STUDY UNIT 1
INTRO TO COMPANY ANNUAL FINANCIAL
INTRODUCTION
Company is formed by its founders. Establishment of it is regulated by Companies Act 61 of 1973. following procedure
has to be followed:
Memorandum of Association and Articles are set up
Memorandum with prescribed forms and fees are submitted to Registrar of companies
Company comes into existence as soon as registrar of companies certifies memorandum and issues certificate of
incorporation
Registrar issues a further certificate that gives comp right to commence buss
Main aspects included in memorandum of association (external characteristics):
Purpose for which comp was formed and main business
Name of comp
Details of share capital with which comp registered
Main aspects included in memorandum of articles (internal characteristics):
Meetings
Voting rights and procedures
Loan powers
Rights and responsibilities of directors
TYPES OF COMPANIES
Two types of companies may be formed:
Comp having share capital which are sub-divided into a “public” and “private” comp
Comp without share capital known as “limited by guarantee”, which are deemed to be public companies
Private Company
Share capital which has limitations placed on it by its articles
Cant freely transfer shares to/between shareholders
Membership limited to 50 members
Cant make an offer for subscription of its shares/debentures to the public
Company is widely-held and limited-interest company if:
Its articles provide an unrestricted transfer of its shares
Its permitted to offer shares to the public
Decides by special resolution to be widely-held company
It’s a subsidiary of a company described in the three requirements above
Comp is limited-interest comp if not a widely-held company
POWERS RELATING TO PRE-INCORPORATION CONTRACTS(pic)
Pic can b entered into by agents/trustees on behalf of comp yet to be incorporated provided:
- contract is ratified by comp after incorporation
- memorandum of comp has as an object for the ratification of such contracts
Section 35 states a comp can, following incorp, ratify and adopt a contr entered into before its incorporation, provided the
following requirements are met:
- contr must be in writing
- contr must have been entered into by person who declared himself to b agent/trustee of comp still to b incorp.
- Memorandum on its registration must contain an object clause for the ratification and adoption of pic
, - 2 copies of contr, 1 certified by notary public, must b lodged with the articles and memorandum, at registrar of
companies
Pre-incorporation profits
- If comp obtains buss through conclusion of pic, its possible that profits may accrue by comp not yet incorporated.
- Known as pic profits and considered to b of capital nature
- These profits may b distributed as dividends
- Treatment of pic profits will depend on provisions of purchase contr relating to acquisition of going concern
1. If purchase price payable in cash and purchaser paid in excess of net asset value of entity, the goodwill will be
applied to writing off the capital profits(pic profits)
Property, plant, equipment 100,000
Inventories 80,000
Debtors 70,000
Goodwill(balancing #) 30,000
Creditors 40,000
Bank 240,000
Net sundry nominal accounts 20,000
Pre-incorporation profits 20,000
(pic realised)
Pre-incorporation profits 20,000
Goodwill 20,000
(pic offset against goodwill)
2. If still cash transaction, but purchaser and seller in pic included specific amount for goodwill, then capital profit
shown as a reserve.
If articles prohibit distribution of capital profits, then this forms part of non-distributable reserves.
If articles don’t prohibit it, pi profits are treated as distributable
Property, plant, equipment 100,000
Inventories 80,000
Debtors 70,000
Goodwill(predetermined) 30,000
Creditors 40,000
Bank 240,000
Net sundry nominal accounts 20,000
Pre-incorporation profits(reserve) 20,000
(realisation of pre-incorporation profits)
- If purchase price paid is payable by issue of shares, its suggested that pic profits realised should b treated as share
premium(reserve) in accordance with section 76(2)
- Pic profits can be offset against goodwill, unless otherwise stated in purchase contr
- If pic losses are suffered, the conservatism concept applies and losses are written off in income statement
immediately.
Profit/Loss between incorp date and dated on which certificate to commence buss is received
Profits considered distributable since they were earned after comp was incorp, even though certificate has not been
received.
Losses are recognised in income statement when thye occur and reduce distributable reserves(retained earnings)
accordingly.
Pre-acquisition profits
Same as above
, ANNUAL FINANCIAL STATEMENTS
Comp obliged to draw up annual finance st, using ledger accounts, cash books and journals
Users find this endless mine of info on which they base realistic buss and economic decisions
Users – owners, investors, mng, borrowers, suppliers, creditors, tax authorities, bankers, employers
Forms basis for conclusions and eventual decision making.
Comp act contains req. regarding disclosure of info in statements (schedule 4 of act). Failure to meet these req. is a
contravention of comp act.
Statements have to b drawn up in accordance with GAAP and specific req. of schedule 4
AFS (annual financial statements) are drafted, published and submitted to annual general meeting of members.
Thus mainly drafted and directed to shareholders.
AFS must reflect state of affairs of comp and its buss at end of finance. Year as well as profit/loss for that year
AFS must comply with 4 qualitative req.
GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP)
Research was done to determine what general practice iro drafting and disclosure of into in comp AFS.
After GAAP was determined, this used as lay down a standard.
