FAC1602 EXAM PACK 2025

Introduction and overview of the module ......................................................... ii LEARNING UNIT 1 Introduction to the preparation of financial statements .......................... 1 LEARNING UNIT 2 Financial statements of a sole proprietorship ........................................ 24 LEARNING UNIT 3 Establishment and financial statements of a partnership ...................... 46 LEARNING UNIT 4 Changes in the ownership structure of partnerships ............................. 69 LEARNING UNIT 5 Close corporations ................................................................................ 86 LEARNING UNIT 6 Statement of cash flows ........................................................................ 129 LEARNING UNIT 7 Branches ............................................................................................... 155 FAC1602/501/3/2022 iii Introduction and overview of the module 1. Word of welcome Dear Student We are pleased to welcome you to this module and hope that you will find the content both interesting and rewarding. We shall do our best to assist you to master this module and we recommend that you start studying immediately after enrolment. Accounting is a subject that requires continued exercise by working through many examples and you will be required to work continually throughout the semester. First-year accounting at UNISA consists of the following modules, namely FAC1502 and FAC1601 or FAC1602. If you aim to become a chartered accountant (CA) or plan to include second- and third-year Financial Accounting modules in your degree, the FAC1601 module is compulsory. The same applies to other qualifications where second- and third-year Financial Accounting is required. Completing FAC1502 and FAC1601 successfully, will allow you to enrol for the second-year modules FAC2601 and FAC2602. If your focus is certain diplomas and other Bachelor of Commerce degrees where you only need first-year Financial Accounting, we recommend that you enrol for the FAC1602 module. However, ensure that FAC2601 and FAC2602 are not included in your degree’s curriculum as only the FAC1601 allows access to further studies in Financial Accounting. 2. Overview of FAC1602 and assumed knowledge from FAC1502 FAC1602 concerns itself with the issues of accounting reporting for different entities and builds on the learning outcomes of FAC1502. You will remember that in FAC1502 the following topics were covered: iv FAC1502 taught the basic bookkeeping functions and introduced you to the concepts, principles and procedures of accounting. It is important to realise that FAC1502 forms the foundation for all other financial accounting modules. The knowledge that you gained in FAC1502 forms the building block of this module and cannot be repeated. If you need to refresh your memory on these concepts, please refer to your FAC1502 guide and other supplementary learning material for that module. Although the aim is not to provide an exhaustive list of concepts dealt with in FAC1502, we provide you with a summary of the most important ones to enable you to refer with ease: • Value-added tax (VAT) – section 5.10 in the FAC1502 guide and section 5.4 in the textbook. Remember that the input and output VAT accounts are closed off to a VAT control account which can be either a debtor (if VAT input is greater than VAT output for the period) or a creditor (when VAT output is greater than VAT input for the period). In this module, we refer to the VAT debtor account as VAT receivable and the VAT creditor account as VAT payable. • The recording of depreciation – section 6.3 and section 11.5 – 7 in the FAC1502 guide and section 11.7 in the textbook. Familiarise yourself with the reason for depreciation, the journal entries to provide for depreciation and the different methods that can be used F A C 1 5 0 2 Basic principles of accounting Including the nature of accounting, financial position and performance, double entry and the accounting process Collecting and processing accounting data Including the processing of data and adjustments, closing-off procedures and preparing financial statements Accounting for current and non-current assets Including cash and cash equivalents, trade and other receivables, inventory, property, plant and equipment, and other non-current assets Accounting for current and non-current liabilities Accounting reporting Including the financial statements of a sole proprietor, non-profit entities and incomplete records FAC1602/501/3/2022 v to calculate depreciation. These methods are the diminishing-balance, the straight-line and the production unit method. Remember that the useful life of an asset is an estimation that must be reviewed annually, and the depreciable amount is reduced with the residual value or scrapping value of the asset. • Credit losses and allowances for credit losses – section 9.5 in the FAC1502 guide and section 9.4–9.6 in the textbook. Refresh your memory on the journal entries to write off credit losses as well as to create, increase or reduce an allowance for credit losses. Also refer to section 9.8 in the textbook where the VAT on credit losses is discussed and how to journalise the VAT amount when credit losses are written off. Remember that when credit losses previously written off are recovered, that a VAT output must again be accounted for. • Settlement discount granted and allowance for settlement discount granted – section 5.9 and 9.2 – 9.3 in the FAC1502 guide and section 9.3 in the