, Gripping GAAP First edition: 2000
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© 2024
ISBN softcover 978 1 776 17758 5
e-book 978 1 776 17765 3
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Whilst every effort has been made to ensure that the information published in this work is
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Suggestions and comments are most welcome. Please address these to:
The author: Cathrynne Service Via Facebook:
• Accounting 911 by Kolitz and Service
Via LexisNexis:
• See contact details below
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Disclaimer
This text has been meticulously prepared, but in order for it to be user-friendly, the principles,
application thereof and disclosure requirements have been summarised.
This text should therefore not be used as a substitute for studying, first-hand, the official
International Financial Reporting Standards, including their interpretations.
ii
, Gripping GAAP
Dedication
This book is once again dedicated to my very dear family and friends!
Writing it would simply not have been possible without
my dear parents, Roger and Jillianne,
who have provided endless love and support, on every level,
during the decades of writing that have gone into this book;
my dear sons, Roger and Guy,
who have been in the front line, providing love, patience, understanding and
endless cups of tea and coffee; and
my dear friend, Dave Kolitz,
for providing the humour and encouragement during writer’s-block, deadlines and other
crises, which as a co-author on another book, only he can understand.
Too numerous to mention, are the rest of my family and friends,
who have all been subjected to the same excuse:
‘Sorry – I can’t – I’m writing …’.
And to my team of guardian angels who not only prompted me to write this book but
who have provided me with the guidance and super-human strength
needed to update it each year.
And finally, I wish to dedicate this book to those for whom I wrote it: You!
I sincerely wish that my book sheds the necessary light as you
fervently study towards your ultimate goal of
joining our country’s ranks of
‘counting mutants’
Our country needs you!
(‘counting mutants’ is a reference to accountants in the quirky comedy:
Mr Magorium’s Wonder Emporium)
iii
, Gripping GAAP
Foreword
Yet another ‘Four Words’ to Gripping GAAP
My own lifelong – and appalling – inability to accurately distinguish between debits
and credits suggests that (a) I was right not to consider accounting as a career and
(b) I have little credibility – oh, let’s be honest ‘no’ credibility whatsoever – in being
accorded the honour of penning a foreword to ‘Gripping GAAP’. While I dread the
thought that nepotism could be considered a rationale for such distinction (I am
closely related to the authoress!), I have, at least ‘I hope’, established my monstrous
lack of appropriate credentials. However, as a fellow writer (of fiction – and is that so
different from latter-day accounting fact?), I feel qualified to commend the work for its
lucid and clearly understandable (even to me!) ‘unpacking’ of the arcane subject of
accountancy.
A sage of old opined that ‘Money is the root of all evil’ – a maxim which appears to
have stood the test of time. Until recently. Of late, it would appear that the
‘accounting of money’ (on a worldwide basis) has much to answer for. Hitherto
trustworthy multinational financial edifices have been found wanting to an alarming
degree and the aspect of ‘creative accounting’ has been rightly indicted. The vigour
of youth (yours), coupled with a sincere passion to put right was has gone wrong, is
what ‘Gripping GAAP’ seeks to advance.
Balzac said ‘Behind every great fortune there is a crime!’. Was he right? Winston
Churchill said ‘Success is the ability to lurch from failure to failure with no loss of
enthusiasm’. Was he right? Does it matter? Perhaps it does. Certainly my personal
hope is that those who, thousands of years ago, taught us all to read and write with
such fine precision, will now also deal with the new global need to account with
similar exactitude. Carpe diem!
Roger Service Ph.D.
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, Gripping GAAP
A note to you from the author
To all you dear students,
It’s widely accepted that South African chartered accountants
South Africa was ranked the are world class. Indeed, for seven consecutive years, South
WORLD LEADER in auditing Africa was ranked the best in the world. This accolade was
and financial reporting for given by the World Economic Forum, the most recent of which
SEVEN years in a row! was in the 2016–2017 Global Competitiveness Report. Sadly,
World Economic Forum’s 2016–2017 Global Competitiveness Report this winning streak was lost in 2018, not due to a lack of technical
prowess, but due purely to corruption in certain top echelons of an
otherwise beautiful country. So, I want to start by congratulating
you on choosing a career in which you can only flourish, given that South Africa’s education and
training in this field are clearly the very best there is!