ACCOUNTING POLICY AND NOTES
More than 1 acc policy can by applied iro matters such as inventories, its nb for comp to disclose which policy its
using in the notes
, STUDY UNIT 2
THE FRAMEWORK OF ACCOUNTING
SCHEMATIC REPRESENTATION OF FRAMEWORK
Users – decision makers and their characteristics and assumed levels of knowledge
Assumptions - accrual basis, general purpose of AFS, going concern
Qualitative characteristics – understandability, relevance, reliability, comparability
Components of qualitative charac – predictive value, confirmation value, faithful representation, neutrality,
consistency
Other considerations – nature, materiality, substance over form, completeness, prudence
BACKGROUND
Read chapter 1, pg 3.1 and 3.2
SCOPE OF THE FRAMEWORK
Read chapter 1, pg 4
USERS OF FINANCIAL STATEMENTS
Biggest difficulty is wide range of users, each with different perspective that need to use the AFS.
Investors – suppliers of risk. Need info on inherent risk and return on their investment. AFS usually most nb
source on info when deciding on whether to buy, sell or hold shares. Most concerned with comp ability to generate
net cash inflows. Equity investors view entity as source of cash in form of dividends and increases in prices of
shares. Ability of comp to achieve these goals affect price of equity interests.
Employees – info about stability, profitability, growth of employer and employment opportunities offered. Want to
know employer can afford remuneration package and agreed retirement benefits
Lenders – info to assess likelihood that capital and interest payments will be met as scheduled. Thus solvency and
liquidity of comp
Suppliers – info to assess if amounts owed to them will b paid timeously. Future cash flows
Customers – assess if comp will continue exist in future, viewed as source of goods and services
Government and its agencies – info for levying of taxes and statistical info for policy decisions
Public – info on several aspects, ex. contribution to economy, creation of work, paying taxes, charitable
contributions. Range of activities, trends, future ability to deliver service. Environmental sustainability practices
Framework follows investor-centred approach by suggesting that info needs of other users will be largely satisfied
by providing info that investors req.
OBJECTIVES AND COMPONENTS OF FINANCIAL STATEMENTS
afs not only source when making econ decisions, only shows past events and not non-financial info.
But IFRS also req non-financial info and future info, this trend likely to continue
Stewardship currently shows in corporate governance and accountability. Shareholder activism implies that
shareholders no longer merely accept statements made my mng, but seek more info of higher quality
AFS must contain info that is:
Useful to current and potential investors, including creditors and other users who make rational decisions on their
investments and supply credit to comp.
Info must b understandable
About manner in which mng performs its stewardship function
Useful to directors and mng when making decisions that affect owners of comp
INTRO TO COMPANY ANNUAL FINANCIAL
INTRODUCTION
Company is formed by its founders. Establishment of it is regulated by Companies Act 61 of 1973. following procedure
has to be followed:
Memorandum of Association and Articles are set up
Memorandum with prescribed forms and fees are submitted to Registrar of companies
Company comes into existence as soon as registrar of companies certifies memorandum and issues certificate of
incorporation
Registrar issues a further certificate that gives comp right to commence buss
Main aspects included in memorandum of association (external characteristics):
Purpose for which comp was formed and main business
Name of comp
Details of share capital with which comp registered
Main aspects included in memorandum of articles (internal characteristics):
Meetings
Voting rights and procedures
Loan powers
Rights and responsibilities of directors
TYPES OF COMPANIES
Two types of companies may be formed:
Comp having share capital which are sub-divided into a “public” and “private” comp
Comp without share capital known as “limited by guarantee”, which are deemed to be public companies
Private Company
Share capital which has limitations placed on it by its articles
Cant freely transfer shares to/between shareholders
Membership limited to 50 members
Cant make an offer for subscription of its shares/debentures to the public
Company is widely-held and limited-interest company if:
Its articles provide an unrestricted transfer of its shares
Its permitted to offer shares to the public
Decides by special resolution to be widely-held company
It’s a subsidiary of a company described in the three requirements above
Comp is limited-interest comp if not a widely-held company
POWERS RELATING TO PRE-INCORPORATION CONTRACTS(pic)
Pic can b entered into by agents/trustees on behalf of comp yet to be incorporated provided:
- contract is ratified by comp after incorporation
- memorandum of comp has as an object for the ratification of such contracts
Section 35 states a comp can, following incorp, ratify and adopt a contr entered into before its incorporation, provided the
following requirements are met:
- contr must be in writing
- contr must have been entered into by person who declared himself to b agent/trustee of comp still to b incorp.
- Memorandum on its registration must contain an object clause for the ratification and adoption of pic
, - 2 copies of contr, 1 certified by notary public, must b lodged with the articles and memorandum, at registrar of
companies
Pre-incorporation profits
- If comp obtains buss through conclusion of pic, its possible that profits may accrue by comp not yet incorporated.
