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FAC2601NOTES
, *Chapter 1 – Introduction to Company Financial Statements
IFRS is a set of international accounting standards stating how particular types of transactions and
other events should be recognised, measured and reported in financial statements.
IFRS provides a single set of world-wide standards to provide investors and auditors with a cohesive
view of finances.
A company can be described as an association between persons that work together with the aim to
make a profit. A company as an entity is a legal person which is incorporated in terms of the
Companies Act 71 of 2008. Formed:
To acquire more capital
Ensure continued existence of company
Easy way to exchange owners
Limit financial liability of owners
Incorporated by lodging:
Notice of Incorporation
Memorandum of Incorporation
Any fees acquired when incorporating are debited to the ‘Preliminary Expenses’ account.
Once incorporated the company becomes a juristic person.
In South Africa there are either profit or non-profit companies.
Capital divided into shares where each shareholder shares in the profits in relation to the value of his
or her shares. Share certificate serves a proof. Right to vote gives shareholders opportunity to
appoint directors and determines objectives of company.
Public Company:
Ends with ‘Limited’
Minimum number of directors – 3
May be listed on JSE.
Private Company:
Ends with ‘(Proprietary) Limited’ or (Pty) Ltd.
Minimum number of directors – 1
Financial statements are a structured representation of the financial position and financial
performance of an entity with the objective to provide this information to a wide range of users.
Users include:
Investors (inherent risk and return on their investment).
Employees (stability, profitability and growth of employer and employment opportunities)
Lenders (will capital and interest payments be met timeously)
Suppliers and other trade creditors (will amounts owing to them be paid timeously)
Customers (will entity continue into foreseeable future, reputable)
Government and its agencies (levying of taxes and statistical information)
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, The public (contribution to economy, creation of work opportunities and environment
stability processes).
According to Companies Act 71 of 2008 a company’s financial statements must be drawn up in
accordance to IFRS (or IFRS for SMEs) and are published and submitted to the general meeting of
shareholders.
Share Capital is the capital contributed by the shareholders of the company.
Authorised share capital is set out in MOI.
Types of shares:
Ordinary Shares
Preference Shares (Cumulative, Redeemable, Convertible, Participating)
Ordinary shares represent equity ownership and give full voting rights at AGMs and dividends. Do
not bear a fixed dividend.
Preference shares are instruments that have debt and equity characteristics. Have a higher claim on
assets (in cases of bankruptcy) and earnings. Paid a fixed rate before dividends are paid to ordinary
shareholders. Preference shares usually do not have voting rights. There are 4 types of preference
shares:
Cumulative preference shares differs in that in that the fixed preferential dividend accumulates if it is
not paid annually. Cumulative preference dividends not declared or paid must be disclosed.
Redeemable preference shares is a preference share that provides redemption on a specific date or
at the option of the holder. It meets the definition of a financial liability if the issuer has an obligation
to transfer financial assets to the holder of the share. If the ISSUER has the option to redeem the
share it is not a financial liability.
Convertible and participating preference shares are not included in FAC2601
Companies may wish to not distribute distributable reserves in the form of dividends (adverse effect
on cash position). In this case, a shareholder receives his or her rightful share of the reserves in the
form of capitalisation shares.
Number of shares increase, but the total value of the share portfolio will remain the same (value per
share decreases).
Debit: Retained Earnings
Credit: Share Capital
A rights issue is when a company issues its existing shareholders with a right to buy additional shares
at a discounted price (for a limited time only). If the rights are renounceable, then the shareholder
may sell it in order to gain a profit. In order to quickly acquire funds.
An underwriter guarantees that if the whole issue of shares is not taken up by the public the financial
institution will itself take up the remainder. An underwriter’s commission is applicable (this may not
exceed 10% of the price at which the shares are issued according to the Companies Act).
50000 Ordinary Shares at R2 each are issued with an underwriter’s commission fee of 7%. The public
takes up 45000 of these shares.
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, If the full issue is underwritten (financial institution is liable):
Commission: 50000 x R2 x 7% = R7000
Therefore R10000 (5000 x R2) will be subscribed by the underwriters.
If the issue is partly underwritten (underwriter has a pro rata liability – let’s say 50% for this
example):
Commission: (50000 x 50%) x R2 x 7% = R3500
50% of shortfall = 50% x 5000 x R2 = R5000
Issue may also be underwritten by joint underwriters (numerous underwriters who take up
responsibility for portion of shares that correspond to their obligation).
A dividend can be defined as that portion of profit of a company which is divided among the
shareholders.
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