Having read the WEF assessment in 2018, the main reasons for South Africa’s fall from grace, was
declining investor protection, deteriorating ethical behaviour and efficacy of corporate boards and
increasing corruption. But as a previous IRBA CEO, Bernard Agulhas, pointed out, we all need to “work
together to regain confidence in our markets, stimulate investment and reclaim our world class rankings”.
The onus is on all accountants, including you, a budding accountant. This is not a subject you should aim
to get 50% in – it is imperative you grasp as much as you can and aim at full understanding of all
principles. Our economy is desperate for growth, more so now than ever before, and for this to happen,
investor confidence is essential. Accountants play a pivotal role in generating confidence, together, of
course, with clear and sound economic policies.
So, to the subject at hand: accounting. It is a discipline that is most
misunderstood, with the general public’s perception being that it is dull Please visit our Facebook!
and easy since it is simply about ‘debits and credits’. How hard can (see page ii for details)
the principle of ‘debit-credit’ really be? Well, it is safe to say that
accounting is one of the fastest changing and most complex subjects
and is very interesting to those ‘in the thick of it’. The International Financial Reporting Standards are
currently a few THOUSAND pages long – and get longer every year. It is these IFRSs that Gripping
GAAP hopes to simplify for you. These IFRSs regulate how we communicate financial information and
are essentially the rules of accounting – and you may be interested to learn that nowhere in the literally
thousands of pages is any reference made to debits and credits!
Now, probably the most important thing I can tell you is that the clue to enjoying the study of any future
career may be summed up as follows: knowledge without understanding is much the same as a vehicle
without an engine – you just won’t be going anywhere! So, to help you understand the many principles,
I have included over 600 examples and tried my very best to make the frequently dry subject as easy to
read as possible. There are flowchart summaries and little grey boxes throughout the chapters.
These little grey boxes, which I sometimes call ‘grey boxes’ and sometimes call ‘pop-ups’, are designed
to help you quickly identify core definitions (these pop-ups
have a picture of an apple core), to help you find mini-
Support lectures and tutorials summaries, showing the essence of a section (these pop-ups have
are available – please contact me a picture of a happy face) and to help you identify important tips or
for details via Facebook interesting facts (these pop-ups have a picture of a winking face).
(see page ii for web addresses)
To see how you are progressing, please access the LexisNexis
portal for free online questions. For teamwork and a community of students, there is also a
Facebook page (see page ii) on which you can discuss both the IFRSs and Gripping GAAP with other
students and from which you can contact me directly with
any queries or comments. I hope to see you there! The
more students visit, the more you will all benefit! All you need is a positive attitude,
enthusiasm, commitment,
As an optional extra, I offer online lectures for those who would
prefer extra assistance. Please contact me if you have requests perseverance ...
or queries in this regard by using the same Facebook page. and Gripping GAAP!
In closing, please avoid complacency. I predict that the
coming year of your studies will be dynamic and you will
probably feel as though you are not studying accounting at all but rather a form of complex law! In a way
you are right. So, as you embark upon your journey into the world of ‘GAAP’, it is imperative that you
maintain a positive attitude and keep your wits about you … and Gripping GAAP as your guide.
Bon voyage! And remember that with enthusiasm, commitment and perseverance, success will
inevitably follow. Wishing you the very best for your studies!
v
, Gripping GAAP
Introduction
The ongoing international harmonisation and improvements projects result in a
proliferation of revised and re-revised standards, interpretations and exposure drafts.
This edition includes any amendments over the two years ended 10 December 2023
including any amendments to South African Circulars, legislation and regulations
(e.g. Circular 1/2023 and JSE Listing Requirements).
The international standards and their interpretations are subject to a continuous
process of improvements, amendments, withdrawals and new publications. Please
watch the Facebook page for details of the changes as they happen (see page ii).
