Study guide 001 FOR TOTURIALSPurpose: To equip students with the necessary competencies for the preparation and presentation of financial statements according to the requirements of International Fina PDF

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FAC3701/MO001/3/2015

Tutorial Letter MO001/3/2015 General Financial Reporting FAC3701 Semesters 1 and 2 Department of Financial Accounting This tutorial letter contains the tutorial matter of the learning units of this module. IMPORTANT INFORMATION:

Please activate your myUnisa and myLife e-mail address and ensure you have regular access to the myUnisa module site for FAC3701 as well as your group site. Note: This is an online module, which means your module is available on myUnisa. However, in order to support you in your learning process, you will also receive some study materials in printed format.

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1 Open Rubric

CONTENTS 1.

INTRODUCTION ............................................................................................................... 3

2.

LECTURERS AND CONTACT DETAILS ......................................................................... 3

3.

LEARNING UNIT 1 The Conceptual Framework for Financial Reporting 2010............ 4

4.

LEARNING UNIT 2 Preface to International Financial Reporting Standards ............... 4

5.

LEARNING UNIT 3 Presentation of financial statements (IAS 1) ................................. 4

6.

LEARNING UNIT 4 Income Taxes (IAS 12 AND FRG 1) ................................................. 4

7.

LEARNING UNIT 5 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) ................................................................................................................... 4

8.

LEARNING UNIT 6 Events after the reporting period (IAS 10) ..................................... 4

9.

LEARNING UNIT 7 Provisions, Contingent Liabilities and Contingent Assets (IAS 37) ............................................................................................................................. 4

10.

LEARNING UNIT 8 Fair Value Measurement (IFRS 13) ................................................. 4

11.

LEARNING UNIT 9 Revenue from contracts with customers (IFRS 15) ....................... 4

2

FAC3701/MO001

1.

INTRODUCTION

Dear Student, This tutorial letter includes the following learning units:  Learning unit 1 – The Conceptual Framework for Financial Reporting 2010  Learning unit 2 – Preface to International Financial Reporting Standards  Learning unit 3 – Presentation of financial statements (IAS 1)  Learning unit 4 – Income taxes (IAS 12 and FRG 1)  Learning unit 5 – Accounting policies, changes in accounting estimates and errors (IAS 8)  Learning unit 6 – Events after the reporting period (IAS 10)  Learning unit 7 – Provisions, contingent liabilities and contingent assets (IAS 37)  Learning unit 8 – Fair value measurement (IFRS 13)  Learning unit 9 – Revenue from contracts with customers (IFRS 15)

2.

LECTURERS AND CONTACT DETAILS

Please use only the following e-mail address for all communication with the lecturers: SEMESTER 1: [email protected] SEMESTER 2: [email protected]

Please use the following telephone number for all communication with the lecturers:

012 429 4266

Lecturers Mr Y Mohamed Ms L Labuschagne Ms R Horn Mr J Riekert

Office AJH van der Walt Building, 02-51 AJH van der Walt Building, 02-49 AJH van der Walt Building, 02-48 AJH van der Walt Building, 02-42

3

FAC3701

LEARNING UNIT 1 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 2010

General Financial Reporting

4

FAC3701/MO001

LEARNING OUTCOME Learners must be able to prepare and present financial statements according to the concepts which underlie the preparation and presentation of financial statements.

OVERVIEW This learning unit is divided into the following: 1.1 1.2 1.3 1.4

Scope of the Conceptual Framework The objective of general purpose financial reporting (Chapter 1) Qualitative characteristics of useful financial information (Chapter 3) The Framework (1989): The remaining text (Chapter 4)

STUDY PRESCRIBED: Descriptive Accounting Chapter 2

OVERVIEW OF LEARNING UNIT The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The Conceptual Framework is not an IFRS and hence does not define standards for any particular measurement or disclosure issue. Nothing in the Conceptual Framework overrides any specific IFRS.

1.1

Scope of the Conceptual Framework

The Conceptual Framework deals with the following four chapters: Chapter 1 – The objective of general purpose financial reporting Chapter 2 – The reporting entity (This chapter has not been included in this learning unit as Chapter 2 has not been finalised by the IASB.) Chapter 3 – Qualitative characteristics of useful financial information Chapter 4 – The Framework (1989): The remaining text Please note that the paragraph numbers in this learning unit are references to paragraph numbers that appear in the Conceptual Framework for Financial Reporting 2010. The Conceptual Framework for Financial Reporting appears in part A of volume 1 of the SAICA handbook.

