lOMoARcPSD|4339232
FAC1601 Study Notes 2018
Financial Accounting and Reporting (University of South Africa)
)
, lOMoARcPSD|4339232
1
Page 6 – Overview of Conceptual Framework for Financial Reporting.
IFRSs deal with the recognition, measurement, presentation and disclosure
requirements in general purpose financial statements.
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. It is not an IFRS.
Purpose:
Development of future standards, reducing number of alternative accounting
treatments, assist users in interpreting information in financial statements.
The communication of financial information is referred to as financial reporting.
Financial statements form part of a process of financial reporting and the
purpose of their preparation is to summarise and present all the transactions
recorded in the journals and ledgers of an entity in a useful, logical and
understandable way to the users of those financial statements.
Different components usually included in an entity’s complete set of financial statements:
Statement of financial position:
Information about financial position of entity at a certain point in time, economic
resources available to generate future cash flows, financial structure; liquidity
and solvency positions and may be used to predict availability of cash after
settling financial commitments or over longer periods.
Statement of profit or loss and other comprehensive income:
Information about financial performance of an entity over a given period,
assessment of potential changes in economic resources in the future, predicting
capacity of the entity to generate cash flows from existing resources.
Statement of changes in equity:
Information about changes in the capital structure of an entity.
Statement of cash flows:
Information about changes in the financial position of entity over a period of time.
Notes to the financial statements:
Additional information that is relevant to the needs of users about the items
in the entity’s various financial statements.
Objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors.
1
, lOMoARcPSD|4339232
Primary Users : Present and potential investors, lenders (private and corporate), customers
and creditors. Other users include shareholders, employees, management and regulators.
Underlying assumption when preparing financial statements:
Going-concern – financial statements are prepared on the basis that the entity
will continue in operation for the foreseeable future.
Fundamental Qualitative Characteristics:
Relevance, materiality (if information is material then omitting or
misstating such information could influence future decisions), faithful
representation (perfectly faithful representation of information would
depict a complete, neutral and error-free set of financial statements).
Enhancing Qualitative characteristics:
Comparability, verifiability (reach the same conclusion), timeliness, understandability.
Cost of providing financial reporting must be justified by the benefit derived therefrom.
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
Physical form of asset is not essential (patents and copyrights).
A liability is a present obligation arising from past events, the settlement
of which is expected to result in an outflow of economic resources.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Normally coincidental that the aggregate amount of equity corresponds with the aggregate
market value of shares of the entity or the sum that could be raised by disposing of either the
net assets on a piecemeal basis, or the entity as a whole on a piecemeal basis.
Income is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity other than those relating to the contributions from the equity participants.
Income represents both revenue and gains.
Revenue arises in the course of ordinary activities of an entity (sales,
fees, interest, dividends, royalties and rent).
Gains represent other items that meet the definition of income and may or
may not arise in the course of ordinary business activities. (Gains are
reported net of related expenses and are separately recorded).
Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletion of assets or incurrence of liabilities that
result in decreases in equity, other than those relating to a distribution to
equity participants. Losses (see gains above and reverse wording).
Recognition of elements of financial statements:
Recognition is the process of incorporating an item that meets the definition of an element and
satisfies the criteria for recognition in the statement of financial position or statement
2
, lOMoARcPSD|4339232
of profit or loss and other comprehensive income.
“An item that meets the definition of an element should be recognised if:
It is probable that any future economic benefit associated with the item
will flow to or from the entity; and
The item has a cost or value that can be measured with reliability.”
If no cost or value is attached to an item, and it is not possible to make an
estimate, such an item can be recognised (pending law suit).
Asset is recognised when it is probable that the future economic benefits will
flow to the entity and it can be reliably measured or has a cost attached. If it is
improbable that economic benefit will flow to the entity, the item is removed from
the balance sheet but is recognised as an expense (Read page 9 of study guide).
Measurement is defined as the process of determining the monetary amounts
at which the elements of the financial statements are to be recognised and
carried in the balance sheet and income statement.
4 methods:
Historical Cost – Assets are recorded as the amount of cash or cash equivalent paid or
the fair value of the consideration given to acquire them at the time of acquisition.
Realisable value – Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the assets in an
orderly disposal. Liabilities are carried at settlement value.
Current Cost – Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or equivalent asset was acquired currently.
Present Value – Assets are carried at present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business.
Fair value (not an IFRS) is defined as the amount for which an asset could be sold or
a liability transferred between market participants on the measurement date.
Selection of measurement basis and the concepts of capital and capital
maintenance determine the model to which the financial statements are prepared.
Financial concept (synonymous with the net assets or equity of a business
entity) and physical concept (productive capacity of the entity) of capital.
Financial capital maintenance – A profit is only made if the net assets at the end of
the period exceeds the financial amount of net assets at the beginning of the period,
after excluding any distributions and contributions from owners during the period.
Physical capital maintenance – A profit is earned only if the physical
productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any
distributions to and contributions from owners during the period.
IFRS must be applied when the financial statements of entities that are
incorporated under the Companies Act No 71 of 2008 are prepared.