Since Gripping GAAP has gained international attention, the text has been updated
to be more country non-specific in terms of tax legislation. In this regard, students
may assume that the business entity is subjected to the following taxes (unless other-
wise indicated):
⚫ A tax on taxable profits at 30%, (referred to as income tax);
⚫ An inclusion rate of 80% for entities when dealing with capital gains tax (part of
income tax);
⚫ A transaction tax levied at 15%, (referred to as VAT or value added tax).
Gripping GAAP uses the symbol ‘C’ to denote an entity’s currency but uses the sym-
bol ‘LC’ for an entity’s ‘local currency’ in any chapter dealing with foreign currencies.
Some chapters (e.g. chapter 1 & 23) include unavoidable reference to South African
legislation. Aspects of these chapters may possibly not be relevant to some of the
countries using this book. All principles are, however, international principles.
Paedagogical philosophy
Gripping GAAP is designed for those who wish to:
⚫ fully understand the concepts and principles of accounting
⚫ be able to study their syllabus without the aid of daily lectures (e.g. students
studying on a distance learning basis);
⚫ qualify as chartered accountants; and
⚫ keep abreast of the changes to international financial reporting standards.
Gripping GAAP can be successfully used with GAAP: Graded Questions, by
C Service and D Kolitz, and Gripping Groups, by C Service and M Wichlinski.
Gripping GAAP covers an enormous volume of work and is frequently studied over a
few years. It includes material that is covered at both undergraduate level and post-
graduate level.
The text has therefore been written so as to be as easy-to-read as possible and
includes more than 600 examples as well as both mini pop-up summaries and maxi
flowchart summaries, thus making it ideal for students studying on a distance basis.
Students must be able to see the ‘big picture’ and thus flowchart summaries are
provided at the end of each chapter. These summaries are actually a good place to
start before reading any chapter or in preparation for lectures and are also good to
read over after reading a chapter or after attending a lecture.
In order to help one remain focused whilst reading the chapters, which unavoidably
contain copious and complex detail, little grey pop-ups have been inserted to high-
light the relevant core definitions and summarise the essence. These pop-ups have
been provided in a bulleted format to enable quick assimilation of ‘fast-facts’. The
pop-ups with a graphic of an apple-core generally identify core definitions whereas
those with the graphic of a smiling face provide summaries of core facts and
principles and those with the graphic of a winking face provide tips.
vi
, Gripping GAAP
Paedagogical philosophy
• Chapter 1 explains the environment within which a ‘reporting accountant’ finds himself or herself (i.e.
where an accountant is affected by the IASB and various related legislation).
• Chapter 2 explains the Conceptual Framework (CF), which is the basic logic underpinning the design
of the IFRSs. Chapter 2 covers the CF issued in 2018, highlighting key changes from the prior CF.
The IASB has still not updated all pre-existing IFRSs for the 2018 CF. In this regard, the IASB has
reminded preparers that, in case of any resulting conflict between an IFRS and the new CF, IFRSs
must always override the CF. For this reason, the remaining chapters thus focus on the relevant IFRS
and simply identify any conflict with the 2018 CF.
• Chapter 3 explains how financial statements should be presented..
• Chapters 4–6 involve revenue from customer contracts and taxes. Since tax is integral to all topics, the
chapters on tax are included early in the book. We first look at how to account for current tax (chapter 5)
and then explain how deferred tax arises and is accounted for (chapter 6).
• Chapters 7–13 involve various assets. These chapters are covered after having grasped deferred tax
since these assets have deferred tax consequences. That said, some institutions prefer to teach the
principles involving each of the asset types without these deferred tax consequences. For this
reason, the deferred tax consequences are presented in a separate section of each of these chapters
and examples are shown with deferred tax consequences and without deferred tax consequences.
We start with non-current assets and proceed to current assets (inventory). Impairment of assets is also
included in this set of chapters: it is inserted after the chapters covering property, plant and equipment,
intangible assets and investment properties but before non-current assets held for sale and inventories.
