Competency for Accounting and External Reporting in Perspective

(with references to the SAICA’s Competency Framework)

Background and introduction

As a Financial Accounting student, you aspire to become a Chartered Accountant (CA

(SA)). The South African Institute of Chartered Accountants (SAICA) has developed a
“competency framework” detailing the competencies of a CA (SA) at the point of the
“Initial Test of Competence (ITC)”, which is a formal assessment of core technical
knowledge. An academic programme, such as the University of the Free State’s
specific accounting degrees, aims to develop these competencies of an aspiring CA
(SA) for entry into the profession.

One of the specific technical competencies is the area of “accounting and external
reporting”. Entities record transactions and events (bookkeeping and accounting)
and measure and report their performance and financial position (external financial
reporting). The reports generated for external use can be of a financial or non-financial
nature. Common examples include general-purpose financial statements and
integrated reports. Entities report information to their various stakeholders to provide
decision-useful information to their stakeholders and to meet their stewardship
requirements.

The primary role of a prospective CA (regarding this competency area) will be to act
as part of a team that is competent in understanding an entity’s reporting requirements
and the importance of providing relevant, faithful, accurate and complete information
in meeting the entity’s reporting requirements. A prospective CA should have a
thorough knowledge of generally accepted accounting practices (GAAP), their
application in IFRS and a thorough understanding of when and how to apply them. A
prospective CA should also understand that different entities have different objectives
and may be required to use different reporting frameworks.

This document aims to put the detailed competencies in the area of accounting
and external reporting into perspective for a student.

Competencies within Accounting and External Reporting

 III-1: Analyses financial reporting needs and establishes the

necessary systems

In analysing the financial reporting needs of an entity, it is vitally important to

consider the Conceptual Framework for Financial Reporting as it specifically
explains the objective of general purpose financial reporting and the information
needs of users (chapter 1), the qualitative characteristics of useful financial
information (chapter 2) and the general aspects relating to financial statements of
a reporting entity (chapter 3).

UFS-SAICA CF-in perspective for EFIN5-6 (2022)

o III-1.1: Identifies the appropriate reporting framework

Possible reporting frameworks for South African entities that can be used for
the financial reporting (bases for the preparation of an entity’s financial
statements) include the following:
 International Financial Reporting Standards (IFRSs)
 The International Financial Reporting Standard for Small and Medium-Sized
Entities (IFRS for SMEs)
 Standards of Generally Recognised Accounting Practice (GRAP)
 Entity specific (own accounting policies) (which may include the accrual
basis, cash basis, modified cash basis, etc.)

Legislation and other regulations will also have an impact on the financial
reporting of an entity. Entities need to consider whether there are any legal
requirements to apply a given financial reporting framework, such as:
 The Companies Act applies to Companies and Close Corporations (CC’s).
The reporting framework depends on the Public Interest Score of the
company/CC, and the companies/CC’s are then classified into three tiers
and have to apply:
- IFRSs;
- IFRS for SMEs (provided they meet the scoping requirements of the
IFRS for SMEs); or
- Entity specific / “own accounting policies”.
 Listed companies also have to adhere to the JSE Listing Requirements,
which requires that annual financial statements must be prepared in
accordance with IFRSs for all listed companies.
 Some public entities and government departments are required by
legislation (such as the Public Finance Management Act (PFMA) and the
Municipal Finance Management Act (MFMA)) to follow GRAP.
 Other entities (such as partnerships, trusts, body corporates, etc., in
general) do not normally have a legal requirement to follow IFRS/IFRS for
SMEs. Still, they may opt to do so voluntarily.

During the preparation of financial statements, it is considered whether the

entity is applying the appropriate and relevant accounting framework based on
the following:
 The context, for example, the nature of the industry, legislation requirements
and the country of listing.
 The stakeholders’ requirements, for example, the requirements of the
shareholders, creditors, credit rating agencies and tax authorities or other
governmental authorities.
 The requirements contained in the applicable reporting framework – some
reporting frameworks prescribe specific requirements for application.
o III-1.2: Analyses financial reporting needs

Entities prepare financial statements to tell the story about the entity's results
for the past two years and to indicate the entity's financial health. Based on this
story, users of the financial statements should be able to make informed
economic decisions (i.e. to invest in the company or not).

Financial reporting needs depend on the relevant stakeholders and the

information relevant to these stakeholders, and the information required by
these stakeholders to enable them to make informed decisions based on the
reported information.

