Conceptual framework summary compiled by Sibonelo Ncube... 2024 Students are encouraged to do a thorough reading CONCEPTUAL FRAMEWORK & INTERNATIONAL ACCOUNTING STANDARD 1 INTERNATIONAL FINANCIAL REPORTING STANDARS (IFRS) > IFRSs are principles that are applied by accountants when they: Y Record transactions and other financial information (accounting information) and Y Prepare financial statements for external users (external reporting). > IFRS are issued by the International Accounting Standards Board. (IASB) > IFRSs are developed within the International Accounting Standards Board (IASB) or by the IFRS International Committee (IFRISIC) THE CONCEPTUAL FRAMEWORK (CF) > The Conceptual Framework (CF) is the foundation on which all IFRSs are build. The conceptual framework help the IASB in developing IFRSs. The conceptual framework help preparers of financial statements to create their own accounting policies. The conceptual framework assist all interested parties to understand and interpret the standards. When there is a contradiction between the standard and the conceptual framework, the standard is used. THERE ARE EIGHT CHAPTERS IN THE CONCEPTUAL FRAMEWORK: vvv v Objective of financial reporting Qualitative characteristics of useful financial information Financial statements and the reporting entity Elements of financial statements (Assets, Liabilities, Equity, Income & Expenses) Recognition and derecognition of the elements Measurement bases that may be used when measuring the elements. Presentation and disclosure Concepts of capital and capital maintenance OBJECTIVE OF FINANCIAL REPORTING vVvvvvYyY v > The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful for decision making to primary users and other interested parties. > WHO ARE PRIMARY USERS OF FINANCIAL INFORMATION Y Existing/potential investors, lenders and creditors FINANCIAL STATEMENTS AND REPORTING ENTITY > The objective of general purpose financial statements is to provide useful financial information about reporting entity's assets, equity, income and expenses. Financial statements must be presented for the current period and at least one preceding reporting period. Financial statements are prepared on a going concern assumption. Acomplete Set of Annual Financial Statements includes: Y SOPL, SOFP, SOCE, SOCF and NOTES to the financial statements vv vConceptual framework summary compiled by Sibonelo Neube...... 2024 Students are encouraged to do a thorough reading QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION > For financial statements to be useful to its users, it must have certain qualitative characteristics. >» The Conceptual Framework separates the qualitative characteristics into the following two types: v Fundamental qualitative characteristics ‘@ Those that are essential for financial information to be useful for users are: 1. Relevance In order for information to be relevant, one should consider whether it could make a difference in users’ decision-making. 2. Faithful representation In order to achieve faithful representation, the financial information given to users must be complete, neutral and free from error. v Enhancing qualitative characteristics ‘% Those that improve usefulness are: 1. Comparability 2. Ver 3. Timeliness 4. Understandability ELEMENTS OF THE FINANCIAL STATEMENTS > The Conceptual Framework identifies 5 main elements: Assets, Liabilities, Income, Expenses and Equity. > The following definitions are relevant: 1. Anasset is ‘ Apresent economic resource ‘% Controlled by the entity Resulting from past events * NB: An economic resource is defined as a right that has: ‘The potential to produce economic benefits 2. A liability is: “A present obligation ‘To transfer an economic resource Resulting from past events ‘© NB: An obligation is defined as a duty that the entity has: ‘No practical ability to avoid. 3. Equity is: ‘+ The residual interest in the entity's assets ‘After deducting all its liabilities (Residual interest = 4. An expense i ‘“ Adecrease in assets or increase in liabilities + Resulting in a decrease in equity “Other than distributions to holders of equity claims. 5. An income is: + An increase in assets or a decrease in liabilities Resulting in an increase in equity ‘Other than contributions from holders of equity claims.Conceptual framework summary compiled by Sibonelo Neube..... 2024 Students are encouraged to do a thorough reading RECOGNITION CRITERIA: > Assets, liabilities, equity, income and expenses may only be recognised in the financial statements if they meet the definition as well as the recognition criteria. MEASUREMENT OF ELEMENTS: » The term “measurement” refers to the process of deciding or calculating the amount to be used in our financial statements, & There are a number of different methods (or possible measurement basis) that may be used to measure the amounts of individual elements (assets/libilties) recognised in the financial statements > Some of the different methods are listed below: The historical cost The current value Fair value Value in use Net Realisable Value (NRV) SKK KConceptual framework summary compiled by Sibonelo Neube...... 2024 Students are encouraged to do a thorough reading CLASS ACTIVITIE 1 ON IAS 1 Question 3.1 “JAS 1 Presentation of Financial Statements prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. It sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content...” IAS 1.1 Required: a) State the objective of IAS 1 Presentation of Financial Statements. ‘The objective of IAS 1, which is designed to be used when presenting general-purpose financial statements, is to provide information about the financial position, performance & cash flows that is useful to a wide range of users in making economic decisions; and also shows the results of management's stewardship of the resources entrusted to it. b) List the five statements that make up a complete set of financial statements. ‘There are five main statements in a complete set of financial statements, where each statement must reflect information for at least the current year and the prior year (comparative year): the statement of financial position (SOFP); the statement of comprehensive income (SOCI); the statement of changes in equity (SOCIE); the statement of cash flows (SOCF); the notes to the financial statements (Notes) (Gripping GAAP Pg 75) ¢) List the general features of financial statements as outlined in IAS Presentation of Financial Statements. KANN Financial statements should have eight general features, which are that they should: Y be fairly presented and comply with IFRSs, be presented on the going concern basis only if appropriate be prepared using accrual accounting (except when preparing the statement of cash flows) be presented with items of a similar nature or function having been aggregated into classes that are then presented separately from other dissimilar classes only if the classes are material not offset assets and liabilities or income and expenses