This is because the standard on impairments applies to the former assets but not the latter assets.
There are two chapters on property, plant and equipment: the first explains the basic concepts and
the cost model. The second chapter explains the revaluation model. The first part of this chapter
is designed to explain the very basics, focusing on non-depreciable assets. It then progresses to
depreciable assets. The deferred tax and disclosure consequences for both non-depreciable and
depreciable assets are also explained.
Some institutions are de-emphasising certain topics, such as borrowing costs and government grants.
However, it is essential that students understand the basic concepts and how these can topics affect
the measurement of various assets. For this reason, these topics are included at a basic level in the
asset chapters. For a more detailed understanding, see chapters 14 and 15.
• Chapter 14–17 deal with borrowing costs, government grants and leases (lessees and lessors). These
chapters may all have an impact on the recognition and measurement of assets.
• Chapters 18–19 cover provisions, contingencies & events after the reporting period and employee
benefits. Both chapters focus largely (but not entirely) on obligations (liabilities).
• Chapter 20–24: Chapter 20 deals with foreign currency transactions, where it explains how trans-
acting in a foreign currency can affect the measurement of items.
Since foreign currency transactions frequently require hedging, chapter 22 explains hedge account-
ing, by using the example of a currency forward exchange contract so as to link back to chapter 20.
However, since forward exchange contracts are a type of financial instrument, the student should
ideally first study financial instruments. The financial instruments topic is covered in chapter 21.
Share capital involves either equity instruments or financial liabilities and is thus best covered after
having grasped the various concepts in the financial instruments chapter and thus the concept of
share capital and liabilities is contained in chapter 23. Chapter 24 covers earnings per share: this
chapter is best covered after studying share capital.
• Chapter 25: Fair value measurement affects numerous prior chapters affected by fair value measure-
ments. This chapter may be referred to whilst studying these other affected chapters.
• Chapter 26: Everything we have learned thus far involves applying policies and making estimates
(and hopefully not too many errors!). This chapter now explains how you would account for a change
in an accounting policy or estimate and how to correct errors.
• Chapter 27: Statements of cash flows is distinct from all prior chapters since it applies the cash con-
cept rather than the accrual concept and is thus the penultimate chapter.
• Chapter 28: The final chapter is financial analysis and interpretation since it does not relate to an
IFRS but simply explains how users analyse and interpret the financial statements.
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, Gripping GAAP
Contents
Chp. References Title of chapter Page
1 IASB, Companies The reporting environment 1
Act & King IV
2 Conceptual The conceptual framework for financial reporting 34
Framework
3 IAS 1 Presentation of financial statements 75
4 IFRS 15 Revenue from contracts with customers 120
5 IAS 12 Taxation: various types and current income tax 218
6 IAS 12 Taxation: deferred taxation 269
7 IAS 16 Property, plant and equipment: the cost model 364
8 IAS 16 Property, plant and equipment: the revaluation model 417
9 IAS 38 & IFRS 3 Intangible assets and purchased goodwill 472
10 IAS 40 Investment properties 513
11 IAS 36 Impairment of assets 553
12 IFRS 5 Non-current assets held for sale and discontinued operations 603
13 IAS 2 Inventories 661
14 IAS 23 Borrowing costs 724
15 IAS 20 Government grants and government assistance 749
16 IFRS 16 Leases: lessee accounting 782
17 IFRS 16 Leases: lessor accounting 841