textbook. Remember that settlement discount granted reduces sales in financial statements. Refresh your memory on the VAT implications that arose with settlement discount granted and how to account for VAT on settlement discounted granted in the journals of first entry. • Settlement discount received – section 5.9 in the FAC1502 guide and section13.6 in the textbook. Remember that settlement discount received reduces purchases in financial statements. The same VAT implications as for settlement discount granted are applicable and you need to refresh your memory on the treatment of settlement discount received in the journals of first entry. • Inventory systems – section 7.4 in the FAC1502 guide. Remember that an entity can either use a perpetual (continuous) inventory system or a periodic inventory system. When a perpetual inventory system is used, the cost of sales is determined for every transaction and the inventory account reflects the purchases and sales of inventory items. Under this inventory system, a purchase journal and purchase returns journal are not used, and a physical inventory count will disclose shortages or surpluses in inventory. When a periodic inventory system is used, purchases and purchases returns journals are used. Accounts are closed off to a trading account. The trading account is used to calculate cost of sales as no cost of sales account is kept and a physical inventory count is essential to establish the closing inventory. • Inventory valuation – please familiarise yourself with the calculation of the cost of inventory, which includes the cost of purchases, conversion costs and other cost. The cost of purchases includes the purchase price, import duties, non-recoverable taxes, transportation costs and handling costs. The cost of purchases must be reduced by trade discounts, settlement discounts and rebates on purchases. Conversion costs include, for example, direct labour cost, variable production overhead costs and fixed overhead cost based on production at normal capacity. Other cost could include, for example, designing and storage costs. Refresh your memory on the different inventory valuation methods such as first-in-first-out (FIFO) and weighted average that were covered in FAC1502. Remember that inventory is valued in the financial statements at the lower of cost or net realisable value (NRV). The NRV is the selling price less the cost to make the sale and these costs can include inventory completion costs, trade and other discounts allowed, advertising cost, sales commission, packaging costs and transport costs. Assuming that your abovementioned knowledge is refreshed and sufficient, we can now discuss the module objective and content of FAC1602. vi 3. Module objective of FAC1602 The main objective of this module is to teach you certain aspects of financial accounting and reporting so that you are able to do the following: • Discuss specified aspects of the Conceptual Framework for the preparation and presentation of financial statements. • Understand and apply the concept of International Financial Reporting Standards (IFRS). • Prepare the financial statements for sole proprietors, partnerships and close corporations according to certain of the requirements of International Accounting Standards 1 (IAS 1). • Apply the accounting procedures to record changes in the ownership structure of partnerships on the admittance, retirement or death of partners. • Prepare statements of cash flows for sole proprietors, partnerships and close corporations according to the requirements of International Accounting Standard 7 (IAS 7). In this course only, the direct method is prescribed and dealt with. The FAC1602 module content is illustrated in the following diagram: FAC1602/501/3/2022 vii F A C16 0 2 + a p plie d k n o wle d g e f r o m F A C15 0 2 Learning Unit 1 Introduction to the preparation of financial statements Learning Unit 2 Financial statements of a sole proprietorship Learning Unit 3 Establishment and financial statements of a partnership Learning Unit 4 Change in the ownership structure of partnerships Learning Unit 5 Close corporations Learning Unit 6 Statement of cash flows Learning Unit 7 Branches viii 4. Using this Tutorial Letter (TL501), Tutorial Letter 101 (TL101) and the prescribed textbook This tutorial letter and the prescribed textbook, About Financial Accounting Volume 2, are the primary sources of learning content for this module. The prescribed textbook contains a major part of the learning content and must be used according to the directives given in this tutorial letter. For example, the guide will indicate that certain sections in the prescribed textbook need only be read, whereas other sections must be studied thoroughly. Such references usually include action words. In this regard, the following action words should be interpreted as follows: ACTION WORD Read Read to obtain broad and basic background knowledge of the subject under discussion. You must read attentively so that theory/explanations are clearly understood. You may be assessed on the theory by means of short questions in activities and assignments. Study Learn with a view to gaining the highest level of understanding that is necessary to solve problems in exercises, assignments and in the examination. This level of knowledge will also be necessary for further studies in financial accounting and/or your career. You will never be required to give a definition of a concept or to discuss theory in the examination. You will, however, be required to