lecture 1 slides - 1-student version
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7/30/2019 Lecture 1 Slides - 1-Student Version
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 1
Lecture plan:
Housekeeping
Course assessment DP requirements
The perimeter wall
Corporate Laws Amendment Act of 2006 (proclaimed on 12 Nov 2007 and published in the GovernmentGazette on 14 December 2007) amends the Companies Act of 1973
Companies Bill of 2008 JSE Listing Requirements
The walls and windows
The Framework IAS 1
The bathroom
IAS 12The foundation & walls
Framework
Framework for the preparation and presentation of financial statements
objectives of financial statements underlying assumptions (2) qualitative characteristics (4) the elements (5) recognition of the elements measurement of the elements
Objective of f/statements
providing info about:
financial position, perform. & cash flows results of mgmts stewardship of the resources entrusted to it useful to wide range of users for econ decisions.
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 2
Underlying assumptions Qualitative characteristics
- accrual basis- going concern
- understandable- relevance- reliability- comparability.
Elements in the financial statements
Assets Liabilities
Resource Controlled by the entity As a result of a past event From which future economic benefits are
expected to flow to the entity
Present obligation Of the entity As a result of a past event From which future economic benefits are
expected to flow from the entity
Equity
Assets less Liabilities
Income Expenses
An increase in economic benefits During the accounting period In the form of increases in assets or
decreases in liabilities
Resulting in increases in equity Other than contributions from equity
participants
A decrease in economic benefits During the accounting period In the form of decreases in assets or
increases in liabilities
Resulting in decreases in equity Other than distributions to equity
participants
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 3
Recognition & measurement of elements
Recognition:
Meet:
- definition- recognition criteria
Measurement:
- Historical coste.g. land
- Current cost:e.g. PPE at fair value calculated according to an active market
- Present values:e.g. PPE at fair value calculated in accordance with DCF techniques
- Realisable values:e.g. inventories carried at lower of cost or NRV- Liquidation values
- etc
Recognition of elements
Asset and liability Income and expense
Future economic benefits probable Reliably measurable Reliably measurable
Recognition criteria met?
Yes No
Recognise; and where applicable Disclose separately (if required by IFRSor for fair presentation)
Is the item material to the user?
Yes No
Disclose Ignore
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 4
The windows into our business
IAS 1
Presentation of financial statements
objective of IAS 1 objective of financial statements the 5 statements in a set of fin. statements the 8 general features the structure & content of fin. statements
Set of financial statements
-Statement of financial position (old BS)-Statement of comprehensive income (old IS)-Statement of changes in equity-Statement of cash flows-Notes to the financial statements
ABC Ltd
Statement of financial position
As at 31 December 20X2
20X2
C000s
ASSETS X
Non-current assets X
Property, plant and equipment X
Goodwill X
Other intangible assets X
Current assets X
Inventories X
Trade and other receivables X
Cash and cash equivalents X
EQUITY AND LIABILITIES X
Issued SC and reserves (the total in the SOCIE) XNon-current liabilities X
Long-term borrowings X
Deferred tax X
Provisions X
Current liabilities X
Trade and other payables X
Current portion of long-term borrowings X
Short-term borrowings X
Current tax payable X
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 5
Statement of Comprehensive Income
Expenses
Function method (i.e. use or purpose) Nature method
One statement or two statements
Statement of profit or loss Statement of comprehensive incomeOR
Statement of comprehensive income (all inclusive)Other comprehensive income Change in revaluation surplus Actuarial gains or losses on DBP Gains or losses on translating foreign operations Gains or losses on available-for-sale financial assets Effective portion of gains or losses on hedging instruments in a cash flow hedge
ABC Ltd
Statement of comprehensive income
For the year ended 31 December 20X2 (function method)
20X2
C
Revenue X
Other income X
Cost of sales
Distribution costs
Administration costs
Other costsFinance costs (X)
Profit before tax X
Tax expense (X)
Profit for the period X
Other comprehensive income X
Total comprehensive income X
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 6
ABC Ltd
Statement of comprehensive income
For the year ended 31 December 20X2 (function method)
20X2
C
Revenue X
Other income X
Add/ (Less) Changes in inventories of FG and WIP (X)
Raw materials and consumables used (X)
Employee benefit costs (X)
Depreciation (X)
Other expenses (X)
Total expenses (X)
Finance costs (X)
Profit before tax X
Tax expense (X)
Profit for the period X
Other comprehensive income X
Total comprehensive income X
See example 16 in GG: SOCI: two layouts compared
Reclassification adjustments
Occurs with gains or losses on:
translating foreign operations; re-measuring available-for-sale financial assets; the effective portion of hedging instruments in a cash flow hedge.