18 IAS 37; IAS 10 Provisions, contingencies and events after the reporting period 900
19 IAS 19 Employee benefits 938
20 IAS 21, IFRS 9, & Foreign currency transactions 960
IFRS 7
21 IFRS 9, IFRS 7, & Financial instruments – general principles 985
IAS 32
22 IFRS 9, IFRS 7, & Financial instruments – hedge accounting 1079
IAS 32
23 IFRS 9 & IFRS 7, Share capital: equity instruments and financial liabilities 1119
IAS 32 & Co’s Act
24 IAS 33; Circ 1/23 Earnings per share 1144
25 IFRS 13 Fair value measurement 1185
26 IAS 8 Accounting policies, estimates and errors 1202
27 IAS 7 Statement of cash flows 1233
28 N/A Financial analysis and interpretation 1266
viii
,Gripping GAAP The reporting environment
Chapter 1
The Reporting Environment
Main references: IFRS Foundation Constitution (2021); Due Process Handbook (2020); www.IFRS.org;
Companies Act 2008; Companies Regulations, 2011; King IV (2016) and JSE Listing Requirements
(November 2017) – all latest versions at 1 December 2023
Contents: Page
1. Introduction 3
2. History: accounting before internationalisation 3
2.1 Accounting – history before corporations and credit 3
2.2 Accounting – history after corporations and credit 3
2.3 Accounting – history of the double-entry system 4
3. History: internationalisation of accounting 5
3.1 Accounting is just a language 5
3.2 Generally Accepted Accounting Practice (GAAP) 5
3.3 GAAP and IFRS – what is the difference? 5
3.4 Harmonisation of National GAAPs into IFRSs – a brief history 6
4. IFRSs – in a nutshell 7
4.1 Overview 7
4.2 The term ‘IFRSs’ or ‘IFRS Standards’ – what does it mean? 7
4.3 Standards 7
4.4 Interpretations 7
4.5 Conceptual Framework for Financial Reporting 8
5. IFRSs – Compliance , convergence and harmonisation 8
5.1 Compliance with IFRSs (adoption) 8
5.1.1 What does compliance involve? 8
5.1.2 Why would one comply? 8
5.1.3 Does the whole world comply? 9
5.2 Harmonisation versus Convergence 9
5.3 Compliance (adoption) versus Convergence 10
6. IFRSs – The development process (standard-setting) 11
6.1 Overview 11
6.2 Standards developed to date 12
6.3 Interpretations developed to date 12
6.4 Due process 12
6.4.1 Overview 12
6.4.2 Principles of due process 12
6.4.3 The basic standard-setting cycle 13
Diagram 1: Basic standard-setting cycle 13
Diagram 2: Summary of who develops what 14
6.4.4 More about exposure drafts 14
6.4.5 More about annual improvements 15
Chapter 1 1
, Gripping GAAP The reporting environment
Contents continued …
7. IFRSs – The structures and people involved in developing IFRSs 16
7.1 Overview 16
7.2 The IFRS Foundation 16
7.3 The IFRS Foundation: an organogram 17
7.4 The Monitoring Board 17
7.5 The Trustees 18
7.6 The International Accounting Standards Board (IASB) 18
7.7 The IFRS Interpretations Committee (IFRSIC) 19
7.8 The International Sustainability Standards Board (ISSB) 19
7.9 The IFRS Advisory Council (IFRSAC) 19
8. Companies Act and related Regulations 19
8.1 Overview 19
8.2 Categorisation of companies 20
8.3 Legal backing for financial reporting standards 21
8.4 Which financial reporting standards must we use? 22
8.5 Legal backing for differential reporting 23
8.5.1 Overview 23
8.5.2 What are small and medium-sized entities (SMEs)? 23
8.5.3 The history of differential reporting in South Africa 24
8.5.4 How do the IFRSs for SMEs help? 24
8.6 Does our company need an audit or independent review? 24
8.7 Company records 25
8.8 Accounting records 25
8.9 Financial year 26
8.10 Financial statements 26
8.11 Annual financial statements 27
8.11.1 Timing 27
8.11.2 Audit or independent review 27
8.11.3 Other documents included in the annual financial statements 27
8.11.4 Extra disclosure relating to directors or prescribed officers 27
8.11.5 Approval and presentation 29
9. JSE Listing Requirements 29
9.1 Overview 29
9.2 JSE on ‘continuing obligations’ 29
9.3 JSE on ‘financial information’ 29
10. King IV Report 30
10.1 Overview 30
10.2 King IV Report on remuneration 31
10.3 King IV Report on sustainability and integrated reporting 31
11. Summary 33
2 Chapter 1