apply the theory in the correct accounting format and to apply the correct steps/procedures. For example, the layout and terminology to be used in the preparation of financial statements are prescribed by the International Accounting Standards. You may not use any other format. Each learning unit starts with several learning outcomes, which will direct your learning. The learning outcomes indicate what is expected of you to understand, know, calculate, disclose and apply and will help you to structure your learning. In each learning unit, keywords or key concepts are provided and should give you an indication of the issues that are being dealt with in the learning content. Activities, examples and exercises will get you involved in the content of the learning unit. These are designed to find out if you have the necessary assumed knowledge, understand the work and can apply new knowledge gained. Activities can be in the form of theory questions, multiple-choice questions, calculations, journal entries or true or false questions, whereas examples and exercises are detailed questions dealing with the learning content. Exercises are indicative of the types of questions that can be expected in assignments and in the examinations. Activities, examples and exercises imply “doing”. They help you to cover the content of the module systematically. For you to become an active learner, you should first do the activity, example and exercise before referring to the feedback and solutions. FAC1602/501/3/2022 ix The following icons are used in this tutorial letter to refer to the above-mentioned concepts: ICON DESCRIPTION Learning outcomes. This icon indicates which aspects of the particular topic you must master and show that you understand. Key concepts. The learning content will address the following issues. Activity. This icon indicates activities that you must do to develop a deeper understanding of the learning material. Self-assessment. This icon indicates that you will be required to test your knowledge, understanding and application of the material you have just studied. Feedback. This icon indicates that you will receive feedback on your answers to the activities. Read. If you are required to read a certain section, you should take note of the contents because that section will contain useful background information or offer another perspective of further examples. Study. This icon indicates which aspects of the study material you need to study and internalise. Time-out. Well done – you have completed the learning unit! To indicate the length, scope and format of answers to questions, action verbs are deliberately applied. An analysis of the action verbs in a question should enable you to: • plan the answer systematically • ensure that you comply with the lecturer’s/examiner’s requirements x A clear understanding of the meaning of certain words is required. For the purpose of this module, the following interpretations are given: WORD INTERPRETATION Adjust To adapt to new conditions/environment; to put in order; add, change Apply Use in a practical manner; use as relevant or suitable Calculate Ascertain by mathematical procedure/exact reckoning Clarify Make clear the meaning of; explain the intention of; show by reasoning/evidence Compare Examine to observe resemblances, relationships and differences Complete Finish/add what is required; show the necessary detail Define State precisely the meaning/scope/total character of; make clear (especially the outline of); give a concise description of the distinguishing features of Describe Give clearly the distinguishing details or essential characteristics of Discuss Examine by argument, debate, hold conversation about Explain Set out in detail (interpret); give the meaning of or account for something; make something understandable List Record/itemise names or things belonging to a class Mention/name/state Specify by name; cite names, characteristics, items, elements of facts Prepare Make ready/complete for a particular purpose; to put together using parts; compose, construct. Compile or complete what is required on the basis of prior knowledge Reconcile To make or become visible, noticeable; to exhibit or present; to indicate Record Put in writing; set down for reference or retention Show To make compatible or consistent with each other At the end of each learning unit, there is an elementary self-assessment questionnaire, which you must complete to evaluate your knowledge of the learning content of each learning unit and to monitor your progress. These questionnaires are presented in the form of questions to which you must answer either “yes” or “no”. If you have answered “yes” to all the questions, you may proceed to the next learning unit. If you have any “no” answers, you must study that particular section of the work again. Since a clear understanding of certain aspects in a learning unit may be essential for your further understanding of the course, you are advised FAC1602/501/3/2022 xi not to go on to the next learning unit until you have resolved all your problems in the preceding one. Before you start studying, please read the discussion section in Tutorial Letter 101. Apart from details on the prescribed textbook, this tutorial letter contains valuable guidelines on how to go about studying this module, as well as suggested time specifications pertaining to each learning unit to ensure that you cover the whole syllabus in time. It also provides you with the contact and communication details of your lecturers for the FAC1602 module. 