Welcome to Advanced Financial Accounting

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Welcome to Advanced Financial Accounting

• Presented by
• Mrs Caryn Maitland

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Todays Agenda

• Welcome
• Course outline
• Tutorials
• Times
• Challenge
• Undergrad tutors

• Simulated Exams
• Books
• Soccer Day
• Lecture AC000 and IAS 1
• Unseen and homework

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Confucius says (around 450 BC)

• "Tell me, and I will forget.
• Show me, and I may remember.
• Involve me, and I will understand."

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Rules of conduct

• Respect
• No such thing as a stupid question!
• Question ideas
• If you know why, you know how!

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The Financial Reporting Framework
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We are the reporters of the financial world.

• Financial Reporting is.?
• Wide range of communications
• By reporting entities
• To the users of that financial info
• Examples?

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Statute
South African Reporting Requirements
JSE
IFRS SA GAAP
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Statute

• The Companies Act of 1973
• Limited vs (Pty) Ltd
• The Corporate Laws Amendment Act, 2006
• Limited interest vs Widely Held
• IFRS for SMEs
• The New Companies Bill
• Closely Held vs Widely Held

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• Corporate Laws Amendment Act, 2006
• Signed into law 17 April 2007
• Proclamation approved on 12 Nov 07
• Promulgated on the 14 December 07
• Distinguishes between widely held and limited
  interest.

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Companies Laws Amendment Act, 2006

• Establishment of a Financial Reporting Standards
  Council
• Sec 440S Functions of Council
• Establish reporting standards for public interest
  Co (reference made to IASB and IFRS)
• Develop standards for limited interest companies
  (developed in consultation) (S440S(1)(b)
• Monitor compliance
• Updated Schedule 4

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Limited interest vs. Widely Held

• Widely held company (S1(h)(6)(a)
• A company is a widely held company if
• (i) its articles provide for unrestricted
  transfer of its shares
• (ii) it is permitted by its articles to offer
  shares to the public
• (iii) it decides by special resolution to be a
  widely held company
• (iv) it is a subsidiary of a company described in
  (i) to (iii) above

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• Limited interest company S1(h)(6)(d)
• A company is a limited interest company if it is
  not a widely held company.

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Limited interest

• Accounting consequences Must comply with
• Use FRSC specially developed standards (SAICA
  SA GAAP for SMEs) or use existing framework (Big
  IFRS).
• Provisions of Co Act and Sch 4 that are
  applicable
• Prepare AFS to fairly present the above.

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New Companies Act.
Widely Held
Closely Held
Closely Held
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IFRS for SMEs?????
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IRBAs opinion

• Consider that SA Statement for GAAP for SMEs is
  acceptable.
• Forms part of the fair presentation framework
• SA Statements for GAAP for SMEs
• NOT
• IFRS for SMEs

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Who can use it?

• Any entity that does not have public
  accountability

Not available to Entities that have other
regulatory frameworks that they need to comply
with
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IASB point of view

• Wanted Standards for entities that
• Do not have public accountability
• Includes economically significant to country
• But still publish general purpose financial
  statements
• Still see these being for external users
• Europe alone over 28 sets of adapted IFRS for
  SMEs comparability issues??

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Public Accountability

• Trades (or intends trading) equity or debt
  publicly
• Holds assets in a fiduciary capacity for a broad
  group of outsiders

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Back to the current situationCompanies Act 1973
CLAA 2006
Annual Financial Statements All Companies
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Companies Act 1973 CLAA 2006 Continued.
Annual Financial Statements All Companies
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Companies Act 1973 CLAA 2006 Continued.
Interim Report
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Companies Act 1973 CLAA 2006 Continued.
Provisional AFS
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JSE Limited Requirements

• General
• All listed Cos have to comply
• Full compliance with IFRS (not SA GAAP)
• 1 Jan 05
• Section 8
• Report on historical info
• Pro forma AFS
• Profit forecast and estimates
• Accountants report
• Minimum content of interim, provisional or
  abridged FS
• Minimum content of AFS

