FAC1601
SUMMARY
STUDY NOTES. FAC1601 - Financial Accounting And Reporting
The Conceptual Framework for Financial Reporting was issued by the International
Accounting Standards Board (IASB). This document contains a group of interrelated
objectives and theoretical principles that serve as a fra...
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Page 6 – Overview of Conceptual Framework for Financial Reporting.
IFRSs deal with the recognition, measurement, presentation and disclosure requirements in
general purpose financial statements.
The Conceptual Framework for Financial Reporting was issued by the International
Accounting Standards Board (IASB). This document contains a group of interrelated
objectives and theoretical principles that serve as a frame of reference for financial
accounting and more specifically financial reporting. It is not an IFRS.
Purpose:
Development of future standards, reducing number of alternative accounting treatments,
assist users in interpreting information in financial statements.
The communication of financial information is referred to as financial reporting.
Financial statements form part of a process of financial reporting and the purpose of their
preparation is to summarise and present all the transactions recorded in the journals and
ledgers of an entity in a useful, logical and understandable way to the users of those
financial statements.
Different components usually included in an entity’s complete set of financial statements:
Statement of financial position:
Information about financial position of entity at a certain point in time, economic resources
available to generate future cash flows, financial structure; liquidity and solvency positions
and may be used to predict availability of cash after settling financial commitments or over
longer periods.
Statement of profit or loss and other comprehensive income:
Information about financial performance of an entity over a given period, assessment of
potential changes in economic resources in the future, predicting capacity of the entity to
generate cash flows from existing resources.
Statement of changes in equity:
Information about changes in the capital structure of an entity.
Statement of cash flows:
Information about changes in the financial position of entity over a period of time.
Notes to the financial statements:
Additional information that is relevant to the needs of users about the items in the entity’s
various financial statements.
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.
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Primary Users: Present and potential investors, lenders (private and corporate), customers
and creditors. Other users include shareholders, employees, management and regulators.
Underlying assumption when preparing financial statements:
Going-concern – financial statements are prepared on the basis that the entity will continue
in operation for the foreseeable future.
Fundamental Qualitative Characteristics:
Relevance, materiality (if information is material then omitting or misstating such
information could influence future decisions), faithful representation (perfectly faithful
representation of information would depict a complete, neutral and error-free set of
financial statements).
Enhancing Qualitative characteristics:
Comparability, verifiability (reach the same conclusion), timeliness, understandability.
Cost of providing financial reporting must be justified by the benefit derived therefrom.
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.
Physical form of asset is not essential (patents and copyrights).
A liability is a present obligation arising from past events, the settlement of which is
expected to result in an outflow of economic resources.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Normally coincidental that the aggregate amount of equity corresponds with the aggregate
market value of shares of the entity or the sum that could be raised by disposing of either
the net assets on a piecemeal basis, or the entity as a whole on a piecemeal basis.
Income is an increase 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 the contributions from the equity participants.
Income represents both revenue and gains.
Revenue arises in the course of ordinary activities of an entity (sales, fees, interest,
dividends, royalties and rent).
Gains represent other items that meet the definition of income and may or may not arise in
the course of ordinary business activities. (Gains are reported net of related expenses and
are separately recorded).
Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletion of assets or incurrence of liabilities that result in decreases in equity,
other than those relating to a distribution to equity participants. Losses (see gains above and
reverse wording).
Recognition of elements of financial statements:
Recognition is the process of incorporating an item that meets the definition of an element
and satisfies the criteria for recognition in the statement of financial position or statement
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of profit or loss and other comprehensive income.
“An item that meets the definition of an element should be recognised if:
⦁ It is probable that any future economic benefit associated with the item will flow to
or from the entity; and
⦁ The item has a cost or value that can be measured with reliability.”
If no cost or value is attached to an item, and it is not possible to make an estimate, such an
item can be recognised (pending law suit).
Asset is recognised when it is probable that the future economic benefits will flow to the
entity and it can be reliably measured or has a cost attached. If it is improbable that
economic benefit will flow to the entity, the item is removed from the balance sheet but is
recognised as an expense (Read page 9 of study guide).
Measurement is defined as the process of determining the monetary amounts at which the
elements of the financial statements are to be recognised and carried in the balance sheet
and income statement.
4 methods:
Historical Cost – Assets are recorded as the amount of cash or cash equivalent paid or the
fair value of the consideration given to acquire them at the time of acquisition.
Realisable value – Assets are carried at the amount of cash or cash equivalents that could
currently be obtained by selling the assets in an orderly disposal. Liabilities are carried at
settlement value.
Current Cost – Assets are carried at the amount of cash or cash equivalents that would have
to be paid if the same or equivalent asset was acquired currently.
Present Value – Assets are carried at present discounted value of the future net cash inflows
that the item is expected to generate in the normal course of business.
Fair value (not an IFRS) is defined as the amount for which an asset could be sold or a
liability transferred between market participants on the measurement date.
Selection of measurement basis and the concepts of capital and capital maintenance
determine the model to which the financial statements are prepared.
Financial concept (synonymous with the net assets or equity of a business entity) and
physical concept (productive capacity of the entity) of capital.
Financial capital maintenance – A profit is only made if the net assets at the end of the
period exceeds the financial amount of net assets at the beginning of the period, after
excluding any distributions and contributions from owners during the period.
Physical capital maintenance – A profit is earned only if the physical productive capacity of
the entity at the end of the period exceeds the physical productive capacity at the beginning
of the period, after excluding any distributions to and contributions from owners during the
period.
IFRS must be applied when the financial statements of entities that are incorporated under
the Companies Act No 71 of 2008 are prepared.
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