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1.2 

The objective of general purpose financial reporting (Chapter 1) Objective, usefulness and limitations of general purpose financial reporting

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. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit (par OB2). To assess an entity's prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources. Examples of such responsibilities include protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes, and ensuring that the entity complies with applicable laws, regulations and contractual provisions. Information about management's discharge of its responsibilities is also useful for decisions by existing investors, lenders and other creditors who have the right to vote on or otherwise influence management's actions (par OB4). However, general purpose financial reports do not and cannot provide all the information that existing and potential investors, lenders and other creditors need. Those users need to consider pertinent information from other sources, for example general economic conditions and expectations, political events and political climate, and industry and company outlooks (par OB6). 

Information about a reporting entity's economic resources, claims, and changes in resources and claims

General purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity's economic resources and the claims against the reporting entity. Financial reports also provide information about the effects of transactions and other events that change a reporting entity's economic resources and claims. Both types of information provide useful input for decisions about providing resources to an entity (par OB12). 

Economic resources and claims

Information about the nature and amounts of a reporting entity's economic resources and claims can help users to identify the reporting entity's financial strengths and weaknesses. That information can help users to assess the reporting entity's liquidity and solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity (par OB13). 6

FAC3701/MO001 

Changes in economic resources and claims

Changes in a reporting entity's economic resources and claims result from that entity's financial performance and from other events or transactions such as issuing debt or equity instruments. To assess the prospects for future cash flows from the reporting entity properly, users need to be able to distinguish between these changes (par OB15). 

Financial performance reflected by accrual accounting

Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity's economic resources and claims, and changes in its economic resources and claims during a period, provides a better basis for assessing the entity's past and future performance than information solely about cash receipts and payments during that period (par OB17). 

Financial performance reflected by past cash flows

Information about a reporting entity's cash flows during a period also helps users to assess the entity's ability to generate future net cash inflows. It indicates how the reporting entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends or other cash distributions to investors, and other factors that may affect the entity's liquidity or solvency. Information about cash flows helps users understand a reporting entity's operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance (par OB20). 

Changes in economic resources and claims not resulting from financial performance

A reporting entity's economic resources and claims may also change for reasons other than financial performance, such as issuing additional ownership shares. Information about this type of change is necessary to give users a complete understanding of why the reporting entity's economic resources and claims changed, and the implications of those changes for its future financial performance (par OB21).

1.3

Qualitative (Chapter 3)

characteristics

of

useful

financial

information

The qualitative characteristics of useful financial information discussed identify the types of information that are likely to be most useful to the existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the basis of information in its financial report (financial information) (par QC1). 7

The fundamental qualitative characteristics are relevance and faithful representation (par QC5). The qualitative characteristics of the Conceptual Framework can be summarised as follows:

   

 

Relevance (.QC6 –.QC10) – Materiality (.QC11) Faithful representation (.QC12 –.QC16) Applying the fundamental qualitative characteristics (.QC17 –.QC18) Enhancing qualitative characteristics (.QC19)  Comparability (.QC20 –.QC25)  Verifiability (.QC26 –.QC28)  Timeliness (.QC29)  Understandability (.QC30 –.QC32) Applying the enhancing qualitative characteristics (.QC33 –.QC34) The cost constraint on useful financial reporting (.QC35 –.QC39)

References to the paragraphs in the Conceptual Framework are in brackets.

1.4

The Framework (1989): The remaining text (Chapter 4)

1.4.1 Underlying assumption 

Going concern

The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed (par 4.1).