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• Primary vs Secondary Listings
• Primary takes preference in enforcement of
  requirements
• If primary not JSE, reserve right to make them
  comply with listing requirements
• If JSE secondary, and co not in compliance with
  S8 need special concession
• Circular 8/2007 Headline EPS must be complied with

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• Dual listing
• Aggregated group of companies
• With combined businesses
• Accounted for under 2 separately listed companies
• I.e.
• Company housing SA business listed on JSE
• Another Company housing foreign business, primary
  listing elsewhere, secondary on JSE

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• Requirements
• Follow the stricter exchange
• Publish aggregated AFS
• Publish aggregated interim FS

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• Powers of suspension, termination, censure and
  penalties
• Failure to comply could result in R1 million fine
  on directors, individually or jointly
• Amongst other things

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SA GAAP

• 5 categories
• AC 000 Framework
• AC 100 series Statements
• AC 200 series Guidelines (carry considerable
  weight)
• AC 300 series Accounting Issues Task Force
  Opinions (just an opinion)
• AC 400 Interpretations
• AC 500 series Statements (new, unique to SA)
• AC 100, AC 400 and AC 500 compliance required
• AC 000 does not override AC Stmts, but requires
  info to be useful
• EDs no legal weight
• Circulars
• QE Part 1 June deadline

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• IAS vs IFRS vs AC?????
• SIC vs IFRIC vs AC4000
• Listed companies IFRS (1 Jan 05)
• GAAP Monitoring Panel
• Widely Held IFRS
• Does the Framework override the Standards?
• Useful economic decisions

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AC000 The Conceptual Framework

• What is a conceptual framework?
• Why is it needed?

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Qualitative Characteristics
The Objective of AFS
AC000
Definition Recognition Measurement
Capital Maintenance
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Objective of AFS
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• Provide info
• that is useful
• 2) Assess stewardship
• of management

Users 1) Reasonable knowledge 2) Study info with
diligence
Objective

• Users include
• Investors
• Employees
• Lenders
• Customers
• Govt
• SARS
• General Public

• Underlying Assumptions
• Accrual
• Going Concern

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Qualitative Characteristics
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Understandability
Relevance (materiality Definition?)
Conflict
Qualitative Characteristics (Fair Presentation)

• Reliability
• Faithful representation
• Substance over form
• Neutrality
• Prudence
• Completeness

Comparability
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Definitions, Recognition, Measurement

• Most important idea
• (Especially for theory..)

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Process
Balance Sheet Accountants Asset, Liability,
Equity Income or Expense
Identify transaction
Can we recognise in GL?
Probable Measurable
How do we measure?
Historic cost Current cost Realisable
Value Present Value
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Asset, Liability, Equity Income or Expense
Definitions
Classifications
Financial Position or Preformance
AFS?
BS IS SoCOE
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Concepts of Capital and Capital Maintenance
Concerned about how an entity defines the
capital it seeks to maintain
Profit Inflow of Assets gt amount needed to
maintain capital
Financial Concept
Operating Concept
Maintain purchasing power
Maintain operating capacity
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IAS 1 Presentation of Financial Statements
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New Standard!!!!!!!

• Wants to aggregate info in AFS on the basis of
  shared characteristics
• Separate changes in net assets (OEA-L) wrt
  owners from other changes in equity

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Key differences

• New titles
• Retrospective change in Acc Policy, restatement
  or reclassification
• Minimum disclosure comparative info 2 of each
  statement and notes
• Owner vs Non Owner changes in equity
• Statement of Comprehensive Income
• One statement or 2?
• Tax effects of other comprehensive income amounts
• Reclassification adjustments of other
  comprehensive income disclose
• Dividends/Distributions to owners and related per
  share disclosure
• SoCOE

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Financial Statement Presentation
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• Standarisation
• Underlying Assumptions
• Components of AFS
• 4) Fair Presentation
• 5) General issues
• 6) Consistency
• 7) Identification
• 8) Period not a year

Present of AFS
New IAS 1
Structure of Components BS, CI, SoCOE
Reacquire own shares
AFS Presentation Issues
Sources of Uncertainty
Other Disclosures
Capital Disclosure
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Standardisation

• State compliance with IFRS
• SA GAAP for SMEs (IFRS for SMEs)
• Departures from IFRS extremely limited
• Guidance on structure of AFS
• Minimum structural requirements
• Accounting policies
• Notes

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• Practical requirements
• Materiality
• Offsetting
• Going concern
• Consistency of presentation
• Comparative info

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Underlying Assumptions

• Going concern
• Default setting
• Management required to make assessment
• If in doubt disclose why?