- Known as pic profits and considered to b of capital nature
- These profits may b distributed as dividends
- Treatment of pic profits will depend on provisions of purchase contr relating to acquisition of going concern
1. If purchase price payable in cash and purchaser paid in excess of net asset value of entity, the goodwill will be
applied to writing off the capital profits(pic profits)
Property, plant, equipment 100,000
Inventories 80,000
Debtors 70,000
Goodwill(balancing #) 30,000
Creditors 40,000
Bank 240,000
Net sundry nominal accounts 20,000
Pre-incorporation profits 20,000
(pic realised)
Pre-incorporation profits 20,000
Goodwill 20,000
(pic offset against goodwill)
2. If still cash transaction, but purchaser and seller in pic included specific amount for goodwill, then capital profit
shown as a reserve.
If articles prohibit distribution of capital profits, then this forms part of non-distributable reserves.
If articles don’t prohibit it, pi profits are treated as distributable
Property, plant, equipment 100,000
Inventories 80,000
Debtors 70,000
Goodwill(predetermined) 30,000
Creditors 40,000
Bank 240,000
Net sundry nominal accounts 20,000
Pre-incorporation profits(reserve) 20,000
(realisation of pre-incorporation profits)
- If purchase price paid is payable by issue of shares, its suggested that pic profits realised should b treated as share
premium(reserve) in accordance with section 76(2)
- Pic profits can be offset against goodwill, unless otherwise stated in purchase contr
- If pic losses are suffered, the conservatism concept applies and losses are written off in income statement
immediately.
Profit/Loss between incorp date and dated on which certificate to commence buss is received
Profits considered distributable since they were earned after comp was incorp, even though certificate has not been
received.
Losses are recognised in income statement when thye occur and reduce distributable reserves(retained earnings)
accordingly.
Pre-acquisition profits
Same as above
, ANNUAL FINANCIAL STATEMENTS
Comp obliged to draw up annual finance st, using ledger accounts, cash books and journals
Users find this endless mine of info on which they base realistic buss and economic decisions
Users – owners, investors, mng, borrowers, suppliers, creditors, tax authorities, bankers, employers
Forms basis for conclusions and eventual decision making.
Comp act contains req. regarding disclosure of info in statements (schedule 4 of act). Failure to meet these req. is a
contravention of comp act.
Statements have to b drawn up in accordance with GAAP and specific req. of schedule 4
AFS (annual financial statements) are drafted, published and submitted to annual general meeting of members.
Thus mainly drafted and directed to shareholders.
AFS must reflect state of affairs of comp and its buss at end of finance. Year as well as profit/loss for that year
AFS must comply with 4 qualitative req.
GENERALLY ACCEPTED ACCOUNTING PRACTICE (GAAP)
Research was done to determine what general practice iro drafting and disclosure of into in comp AFS.
After GAAP was determined, this used as lay down a standard.
ACCOUNTING POLICY AND NOTES
More than 1 acc policy can by applied iro matters such as inventories, its nb for comp to disclose which policy its
using in the notes
, STUDY UNIT 2
THE FRAMEWORK OF ACCOUNTING
SCHEMATIC REPRESENTATION OF FRAMEWORK
Users – decision makers and their characteristics and assumed levels of knowledge
Assumptions - accrual basis, general purpose of AFS, going concern
Qualitative characteristics – understandability, relevance, reliability, comparability
Components of qualitative charac – predictive value, confirmation value, faithful representation, neutrality,
consistency
Other considerations – nature, materiality, substance over form, completeness, prudence
BACKGROUND
Read chapter 1, pg 3.1 and 3.2
SCOPE OF THE FRAMEWORK
Read chapter 1, pg 4
USERS OF FINANCIAL STATEMENTS
Biggest difficulty is wide range of users, each with different perspective that need to use the AFS.
Investors – suppliers of risk. Need info on inherent risk and return on their investment. AFS usually most nb
source on info when deciding on whether to buy, sell or hold shares. Most concerned with comp ability to generate
net cash inflows. Equity investors view entity as source of cash in form of dividends and increases in prices of
shares. Ability of comp to achieve these goals affect price of equity interests.
Employees – info about stability, profitability, growth of employer and employment opportunities offered. Want to
know employer can afford remuneration package and agreed retirement benefits
Lenders – info to assess likelihood that capital and interest payments will be met as scheduled. Thus solvency and
liquidity of comp
Suppliers – info to assess if amounts owed to them will b paid timeously. Future cash flows
Customers – assess if comp will continue exist in future, viewed as source of goods and services
Government and its agencies – info for levying of taxes and statistical info for policy decisions
Public – info on several aspects, ex. contribution to economy, creation of work, paying taxes, charitable
contributions. Range of activities, trends, future ability to deliver service. Environmental sustainability practices
Framework follows investor-centred approach by suggesting that info needs of other users will be largely satisfied
by providing info that investors req.
OBJECTIVES AND COMPONENTS OF FINANCIAL STATEMENTS
afs not only source when making econ decisions, only shows past events and not non-financial info.
But IFRS also req non-financial info and future info, this trend likely to continue
Stewardship currently shows in corporate governance and accountability. Shareholder activism implies that
shareholders no longer merely accept statements made my mng, but seek more info of higher quality
AFS must contain info that is:
Useful to current and potential investors, including creditors and other users who make rational decisions on their
investments and supply credit to comp.
Info must b understandable
About manner in which mng performs its stewardship function
Useful to directors and mng when making decisions that affect owners of comp