3
FAC1601 Study Notes 2018
Financial Accounting and Reporting (University of South Africa)
)
, lOMoARcPSD|4339232
1
Page 6 – Overview of Conceptual Framework for Financial Reporting.
IFRSs deal with the recognition, measurement, presentation and disclosure
requirements in general purpose financial statements.
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. It is not an IFRS.
Purpose:
Development of future standards, reducing number of alternative accounting
treatments, assist users in interpreting information in financial statements.
The communication of financial information is referred to as financial reporting.
Financial statements form part of a process of financial reporting and the
purpose of their preparation is to summarise and present all the transactions
recorded in the journals and ledgers of an entity in a useful, logical and
understandable way to the users of those financial statements.
Different components usually included in an entity’s complete set of financial statements:
Statement of financial position:
Information about financial position of entity at a certain point in time, economic
resources available to generate future cash flows, financial structure; liquidity
and solvency positions and may be used to predict availability of cash after
settling financial commitments or over longer periods.
Statement of profit or loss and other comprehensive income:
Information about financial performance of an entity over a given period,
assessment of potential changes in economic resources in the future, predicting
capacity of the entity to generate cash flows from existing resources.
Statement of changes in equity:
Information about changes in the capital structure of an entity.
Statement of cash flows:
Information about changes in the financial position of entity over a period of time.
Notes to the financial statements:
Additional information that is relevant to the needs of users about the items
in the entity’s various financial statements.
Objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors.
1
, lOMoARcPSD|4339232
Primary Users : Present and potential investors, lenders (private and corporate), customers
and creditors. Other users include shareholders, employees, management and regulators.
Underlying assumption when preparing financial statements:
Going-concern – financial statements are prepared on the basis that the entity
will continue in operation for the foreseeable future.
Fundamental Qualitative Characteristics:
Relevance, materiality (if information is material then omitting or
misstating such information could influence future decisions), faithful
representation (perfectly faithful representation of information would
depict a complete, neutral and error-free set of financial statements).
Enhancing Qualitative characteristics:
Comparability, verifiability (reach the same conclusion), timeliness, understandability.
Cost of providing financial reporting must be justified by the benefit derived therefrom.
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.
Physical form of asset is not essential (patents and copyrights).
A liability is a present obligation arising from past events, the settlement
of which is expected to result in an outflow of economic resources.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Normally coincidental that the aggregate amount of equity corresponds with the aggregate
market value of shares of the entity or the sum that could be raised by disposing of either the
net assets on a piecemeal basis, or the entity as a whole on a piecemeal basis.
Income is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity other than those relating to the contributions from the equity participants.
Income represents both revenue and gains.
Revenue arises in the course of ordinary activities of an entity (sales,
fees, interest, dividends, royalties and rent).
Gains represent other items that meet the definition of income and may or
may not arise in the course of ordinary business activities. (Gains are
reported net of related expenses and are separately recorded).
Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletion of assets or incurrence of liabilities that
result in decreases in equity, other than those relating to a distribution to
equity participants. Losses (see gains above and reverse wording).
Recognition of elements of financial statements:
Recognition is the process of incorporating an item that meets the definition of an element and
satisfies the criteria for recognition in the statement of financial position or statement
2
, lOMoARcPSD|4339232
of profit or loss and other comprehensive income.
“An item that meets the definition of an element should be recognised if:
It is probable that any future economic benefit associated with the item
will flow to or from the entity; and
The item has a cost or value that can be measured with reliability.”
If no cost or value is attached to an item, and it is not possible to make an
estimate, such an item can be recognised (pending law suit).
Asset is recognised when it is probable that the future economic benefits will
flow to the entity and it can be reliably measured or has a cost attached. If it is
improbable that economic benefit will flow to the entity, the item is removed from
the balance sheet but is recognised as an expense (Read page 9 of study guide).
Measurement is defined as the process of determining the monetary amounts
at which the elements of the financial statements are to be recognised and
carried in the balance sheet and income statement.
4 methods:
Historical Cost – Assets are recorded as the amount of cash or cash equivalent paid or
the fair value of the consideration given to acquire them at the time of acquisition.
Realisable value – Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the assets in an
orderly disposal. Liabilities are carried at settlement value.
Current Cost – Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or equivalent asset was acquired currently.
Present Value – Assets are carried at present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business.
Fair value (not an IFRS) is defined as the amount for which an asset could be sold or
a liability transferred between market participants on the measurement date.
Selection of measurement basis and the concepts of capital and capital
maintenance determine the model to which the financial statements are prepared.
Financial concept (synonymous with the net assets or equity of a business
entity) and physical concept (productive capacity of the entity) of capital.
Financial capital maintenance – A profit is only made if the net assets at the end of
the period exceeds the financial amount of net assets at the beginning of the period,
after excluding any distributions and contributions from owners during the period.
Physical capital maintenance – A profit is earned only if the physical
productive capacity of the entity at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any
distributions to and contributions from owners during the period.
IFRS must be applied when the financial statements of entities that are
incorporated under the Companies Act No 71 of 2008 are prepared.
3
