lecture 1 slides - 1-student version

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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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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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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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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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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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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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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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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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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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.

lecture 1 slides - 1-student version

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