Never occurs on:
changes in a revaluation surplus; actuarial gains and losses on defined benefit plans.
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 7
Changes to income and expenses
Changes made via profit or loss (SOCI):
Adjustments to income and expenses through, for example:o Changes in estimateso Correction of current period errorso Correction of prior period errors immaterial
Changes made via retained earnings (SOCIE):
o Correction of prior period errors materialo Changes in accounting policy
ABC Ltd
Statement of changes in equity
For the year ended 31 December 20X2
Share
capital
C
Share premium
C
Retained
earnings
C
Total
equity
C
Bal: 1/1/20X1 restated X X X X
Previously reported X
Change in acc policy X
Correction of error X
Total CI X
Less divs declared (X)
Add issue of shares X X
Bal: 31/12/20X1 - restated X X X X
Previously reported X
Change in acc policy X
Correction of error X
Total CI X
Less divs declared (X)
Add issue of shares X X
Bal: 31/12/20X2 X X X X
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 8
Notes to the fin. statements
Statement of compliance
Significant accounting policies
- measurement bases- acc policies important to understanding- judgments made by mgmt re acc policies chosen
Information about:
- items in other 4 FSs that need deeper disclosure- items not in other 4 FSs
- where an IFRS/ statute requires disclosure- non-financial disclosures (e.g. mgmt objectives and policies re risk management)- where you think disclosure is relevant- judgments made by mgmt affecting amts- capital management
2 Kinds of Judgments made by Mgmt
- which acc policy to use (source of policy uncertainty)- making estimates (sources of estimation uncertainty)
Sources of estimation uncertainty
- which acc policy to apply- making estimates (sources of estimation uncertainty)
Disclosure needed if:
- significant risk- that a material adjustment to the CA of an A or L- may be needed in the next financial year.
Disclosure would include:
- 6 aspects need disclosure (See SGIFR: Chp2, Sect 4) or (See GG pg 52)
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 9
Example 1: Source of Estimation Uncertainty
What S of EU disclosure is required for
an investment in shares measured at fair value based on market prices, where a a significant risk exists of a material change to its CA next year?
Answer 1:
None, because:
the possible change in CA is caused by the market price changing not by incorrect assumptions made by management.
Example 2: Judgements re choice of acc policy
Give an example of a mgmt judgment re choice of policy.
Answer 2:
When management decides that one of its buildings is held for saleand is not held for use
with the result that IAS 40: Investment property is used to account for that building instead ofIAS 16: Property, plant and equipment
Example 3: Judgements causing estimation uncertainty
Give an example of:
a judgement that may be a source of EU, the A or L it may affect and briefly explain how the judgement could affect the estimated amount.
Answer 3:
Judgement: mgmt thought we could win a legal case
Account affected: Provisions for law suits (L):
How affected: If judgement wrong (i.e. we lose), the amount could be underestimated or possibly
not provided for at all!
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Framework & Presentation
Gripping GAAP Overheads: 2009Sowden-Service 10
Judgement: mgmt expects technological advances that they think will reduce the cost of the future
rehabilitation of environment due in 20 years
Account affected: Provision for rehabilitation costs
How affected: If the technological advances dont happen, the provision would be underestimated if
unexpected technology is developed, the provision could be overestimated
Judgement: mgmt expects to have to rehabilitate environment in 20 years
Account affected: Provision for rehabilitation costs
How affected: If the rehabilitation only has to happen in 30 years, the provision will be
overestimated (estimates based on PV factors for 20 years instead of 30 years)
General features
- fair presentation & compliance with IFRS;- sometimes departure required & allowed- sometimes departure required but disallowed
- going concern;- accrual basis;-
materiality and aggregation;- offsetting;
- sometimes allowed- sometimes required- sometimes disallowed
- reporting frequency;- comparative information;
- if change in presentation since prior yr- 2 yrs of comparatives needed for SOFP
- consistency.
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