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FAC3701/MO001 1.4.2 The quantitative characteristics of the Conceptual Framework can be summarised as follows:  Elements of financial statements ― ― ― ― ― ― ― ―

Financial position (4.4 – 4.7) Assets (4.8 – 4.14) Liabilities (4.15 – 4.19) Equity (4.20 – 4.23) Performance (4.24 – 4.28) Income (4.29 – 4.32) Expenses (4.33 – 4.35) Capital maintenance adjustments (4.36)

Recognition of the elements of the financial statements (4.37 – 4.53)

Measurement of the elements of the financial statements (4.54 – 4.56) References to the paragraphs in the Conceptual Framework are in brackets. 1.4.3 Recognition of the elements of financial statements For an item to be recognised in the statement of financial position or statement of profit or loss and other comprehensive income, the item must fall within the definition of an element and satisfy the criteria for recognition. The criteria for recognition are as follows: ― it is probable that any future economic benefit will flow to or from the entity; and ― the item has a cost or value that can be measured with reliability (par 4.38). The decision regarding the probable future economic benefit of an item is taken at the time of finalising the financial statements. For example, if there is a possibility that a debtor will not be collected, it is prudent to make a provision for bad debts. A reduction in economic benefit in respect of that item is recognised. The recognition of the following elements is discussed in the Conceptual Framework: ― ― ― ―

Assets Liabilities Income Expenses

(paragraphs 4.44 – 4.45) (paragraphs 4.46) (paragraphs 4.47 – 4.48) (paragraphs 4.49 – 4.53) 9

1.4.4 Measurement of the elements of financial statements Measurement is the process of allocating a monetary value to the elements of financial statements. A number of different measurement bases exist for the determination of the carrying value of an element. These bases are: ― ― ― ―

Historical cost Current cost Realisable (settlement) value Present value

(Refer to par 4.55.) 1.4.5 Concepts of capital and capital maintenance Capital as a financial concept refers to invested money or invested purchasing power. Capital is therefore equivalent to the net assets or equity of the entity. Capital as a physical concept refers to operating capability. Capital is therefore equivalent to productive capacity of the entity (par 4.57). The two concepts of capital give rise to the following concepts of capital maintenance: 

Financial capital maintenance

Financial capital maintenance means that profit will be recognised if the financial amount of net assets at the end of the financial period is greater than the financial amount of net assets at the beginning of the financial period. 

Physical capital maintenance

Physical capital maintenance means that profit will be recognised if the physical productive capacity of the entity at the end of the financial period exceeds the physical productive capacity at the beginning of the period (par 4.59).

EXAMPLE 1 REQUIRED (a) Define the following elements of financial statements: (i) An asset (ii) A liability (iii) Equity (iv) Income (v) Expenses 10

FAC3701/MO001 (b) Name the various measurement bases that can be used to determine the monetary amounts at which elements of the financial statements can be recorded and recognised in the statement of financial position and the statement of profit or loss and other comprehensive income, and show how the monetary amount of assets and liabilities is determined under each base. (c) During 20.12 Conceptual Framework Ltd purchased the business of Policy Ltd and paid R200 000 more for the assets of Policy Ltd than they were worth. The accountant of Conceptual Framework Ltd does not know how to treat the goodwill of R200 000 in the financial statements and asks you to comment on each of the following alternatives: (i) (ii)

The R200 000 is to be capitalised and shown as an asset. The R200 000 is expensed in the statement of profit or loss and other comprehensive income as an operating expense.

SOLUTION 1 (a)

Definitions of elements

(i)

An asset

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 (par 4.4(a)). Assets can be of a physical substance (a plant) or without physical substance (a patent or goodwill) (ii)

A liability

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (par 4.4(b)). A future obligation is not a liability. (Refer to IAS 37.) (iii)

Equity

Equity is the residual interest in the assets of the entity after deducting all its liabilities (par 4.4(c)).

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(iv)

Income

Income is increases 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 contributions from equity participants (e.g. shareholders) (par 4.25(a)). (v)

Expenses

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (e.g. shareholders) (par 4.25(b)).

(b)

Measurement bases identified in the Conceptual Framework

The following measurement bases have been identified: Measurement basis

Basis upon which elements are measured/recognised Assets Liabilities

Historical cost (par 4.55(a))

Recorded at the amount of cash or cash equivalents paid or fair value of the consideration given to acquire them at the time of their acquisition

Recorded at the amount of proceeds received in exchange for the obligation, or at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business

Current cost (par 4.55(b))

Carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently

Carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently

Realisable (settlement) value (par 4.55(c))

Carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal

Carried at their settlement values, that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business

Present value (par 4.55(d))

Carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business

Carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilitie...