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FAC1602 Assignment 5 (COMPLETE ANSWERS) Semester 2 2024 - DUE 12 November 2024
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ACCOUNTING (FAC1601)
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T@KENOTES
FEBRUARY 18, 2024
, T@KENOTES
1.4
Definitions
IAS 1:7 provides definitions for key terms:
General Purpose Financial Statements: These are standard financial statements meant to meet the
needs of users who can't demand customized reports.
Impracticable: This term means that a requirement cannot be applied even after every reasonable
effort has been made to do so.
International Financial Reporting Standards (IFRS): These are standards and interpretations set by
the International Accounting Standards Board (IASB), including IFRSs, IASs, and interpretations by
the IFRS Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
Materiality: Omissions or misstatements are considered material if they could influence users'
economic decisions based on the financial statements. Materiality depends on the size and nature of
the omission or misstatement in the surrounding circumstances.
Notes: These contain additional information beyond what's presented in the main financial
statements, providing descriptions or further details about items presented and information that
doesn't qualify for recognition in those statements.
Other Comprehensive Income: This includes income and expenses not recognized in profit or loss as
required or permitted by other IFRSs. It can include changes in revaluation surplus, gains and losses
on investments, and hedging gains and losses, among other items.
Owners: These are holders of equity instruments.
Profit or Loss: This is the total of income less expenses, excluding components of other
comprehensive income.
Total Comprehensive Income: This is the overall change in equity during a period resulting from
transactions and events, comprising all components of profit or loss and other comprehensive
income.
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1.4.3 The purpose of financial statements
IAS 1:9 describes financial statements as structured representations of an entity’s:
1. Financial position,
2. Performance, and
3. Cash flows.
They're useful to a wide range of users for making economic decisions and assessing management's
stewardship.
These statements include information about
assets,
liabilities,
equity,
income,
expenses,
contributions,
distributions, and
Cash flows.
The notes provide additional details that assist users in predicting future cash flows.
IAS 1:10 outlines a complete set of financial statements, including a
Statement of financial position,
Statement of profit or loss and other comprehensive income,
Statement of changes in equity,
Statement of cash flows,
Notes with significant policies and explanations, and comparative information from the
preceding period.
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1.4.4 General features
1.4.4.1 Fair presentation and compliance with IFRS
IAS 1:4.4.1 emphasizes fair presentation and compliance with IFRS:
Fair Presentation: Financial statements must accurately reflect an entity's financial
position, performance, and cash flows. This involves faithfully representing the
effects of transactions, events, and conditions according to defi ned criteria.
Compliance with IFRS: Financial statements must comply with all requirements of
IFRS. An entity's compliance with IFRS should be explicitly stated in the notes. If an
entity doesn't comply with all IFRS requirements, it cannot claim compliance.
Exceptional Circumstances: In rare cases, management may find compliance with a
particular requirement misleading. In such cases, specific guidelines prescribe how
to present such departures, though details are beyond this summary.
1.4.4.2 Going concern
IAS 1:25 emphasizes the concept of going concern:
Going Concern Basis: Financial statements should be prepared assuming the entity will
continue operating into the foreseeable future. This is unless there are clear signs that
management intends to close down or has no other option.
Scope of Financial Statements: Financial statements are typically prepared with the
assumption that the entity will continue its operations. If there are indications otherwise,
such as plans to liquidate or cease trading.
The accrual basis of accounting records transactions
when they happen, not just when cash is exchanged.
Revenue is recognized when it's earned, and expenses
are recorded when they occur, regardless of when
money is received or paid. This method gives a truer
picture of a company's finances by matching income
with expenses in the same period. It's different from
cash basis accounting, where transactions are only
recorded when cash moves in or out.
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1.4.4.3 Accrual basis of accounting
IAS 1:4.4.3 mandates the use of accrual basis accounting for financial statements.
Accrual basis means recording transactions when they occur, not just when cash is
exchanged, except for cash flow information.
Assets, liabilities, equity, income, and expenses are recognized based on specific criteria
outlined in the Conceptual Framework.
This method provides a more accurate picture of an entity's financial position and
performance over time.
1.4.4.4 Materiality and aggregation
Materiality and aggregation, per IAS 1:29 and IAS 1:30, involve grouping similar items
together in financial statements.
Significant classes of items should be presented separately, while insignificant ones can be
grouped together.
Financial statements are the result of processing numerous transactions, which are then
aggregated based on their nature or function.
Condensed and categorized data are presented as line items in the financial statements.
If a line item isn't individually significant, it can be grouped with others.
Even if an item isn't significant enough for separate presentation in the statements, it might
still warrant separate presentation in the notes if it's important.
1.4.4.5 Offsetting
Offset in accounting involves combining related financial items, but IAS 1 advises agai nst it
except when necessary or allowed by IFRS.
An exception is when selling assets, where you can offset income with related expenses.
For instance, when selling an asset, deduct its value and selling expenses from the money
earned to calculate profit or loss.
However, adjustments like changing asset values or showing inventory at lower prices aren't
considered offsetting.
1.4.4.6 Frequency of reporting (How frequently)
Financial statements must be presented annually, with comparative information from
previous periods.
Entities must explain any changes to their reporting period length.
For example, new companies starting trading mid-year may report for a shorter period.
In such cases, note that financial figures may not be entirely comparable to previous periods.
(Comparative information refers to data from previous periods that is presented alongside the
current period's financial data. This allows for a comparison of financial performance, position,
and other relevant metrics over time. Typically, comparative information includes figures from
the previous year or period, enabling users of financial statements to assess trends, changes, and
developments in the entity's financial situation and performance.)
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1.4.4.7 Comparative information
IAS 1:38 mandates the inclusion of comparative information in financial statements.
Comparative information compares data from the current period with the previous period.
This comparison helps in understanding changes over time.
If relevant, comparative information should also be provided for narrative or descriptive
details to enhance understanding.
1.4.4.8 Consistency of presentation
Financial statements should maintain consistency in how items are presented and classified
over time.
Changes to presentation or classification should only occur if they are more appropriate or
required by an IFRS rule.
Consistency ensures clarity and comparability in financial reporting across different periods.
1.4.5 Structure and content
IAS 1:47 mandates specific disclosures in the statement of financial position, profit or loss
statement, other comprehensive income statement, and statement of changes in equity.
Disclosure requirements for the statement of cash flows are outlined in IAS 7.
IAS 1:49 and 51 require clear identification of financial statements for easy distinction from
other information in financial reports.
Key information to be prominently displayed includes
o the reporting entity's name,
o reporting period's end date,
o presentation currency,
o And level of rounding used.
Only relevant information for an introductory accounting course is listed.
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