5. Calculations and cash transactions It is very important that you show all your calculations in your answers to exercises and questions. In this tutorial letter and the prescribed textbook, short calculations are disclosed in brackets after an entry in a journal, ledger account or financial statement. Note that these calculations do not form part of the actual accounting disclosures. They are disclosed as such for practical illustrative purposes only. Calculations that are more elaborate are referred to by encircled symbols, for example “”. Sub-calculations are referred to by shaded encircled symbols, for example “”. You may follow the same or a similar approach when preparing your answers in assignments and examinations. You should be aware that the books of first entry in respect of cash transactions are the cash receipts journal and the cash payments journal as taught in FAC1502. However, to simplify matters in this module, cash transactions, where required, are disclosed in the general journal. 6. Feedback request If there is anything discussed in the prescribed textbook or this tutorial letter which in your opinion needs to be explained in more detail or in a different fashion, please notify us accordingly by post or e-mail. The postal and e-mail addresses of this module are provided in Tutorial Letter 101. We trust that you will enjoy this module and wish you all the best! Lecturers FAC1602: Elementary Financial Accounting and Reporting “It is difficult to say what is impossible, for the dream of yesterday is the hope of today and reality of tomorrow.” Robert Goddard FAC1602/501/3/2022 1 LEARNING UNIT 1 1 Introduction to the preparation of financial statements Learning outcomes .............................................................................................................. 2 Key concepts ....................................................................................................................... 3 1.1 Introduction ................................................................................................................. 4 1.2 Conceptual framework for financial reporting .............................................................. 5 1.3 Applicable International Financial Reporting Standards ............................................ 10 1.4 Presentation of financial statements: IAS 1 ............................................................... 10 1.5 Financial instruments ................................................................................................ 14 1.6 Practical applications of IAS 1 and financial instruments ........................................... 17 1.7 Exercises and solutions ............................................................................................ 17 Self-assessment ................................................................................................................ 22 2 Learning outcomes After studying this learning unit, you should be able to: • explain the acronyms IFRS, IAS, APB, FRSC and SAICA, and know what they entail • describe what the concept "Conceptual Framework" entails • list the specific purposes of the Conceptual Framework regarding the preparation and presentation of financial statements • explain the main objectives of financial statements per the Conceptual Framework • explain the underlying assumption when preparing financial statements per the Conceptual Framework • discuss the qualitative characteristics of financial statements per the Conceptual Framework • explain what the Conceptual Framework implies when it refers to the constraints in preparing financial statements • discuss the elements of financial statements as explained in the Conceptual Framework and indicate which elements pertain to the statement of financial position and which to the statement of profit or loss and other comprehensive income • discuss the concepts of recognition and disclosure of the elements incorporated in financial statements, as explained in the Conceptual Framework • explain what is meant by the measurement of the elements of financial statements by referring to the measurement methods discussed in the Conceptual Framework • explain what type of business ownership must comply with IFRS • define each of the following terms per IAS 1: − fair presentation − going concern − accrual basis of accounting − materiality and aggregation − offsetting − frequency of reporting − comparative information − consistency of presentation • list the individual statements that, per IAS 1, together form the complete set of financial statements of a reporting entity • explain what is meant by the identification of financial statements • explain what is meant by reporting period • explain which items comprise current assets and current liabilities per IAS 1 • list the items that must be presented on the face of the Statement of Financial Position and the Statement of Profit or Loss and Other Comprehensive Income respectively by referring to IAS 1 • list the items that can be presented on either the face of the Statement of Financial Position and the Statement of Profit or Loss and Other Comprehensive Income or in the notes to these statements for the particular reporting period per IAS 1 • discuss the purpose of notes, by referring to IAS 1 • discuss, according to IAS 1, the order in which items are disclosed as notes to financial statements FAC1602/501/3/2022 3 • explain or define the following: − a financial instrument − a financial asset − a financial