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Components of AFS

• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash Flows
• Notes
• Accounting policies
• Explanatory info
• Statement of financial position as at the
  beginning of the earliest comparative period
• Retrospective adjustments and reclassifications

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• Can use other titles
• BS
• IS plus Statement of Comprehensive Income
• CFS
• Companies Act requires Directors Report

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Fair Presentation

• Faithful representation of transactions
• Disclose compliance with IFRS
• Cant rectify inappropriate disclosure by trying
  to explain your way out of it!!!
• (What if IFRS is misleading?)

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General Presentation

• Aggregate each material class of similar
  transactions
• Dissimilar items separate disclosure
• Offset only in a statement permits
• Assets vs liabilities
• Income vs expenses
• Complete set of AFS to be presented
• Comparatives
• Numerical, narrative and anything else that helps
• Adjusted for current years reclassifications
• AFS should be clearly identified and
  distinguishable

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Consistency of presentation

• From year to year, unless
• Significant change in companies operations deem
  it more appropriate
• Standard requires change
• Reclassification requires significant disclosures
• Impracticable???

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Identification

• Each components name
• Prominently displayed
• Repeated where necessary
• Company Name
• Group or primary
• Year end
• As at vs. for the period
• Presentation currency
• Rounding

Exam technique
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Financial statements for the period?

• More or less than 12 months?
• Disclose
• Reason
• Comparatives not comparable

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Structure of the Components of Financial
Statements
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Statement of Financial Position(Balance Sheet)

• Minimum info required
• Can give more if it aids understanding
• Order Size, Nature, or Function
• Consider liquidity

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Current vs. Non Current

• Operating cycle
• Trading purposes
• Realised within 12 months of Y/E
• Asset Cash or Cash Equivalent
• Liabilities settled on demand (have no right to
  extend terms)
• Liability still current if was due for settlement
  in 12 months
• PBE refinanced

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• Pictorial Presentation page 7
• Additional info Sub classification face or notes
• Refer to Standard IAS 16 vs IAS 2
• Nature and liquidity? Trade receivables and
  debtors
• Function of assets Employee Benefits vs
  Restoration of asset
• Amounts, timing and nature of liabilities

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• Share Capital disclosure
• Pictorial presentation page 9
• Non Distributable Reserves
• Description of nature and purpose of each reserve
• Pictorial presentation page 10

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Statement of Comprehensive Income

• All items of income and expense recognised in the
  period
• One statement, or
• Two statements
• Components of profit and loss
• Statement beginning with P/L and showing other
  comprehensive income amounts

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• Other comprehensive income identified by IFRS
  Standards
• PPE revaluations
• Intangibles revaluations
• Financial Instruments Available for sale
• Change in Accounting Policies and Errors
• Forex recycling to P/L
• FCTR Foreign operation
• CF Hedge

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• Minimum info (pictorial presentation)
• Para 85 extra disclosure allowed
• No EOI
• Reclassification adjustments
• Move from NDR to P/L
• Excludes changes in Reval Reserve or change in
  Actuarial gains and losses (EB)
• Tax effects of other comprehensive income needed

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• Pictorial Presentations
• One statement by function (page 12)
• Two statements by nature (page 13)
• Tax effects (page 14)

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Statement of Comprehensive Income

• Additional info to be presented
• Para 97 Nature size or incident (page 15)
• Expenses by Nature or Function
• Pictorial presentation page 16
• Additional notes for by function

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Statement of Changes in Equity