unless required or permitted by IFRSS be presented annually (and include extra disclosure if the period is shorter or longer than a year) include comparatives (for at least one prior period) present and classify items consistently from one year to the next unless this needs to change because another method thereof becomes more appropriate or an IFRS requires a change d)_ Fair presentation, which is listed in IAS 1 as a general feature, is the same as ‘faithful representation’, which is listed in the Conceptual Framework as a fundamental qualitative characteristic. True / False? Explain. SAN SKK False, these two terms look similar, but fair presentation (a general feature) is more than faithful representation (a qualitative characteristic) fair presentation is a goal and faithful representation is one of the characteristics needed to achieve this goal e) fone wishes to be able to conclude that the financial statements comply with IFRSs, departure from IFRSs is expressly prohibited. True / False? Explain. False, An entity shall depart from an IFRS: if compliance with an IFRS is expected to result in financial statements that are so misleading that the objective of financial reporting won't be met (essentially that the financial information won't be useful), and if the relevant regulatory framework (e.g. the legislation of the relevant country) requires or otherwise does not prohibit such a departureConceptual framework summary compiled by Sibonelo Neube...... 2024 Students are encouraged to do a thorough reading 8) _Itis management's responsibility to ensure that the entity is a going concern. True / False? Explain. True, Management must assess whether the entity is a going concern (GC). This assessment: Y is made when preparing the financial statements; Y is based on all available information regarding the future; and Y includes a review of the available information relating to, at the very least, one year from the end of the reporting date. h) Explain the difference between the nature method and the function method of disclosing expenses on the statement of comprehensive income. Expenses used in the calculation of profit or loss must be analysed based on either the: nature of the expenses (nature method); or Y function of the expenses (function method). ‘The choice between analysing expenses on the ‘nature method’ or ‘function method’ depends on which method provides reliable and more relevant information. The same profit (or loss) will result no matter which method is used. ‘When using the nature method, expenses are presented based on their nature and are not allocated to the various functions within the entity (such as sales, distribution, administration etc). This method is simpler and thus suits smaller, less sophisticated businesses. Generally, the four main functions (tasks) of a business include the: v sales, Y distribution, Y administration, and Y other operations. Using the function method requires the allocation of all expenses to these different functions (i.e. based on the purpose of the expense). Thus, the function method effectively provides ‘the reasons’ for the expenses and thus provides more relevant, information than the nature method. Another advantage of the function method is, for instance, that it enables the calculation of the gross profit percentage, where this calculation isn’t possible if the nature method is used.Conceptual framework summary compiled by Sibonelo Neube..... 2024 Students are encouraged to do a thorough reading ACTIVITY 1 (Taken from 2022 Test 1 paper) Scenario & Information ‘The following business transaction pertains to SIZWE & ADAMS CONSTRUCTORS (PTY) LIMITED, an entity engaged in the construction of sub-economic houses and roadworks. ‘The company decided to upskill the population of the area where the roadworks would be executed and implemented a training programme of one month prior to the commencement of the project. The successful candidates would be employed by the company for the duration of the project. The costs of the training amounted to R 300 000 and was fully paid on completion of the training programme to accredited training providers. You are required to discuss whether the costs incurred by the company to upskill people should be classified as an asset compliance with the definition as per the Accounting Framework SOLUTION ACTIVITY 2 (Taken from 2022 Test 1) Scenario & Information ‘The following business transaction pertains to SIZWE & ADAMS CONSTRUCTORS (PTY) LIMITED, an entity engaged in the construction of sub-economic houses and roadworks. ‘The account receivable on the trial balance at 31 March 2022 amounts to R50 000 000. Included in the balance is an amount of RS million owed by Durban Technology Limited, which was declared bankrupt in the early hours of the morning of 30 August 2021. You are required to Discuss the impact of issue (see note 2 above) on the financial statement (you must refer to the conceptual framework’s definitions and recognition criteria of the elements of the financial statements. SOLUTIONConceptual framework summary compiled by Sibonelo Ncube... 2024 Students are encouraged to do a thorough reading ‘SOURCE USED TO GATHER ALL THE INFORMATION INCLUDED IN THIS DOCUMENT IS GRIPPING GAAP TEXTBOOK Gripping GAAP Presentation of financial statements, 12. Summary * Objective of IAS — prescribes the basis for presentation of general purpose f/ statements — to ensure comparability both with the entity's prior periods and with other entities. — sets out overall requirements for the presentation of f/ statements, guidelines for their structure and minimum requirements for their content * Objective of f/statements — provide info about the: — financial position, performance & cash flows — that is useful to a wide range of users in making economic decisions; and — also shows the results of management's stewardship of the resources entrusted to it. + 5 Components of a set of f/statements — SOFP — SOCIE - SOCI ~ SOCF Notes. * 8 General features — Fair presentation and compliance with IFRSs ~ Going concern ~ Accrual basis — Materiality and aggregation ~ Offsetting ~ Reporting frequency — Comparative information — Consistency + Statement of financial postion: {ives info bout: Financial psiton Present: assets lilies, eqity + Statement of changes in equity {ives info about: Changes n the fnancil postion Presents: Movement in equity leased capital and reserves), showing separately the transactions with owners + Statenent of comprehensive income Gives info bout: Financial pervormance — Presents income and expences = TCT, where TCT ie elt between Land oct + Statement of cath flows Gives info obout: Cash generating ability Presents cash movements analysed ito: eperatig, investing ond Firancing ectvities + Notes to the finencal statements ‘Gives info about: line items that are inthe other statements but also but items that hove not beer ‘ecognised inthe other statements but may stil be relesantinfermetion to the usees