liability − fair value − a contract • distinguish between financial instruments, financial assets and financial liabilities • recognise, measure and present certain financial assets and liabilities in the financial statements Key concepts • Conceptual Framework • Underlying assumption • Qualitative characteristics • Components of financial statements • Elements of financial statements • Recognition • Measurement of elements • Capital • Capital maintenance • Reporting period • Financial instruments • Financial assets • Financial liabilities • Fair value 4 1.1 Introduction In FAC1502, we learnt that every business entity usually uses some accounting system to collect financial data from a multitude of financial transactions. The entity then uses the data and processed information about the entity’s financial performance and financial position to present the information in a usable format (e.g. financial statements, budgets) that will assist the users to make economically viable decisions. Remember that the accounting system covered in FAC1502 forms the foundation for reporting the information to users. In the introduction to this learning unit, we will briefly explain the regulatory framework applicable to financial reporting in South Africa and give you an overview of why financial statements must comply with certain requirements and who is responsible for issuing and overseeing compliance with the regulatory framework. To have financial information available that is meaningful and comparable across different types of entities in countries around the world, the quest became to develop a set of prescriptive standards that will provide guidance and prescribe certain principles that can be used to prepare financial statements. Most countries established governing bodies with a mandate to develop these standards. One of the many governing bodies mandated to embark on this quest was the Accounting Practices Board (APB), which was established in South Africa in 1973. The APB issued accounting standards which were collectively known as South African Statements of Generally Accepted Accounting Practice or SA GAAP. All listed and unlisted companies in South Africa were required to use SA GAAP as their reporting framework when preparing financial statements. In the 1990s, the APB decided to incorporate South Africa into the international accounting standards arena and to harmonise SA GAAP with the standards issued by the International Accounting Standards Board (IASB) and its predecessor. The predecessor of the IASB issued International Accounting Standards (IASs) from 1973 until 2001, when the IASB was established. These IASs are now designated as part of International Financial Reporting Standards (IFRS), as these international standards are currently called. As from January 2005, the Johannesburg Stock Exchange (JSE) requires all listed companies to comply with IFRS. The Companies Act 71 of 2008 that came into effect in May 2011 established a body known as the Financial Reporting Standards Council (FRSC), which is now the South African governmental accounting standard-setting body. The South African Institute of Chartered Accountants (SAICA) serves as the technical advisor to the FRSC. Because of the high regard of the usefulness of these standards to prepare financial statements that are usable and comparable across countries, it became common practice to also apply these statements, either in full or to a limited extent, when preparing the financial statements of entities other than companies. IFRS deal with identification, recognition, measurement, presentation and disclosure requirements in general-purpose financial statements. These financial standards are directed at a wide range of users, such as investors, shareholders, creditors, banks, the South Africa Revenue Service (SARS), employees and other interest parties. There are currently two reporting frameworks available, namely full IFRS or IFRS for SMEs. FAC1602/501/3/2022 5 You can read more on the regulatory reporting framework and which companies must comply with either full IFRS or IFRS for SMEs in section 1.3 in the prescribed textbook. FAC1502 introduced you to the Conceptual Framework, which is also the starting point of this learning unit. 1.2 Conceptual framework for financial reporting 1.2.1 Introduction The Conceptual Framework for Financial Reporting was issued by the International Accounting Standards Board (IASB). This document contains a group of interrelated objectives and theoretical principles that serve as a frame of reference for financial accounting and, more specifically, financial reporting. As the content of the Conceptual Framework is discussed in sufficient detail in the prescribed textbook of this module, it is unnecessary to obtain a copy thereof. Read paragraph 1.3.1 and 1.3.2 in the prescribed textbook. Take note of the overview of the conceptual framework diagram which will help you to place the content of the Conceptual Framework into perspective. Activity 1.1 a) Describe in your own words what you perceive a framework to be. b) Describe the purpose of the Conceptual Framework. Would you say that the Conceptual Framework is similar to an IFRS? Feedback 1.1 a) A framework serves as a reference for an area of enquiry and often provides the theoretical background to test practical problems. The financial accounting framework is a set of theoretical concepts and principles, which forms the basis for establishing and developing reporting practices. b) The purpose of the Conceptual Framework, inter alia, is to assist • in the development of future standards • in harmonising legislation and reducing the number of alternative accounting treatments • users in interpreting the information in financial statements when compiled according to IFRS 6 The Conceptual Framework is not an IFRS and does not override any particular disclosure or measurement requirement in any IFRS. It is the foundation on which principle-based IFRS is founded. 