Before an entity can identify the relevant stakeholders, it is necessary to

determine why a person or entity is interested in the entity. Stakeholders use
the information in financial statements to make business decisions.

Stakeholders can be internal or external. Internal stakeholders are, for example,

management and employees. External stakeholders are, for example,
shareholders, providers of finance, creditors, credit rating agencies, tax
authorities or other governmental authorities.

The reporting needs of external and internal stakeholders differ and need to be
addressed accordingly. Briefly, the reporting needs of these users can be
described as follows:

Reporting needs of management: Monitors financial information to ensure the

entity's solvency and liquidity and makes important decisions regarding the
business, such as allocating funds to the various activities and monitoring the
profitability of the various units.

Reporting needs of employees: Consider financial information such as the

entity's financial sustainability and profitability since it relates to personal
income and benefits.

Reporting needs of external stakeholders: Use financial statements to stay

informed, make key economic decisions, and consider the entity's health.

When determining the different users' reporting needs, an outcome-based

approach should be followed, i.e. what information needs should be satisfied?

Financial reporting is also linked to other reporting requirements, such as

integrated reporting. Information disclosed in the integrated report should not
contradict the financial information disclosed. The information should be linked
to each other, for example, through the use of ratio analysis and information
relating to the various streams of revenue should be linked with the segment
report.
 Other reports that are generally included in an entity’s annual report may be:
- Integrated report
- Sustainability report (or combined with integrated report) and/or
Environmental report
- Directors’ report
- Auditors’ report
- Financial statements (SFP, SoPL&OCI, ScE, SoCF, notes)
- Report on Governance (including compliance of the “King Report”)
- Statement of value-added
- Other non-financial reports (strategies, KPIs, group structures, new
developments, summaries of successes, board members, etc.)

o III-1.3: Develops or evaluates reporting processes to support financial

reporting

Depending on the size and complexity of transactions, entities will develop

internal reporting processes that support financial reporting. An entity’s
reporting process begins with recording transactions/events on the source
documents (such as invoices, goods received notes, etc.). All transactions are
then recorded in the financial package (computerised cash paid/received
journals, etc.), which are used to produce the general ledger, trial balance and
draft financial statements.

Reporting processes will be developed to simplify the reporting process. An

efficient reporting process is one that eliminates duplication and produces
meaningful information. Controls are implemented in the entity to achieve these
objectives. Reporting processes are evaluated through controls implemented
by the entity. Controls include the review of work originally performed, such as
the review of journal entries, the review of bank reconciliations performed, and
the review of creditors’ reconciliations.

These controls ensure that financial information is accurate, reliable and

complete. An entity will also implement different reporting and review levels.

Reporting processes are continuously evaluated and amended to ensure that

the set objectives are met.

o III-1.4: Develops reliable information

Reliable information is developed by using a reporting infrastructure that

includes items such as a chart of accounts, journals, ledgers and management
reports.

During a financial year, management will prepare financial reporting packs (this
can be done monthly, quarterly, half-yearly). These packs are compared to the
budget and the prior year, and any variances are followed-up. This identifies
areas requiring further investigation (i.e. possible classification errors) that will
ultimately increase reported information's reliability and completeness. Ratio
analysis and other analytical reviews are also performed to ensure that
information is in line with expectations.
 To enhance the reliability of the information, various controls are implemented
that are either detective or preventative.

The validity and usefulness of financial reporting also rely upon good
judgements being made. Judgements should be made by individuals with
sufficient knowledge, experience and expertise.

o III-1.5: Establishes or enhances financial reporting using IT

Most entities have automated the reporting process, which means that financial
information is captured and processed through the use of IT systems.

Financial reporting quality is enhanced since summarised information can

easily be obtained by exporting a report from the IT system. IT reports can also
include “exception reports” (i.e. debtors with a credit balance) that are used for
control purposes and to identify potential problems. Furthermore, information is
protected since regular back-ups are made, and access is restricted to specific
users through the use of passwords. The security measures also ensure the
integrity of information since unauthorised personnel cannot access and
change the financial information.

IT also enhances financial reporting in terms of the reliability and accuracy of

financial reporting since error messages can be used to alert a user of possible
errors, for example, if a journal entry does not balance, if items are sold for an
amount less than cost price, prompt if the VAT should be taken into account in
a transaction, etc. These functions will ensure that mistakes are timeously
identified and corrected. Basic mistakes such as adding errors are eliminated,
and automated checks eliminate time-consuming manual reviews on financial
information.