• Disclose
• Total comprehensive income for the year
• Each component of income
• Retrospective application
• Retrospective reclassification
• Transactions with owners
• Each component of Equity
• OB reconciled to CB
• Pictorial presentation Page 17

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• Dividends
• Per share
• Proposed or declared (PBE)
• Cumulative pref divs not recognised

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Notes to the Financial Statements

• DISCLOSE
• Accounting policies applied
• Info required by IFRS that doesnt fit elsewhere
• Anything extra to improve users understanding
• Cross reference notes to Components of AFS

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Accounting Policy Notes

• Only significant ones disclosed
• Use judgement, needs to be useful
• Disclose some even if amount immaterial, but
  users need to know
• Judgments made by management
• EG Classification of PPE vs Investment Prop
• Financial instruments
• Pictorial presentation page 18

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Sources of Measurement uncertainty

• Limit uncertainty
• Estimates
• Types of disclosure
• Nature of assumption
• Sensitivity
• Expected resolution of uncertainty (possible
  outcomes)
• Explanation of changes to assumptions
• Pictorial Presentation page 19-20

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Capital Disclosures

• Important to users to assess risks
• Level of entitys capital
• How its managed
• Need to DISCLOSE info that allows a user to
  evaluate entities
• Objectives
• Policies and
• Process to manage their capital
• Details of externally imposed capital
  requirements
• Appendix to IAS 1

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Other disclosures

• Domicile of entity
• Legal form of entity
• Country of incorporation
• Address of its registered office,
• Or principle base of business
• Description of entitys operations and principle
  activities
• Name of parent and ultimate parent of group
• Pictorial presentation page 21

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Reacquisition of Own Shares

• Otherwise known as share buy backs.
• Regulated by
• Companies Act
• JSE
• Consider
• A company reacquires its own shares
• Treasury shares
• Corporate Laws Amendment Act

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A company reacquires its own shares

• Companies Act amended in 1999
• Can do provided
• Special resolution
• Articles of Association must authorise
• Company is solvent
• Company is liquid
• Shares acquired revert back ti authorised and
  unissued
• Cant repurchase entire share capital

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• JSE requires
• Specifically approved buy back limited to 20 of
  SCap per class
• Generally approved buy backs are
• Limited to 10 of Share capital per calss, and
• May not be contracted at a price gt than 5 above
  weighted average of market price (5 preceding
  working days)
• Must be implemented in the open market

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Guidance in Companies Act

• To Require
• Par value shares bought back to be paid from
  reserves (suggested as follows)
• 1) Share Premium Acc
• 2) Capital Redemption Reserve Fund
• 3) General reserves not created for specifc
  purpose
• 4) Retained Earnings

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• No par value shares a specified proportion to be
  paid from Stated Capital
• Ie No shares bought back/Total shares issued x
  Stated capital (before buyback)
• Balance over amount paid from Stated Capital to
  be paid from reserves
• Illustrative example page 23-24

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Treasury Shares

• Arise when a company (or its Subsidiary) holds
  shares in itself (or its parent)
• SA law
• These shares become cancelled and unissued if
  company buys them back itself
• Therefore only really looking at when a sub buys
  shares in parent
• SA Subs can hold a max of 10 of parent issued
  shares
• Same as a buy back, except arent canceled, just
  lose vote (NB for groups control discussion!)

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• Accounting for Treasury Shares
• Deduction from equity via SCOE
• Number of shares and amount deducted disclosed in
  notes or face
• Excluded from EPS Calculations
• Adjust crossholding on consolidation

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• Impact of AFS
• Subsidaries AFS (Group and primary)
• Available for sale Financial Assets
• Parent Primary AFS
• No effect
• Parent Consol AFS
• Be presented on SCOE
• BS show deduction from equoty
• Gains and losses resulting to equity not P/L

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Current Developments

• Corporate Laws Amendment Act 2006 amended S38
• Company can offer limited financial assistance to
  purchase its own shares
• Need
• Special Resolution
• Liquidity and Solvency Test
• Facilitate BBBEE