1.2.2 Objective of general-purpose financial reporting The objective of general-purpose reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. These decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit. Potential and existing investors are interested in the returns they expect, while creditors and other lenders are interested in principal repayments and interest payments they expect. Read paragraph 1.3.3 in the prescribed textbook. Activity 1.2 Who do you think are the users of financial statements? Name a few. Feedback 1.2 The primary users of financial statements are present and potential investors of the entity, lenders, customers and creditors. Other users include the owners/shareholders of the entity, trade unions (for collective bargaining), entity’s management, Government and its agencies, such as the South African Revenue Service (SARS) and the public. 1.2.3 Qualitative characteristics of useful financial information Study paragraph 1.3.4 in the prescribed textbook. You must be able to explain in your own words what each qualitative characteristic entails. Activity 1.3 a) Name the fundamental and enhancing qualitative characteristics of financial reporting as stipulated in the Conceptual Framework. b) Should one report all matters, irrespective of the cost of reporting? FAC1602/501/3/2022 7 Fundamental qualitative characteristics 1. Relevance 2. Faithful representation Enhancing qualitative characteristics 1. Comparability 2. Verifiability 3. Timeliness 4. Understandability Feedback 1.3 a) b) The cost of providing reporting information must be justified by the benefits derived from the information. 1.2.4 Financial statements and reporting entity The general purpose of financial statements is discussed in paragraph 1.3.5 in the prescribed textbook. Study this section diligently. 1.2.5 Elements of financial statements Study paragraph 1.3.6 in the prescribed textbook. Elements that pertain to the statement of financial position are assets, liabilities and equity, whilst elements that pertain to the statement of profit or loss and other comprehensive income are income and expenses. You must learn the definitions of these elements by heart as you will have to apply the definitions to establish whether a transaction results in the creation of an asset, liability, equity, income or an expense. The value of a reporting entity lies in the net assets (assets minus liabilities) under its control. It is therefore important to realise that assets can be recognised in the statement of financial position even though the entity may not be the legal owner thereof. Activity 1.4 Define an asset, a liability and equity according to the Conceptual Framework. 8 Feedback 1.4 An asset is: • a present economic resource • controlled by a reporting entity • as a result of past events. A liability is: • a present obligation of a reporting entity • to transfer and economic resource • as a result of past events. Equity is the residual interest in the assets of the entity after deducting all the liabilities. Remember to also learn the definition of an income and expense as they are defined in paragraph 1.2.6.3 in the prescribed textbook. Income encompasses revenue and gains, and it is important to understand the difference between revenue and gains and give examples. Revenue and gains are normally separately reported. Expenses, on the other hand, also encompass losses, which are also normally separately reported. 1.2.6 Recognition of the elements of financial statements Study paragraph 1.3.7 in the prescribed textbook. Before an item can be disclosed in a financial statement, it must first be recognised. However, all recognised items need not be disclosed. Take note of when an element of the financial statements should be recognised and what the criteria for the recognition of each element are. Activity 1.5 When will an asset, liability, income and expenses elements be recognised in the appropriate financial statement? Feedback 1.5 An asset or liability is recognised in the statement of financial position only if that asset or liability, and of any resulting income, expenses or changes in equity, provide the users of the financial statements with useful information. Useful information, in turn, must be relevant and faithfully represented. FAC1602/501/3/2022 9 1.2.7 Measurement of the elements of financial statements “Measurement” means the process of determining the monetary value (amounts) at which the elements of the financial statements are to be recognised and disclosed. Two bases of measurement are listed in the Conceptual Framework, namely (1) historical costs and (2) current value. Study historical cost and current value carefully as these are the two bases you will encounter the most in this module. Financial instruments, which you will encounter later in this learning unit, are mainly measured at fair value whereas property, plant and equipment are often measured at historical cost less accumulated depreciation and impairment, unless entities choose to incorporate a revaluation model which will allow these assets to be revalued to more recent values. Revaluations are covered in more detail in advanced accounting studies. Both these measurement bases are explained in paragraph 1.3.8 in the prescribed textbook. Make sure that you can describe each in your own words. Activity 1.6 Name five measurement bases that are often encountered in a set of financial statements. Feedback 1.6 Historical cost, realisable value, current cost, present value and fair value. 