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Wow, that looks very different from my settings (Sorry, can't take a picture right now) ...I get a small white screen with three tabs (font style, display, and Reading) displayed on top of my open book. The Font Size is changed by a slider bar, even. And the only option on the "Reading" tab is the one-or-two page Landscape layout.
I think my Kobo App version is 2.7.614 (that's what my device administration screen says). The store actually says the current version is 3.1 though, and I could swear I did an upgrade last week. I can't imagine they would have gotten rid of that feature in the most recent upgrade - that makes no sense.
It does seem that what you have is more suited to phones, not tablets. That settings screen looks a lot more like one of my device admin/setting screens rather than the settings screen from within the Kobo app, but that may have to do with allowed differences between the two devices.
Sorry, I thought I could help, but I guess I can't. Like I said, it's working fine on my tablet.
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