FAC_1502 Course Notes.

FAC_1502 Course Notes. STUDY UNIT 1 The Conceptual Framework for Financial Reporting What is the Framework?  Sets out the objectives & concepts  Provides a theoretical background or general frame of reference Purpose of the Framework:  Assist standard setting bodies;  Assist preparation of financial statements;  Assist auditors;  Assist other users of financial statements. The Conceptual Framework for Financial Reporting The Objective of general purpose financial reporting: 2010 Framework Objective The 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, in making decisions about providing resources to the entity. 2 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Qualitative characteristics 2010 Framework FUNDAMENTAL  Relevance - makes a difference in the decisions made by users  Faithful representation – Complete, neutral, free from error ENHANCING  Comparability – period to period and entity to entity  Verifiability – Different, knowledgeable, independent observers reach consensus  Timeliness - Information available to decision makers in time to influence their decisions  Understandability - Classifying, characterising and presenting information clearly and concisely The Conceptual Framework for Financial Reporting Underlying assumptions ACCRUAL BASIS  Effects of transactions & other events are recognised when they occur (NOT when cash flows!).  Recorded in accounting records and reported in AFS of the periods to which they relate. GOING CONCERN  Financial statements normally prepared on the assumption that entity is, and will continue to operate as a going concern into the foreseeable future.  Entity not expected to liquidate in next 12 months 3 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Elements: Definition FINANCIAL POSITION: ASSETS = EQUITY + LIABILITIES – This is a measure of financial POSITION at a specific date. FINANCIAL PERFORMANCE: INCOME – EXPENSES = PROFIT – This is a measure of financial PERFORMANCE over a period. FINANCIAL POSITION • Asset: – Resource controlled by entity; – Resulting from past event; – Expected inflow of future economic benefits • Liability: – Present obligation – Resulting from past event – Expected outflow of economic resources to settle • Equity: – Residual interest, i.e. – Assets – Liabilities FINANCIAL PERFORMANCE • Income: – Increase in assets; or – Decrease in liabilities • Expenses: – Increase in liabilities; or – Decrease in assets Asset: Future economic benefits Liability: Settlement (FOF) 4 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Elements: Recognition Criteria  First meet the definition of one of the elements!  Then 2 recognition criteria: 1. Is PROBABLE that any FUTURE ECONOMIC BENEFITS will flow 2. COST OR VALUE that can be MEASURED with RELIABILITY 5 Study unit 2 FAC1502 © Edge Business School STUDY UNIT 2 FINANCIAL POSITION The equations: A = OE + L OE = A - L The Elements of the equation Assets  Resource  Controlled by the entity (owner)  Past event  Future economic benefits Liabilities  Present obligation  Past event  Outflow of economic benefits Equity (Owner’s)  A – L 6 Study unit 2 FAC1502 © Edge Business School ASSETS: Non-current assets Property, plant & equipment  Land  Buildings  Vehicles  Equipment  Machinery Financial assets  Investments  Fixed deposit Intangible assets  Goodwill  Franchise  Copy right  Trade mark  Patents Current assets Inventory  Trading Inventory on hand  Consumables on hand e.g. Stationery / materials (unused) Trade and other receivables  Trade debtors  Accrued income  Prepaid expenses (prepayments) SARS VAT refundable Cash and cash equivalents  Bank (favourable)  Cash float  Petty cash  Deposit (refundable) LIABILITIES