1.2.8 Presentation and disclosure Presentation and disclosure requirements are discussed in paragraph 1.3.9 in the prescribed textbook. Make sure that you gain a good grasp of each of these requirements. Activity 1.7 When is information effectively communicated in the financial statements? Feedback 1.7 Information is effectively communicated in the financial statements when it … • focuses on presentation and disclosure objectives and principles • classifies information in a manner that groups similar items and separates dissimilar items • aggregates information in such a way that it is not obscured by unnecessary detail. 10 1.2.9 Concepts of capital and capital maintenance The selection of a measurement basis and the concepts of capital and capital maintenance determine the model according to which financial statements are prepared. There are two basic concepts of capital and capital maintenance, namely (1) the financial concept and (2) the physical concept. The financial concept of capital is synonymous with the net assets or equity of a business entity. The physical concept pertains to the productive capacity of the entity, for example the units of production per day. Read paragraph 1.3.10 in the prescribed textbook. 1.3 Applicable International Financial Reporting Standards IFRS must be applied when the financial statements of entities that are incorporated under the Companies Act No 71 of 2008 (hereinafter referred to as the Companies Act) are prepared. The fact that such compliance is not required by any other form of business ownership does not mean that the requirements of these statements cannot be applied when the financial statements of business entities other than companies are prepared. In the remainder of your accounting studies, IFRS are taught and applied to all types of reporting entities. The remainder of this learning unit deals with some important IFRS issued to assist us to present financial statements in a useful and comparable way, namely IAS 1, IFRS 7 and 9 and IAS 32 and 39. In IAS 1, many of the concepts that you have encountered in the Conceptual Framework are enforced, for example the purpose of general purpose financial statements, the users thereof, the elements of financial statements and the underlying principle of going concern. Although you will encounter financial instruments (IFRS 7 and 9 and IAS 32 and 39) in more advanced accounting studies, this learning unit introduces the concept and the main definitions. The aim is to lay a foundation as all entities encounter financial instruments in some form and must include them in their respective financial statements. Ensure that your foundation on financial instruments, as presented in this learning unit, is solid and that you know and understand the content as presented in the textbook and this learning unit. 1.4 Presentation of financial statements: IAS 1 Read the overview of the presentation of financial statements (IAS 1) in paragraph 1.4 in the prescribed textbook. 1.4.1 Introduction The objective of IAS 1 is to prescribe the basis for the presentation of general-purpose financial statements to ensure comparability with: FAC1602/501/3/2022 11 • an entity's financial statements of previous financial periods • the financial statements of other comparable entities. Read paragraph 1.4.1 in the prescribed textbook to learn more about the objective and purpose of IAS 1. 1.4.2 Definitions Certain accounting terms are defined in IAS 1 and listed in paragraph 1.4.2 in the prescribed textbook. Study the definitions in paragraph 1.4.2 in the prescribed textbook. Activity 1.8 Make a list of the new definitions that you will encounter in IAS 1. You don’t have to define them for this activity. Feedback 1.8 • General-purpose financial statements • Impracticable • Material omissions • Notes • Owners • Profit or loss • Other and total comprehensive income 1.4.3 The purpose of financial statements The main purpose of financial statements is to provide useful information to the users thereof. To achieve this purpose, financial statements must provide information about each of the elements listed in the Conceptual Framework in a specific format. 1.4.4 General features You have already encountered some of the overall considerations when preparing financial statements in the Conceptual Framework, such as going concern, materiality, comparability and consistency. Make sure that you understand additional ones such as fair presentation, accrual basis, offsetting and the frequency of reporting. 12 Study paragraph 1.4.4 in the prescribed textbook. 1.4.5 Structure and content of financial statements Structure and content have to do with the format in which financial statements must be presented and with the items that must be disclosed. Structure and content are essential aspects that pertain to the preparation of financial statements and you must study them carefully. Read paragraph 1.4.5.1 in the prescribed textbook. 1.4.5.1 Identification of financial statements Each financial statement and its component(s) must be identified by giving it a name tha