Corrected entry: After Sephiroth turns back into Kadaj when defeated by Cloud, Kadaj is carrying his weapon. However, Kadaj had lost this weapon before he turned into Sephiroth and Sephiroth's own weapon was created with him. Therefore Sephiroth's weapon couldn't transform into Kadaj's when Sephiroth is defeated.
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Correction: When Kadaj is falling off the building with Jenova's head, after his sword falls, as he turns into Sephiroth watch closely; when Cloud attacks Sephiroth you see Kadaj's katana turning into Sephiroth's Masamune. So Sephiroth is technically using Kadaj's katana.