax legislation.
A proactive approach to IFRS compliance, including monitoring changes in standards, updating accounting policies, strengthening internal controls, training employees and reconciling accounting and tax positions can reduce financial reporting risks and disputes with tax authorities. By maintaining accurate, transparent and well-supported financial information, businesses can strengthen the confidence of investors, shareholders, lenders, regulators and other stakeholders.