Some entities use XBRL (eXtensible Business Reporting Language) to

communicate their financial information to various stakeholders on the Internet.
XBRL does not treat financial information as a block of text (on a standard
Internet page, spreadsheet or printed document). Still, it provides an identifying
tag for each individual item of data. This enables automated processing of
business information by computer software as computers can recognise the
information in an XBRL document, select it, analyse it, store it, exchange it with
other computer systems and present it automatically in various ways to users.

Accounting may perhaps be in the midst of an evolution resulting from the IT

environment (smart devices, apps, etc.) we live in. Amongst this, Blockchain
technology is forecasted to have wide-ranging implications for how data is
secured, transmitted and protected. Artificial intelligence may also impact
accounting. Simply put, technology may help to automate processes, organise
a large amount of data, and assist users by responding to customised queries
in real-time.
 III-2: Conducts external financial reporting

o III-2.1: Develops or evaluates accounting policies in accordance with IFRS

Entities have to decide on appropriate accounting policies to account for their

transactions and other events. Accounting policies are developed in
accordance with an applicable IFRS (or another reporting framework), and
entities would consider various sources available, for example, the IFRS,
illustrative financial statements issued by auditing firms and financial reporting
software programs.

The appropriateness of the accounting policies is constantly considered by

confirming that it is in line with the IFRSs. Accounting policies should be applied
consistently from year to year. Furthermore, entities should stay updated with
amendments to reporting standards and new standards being issued.

o III-2.2: Accounts for the entity’s routine transactions

Routine transactions are accounted for from the source documentation through
the books, the trial balance, and the financial statements. The recognition and
measurement of routine transactions should be consistent with the IFRS
requirements (or another reporting framework).

Routine transactions are accounted for either manually or through the use of
the IT system. Routine transactions, such as depreciation, monthly payroll
journals, and reversal of monthly provisions are recorded using standard journal
entries. The IT system is set up to record these standard journals automatically.

Personnel is also trained upfront regarding their responsibilities regarding

routine transactions they will be responsible for. The routine work performed by
personnel is reviewed by senior management.

o III-2.3: Accounts for the entity’s non-routine transactions

Non-routine transactions are normally performed, and amounts are calculated

by more senior management with sufficient knowledge and expertise. These
transactions are recorded in line with the requirements of the financial reporting
framework. Judgement is required to correctly account for non-routine
transactions and ensure that reliable information is used.

These transactions are usually captured through the use of manual journal
entries, and controls are implemented with regards to these journal entries to
ensure that non-routine transactions are valid, complete and accurate.

The controls that are implemented include the review of journal entries. These
journal entries should have sufficient supporting documentation attached to the
entry for the reviewer to recalculate the amounts and understand the economic
substance of the transaction.
o III-2.4: Prepares financial statements using IFRS

To prepare financial statements, information is gathered from the financial

reporting system and other sources (i.e. estimates of lawyers, securities as per
bank records and credit ratings). This information is used to prepare the
financial statements in accordance with IFRSs by referring to the relevant
requirements contained therein.

Financial statements can be prepared on Excel, Word or through the use of

financial reporting software. These financial statements should fairly present
the entity’s financial position, performance and cash flows. All sources used in
the preparation of financial statements should be scrutinised for possible
inconsistencies.

Disclosure checklists containing all the required disclosure requirements as

obtained in the IFRSs, may also be used to ensure that all requirements are
met when preparing financial statements.

o III-2.5: Prepares or evaluates financial statement note disclosure

Information should be available from the financial reporting system and other
sources to enable management to prepare financial statement note
disclosures.

Disclosure checklists containing all the required disclosure requirements as

contained in the IFRSs, financial reporting software programs as well as
illustrative financial statements issued by auditing firms can be used to ensure
that all requirements are met when preparing financial statements, including
note disclosure. An in-depth evaluation of current disclosures should be
conducted and compared to a “perfect world” scenario. Reporting entities
should also pay special attention to its narrative disclosures to ensure that
entity-specific information is appropriately disclosed (and not
generic/boilerplate information).

IFRS disclosures should be supplemented with additional information and

explanations. Narrative and non-financial information should also be included
in the financial statements to achieve fair presentation.

o III-2.6: Explains the financial statement results and balances to

stakeholders

Financial statement results and balances are explained to stakeholders by

using an annual report/integrated report. A company’s annual report is typically
made up of the audited financial statements and narrative reports, containing
management’s description of the company’s performance and activities.
 The financial statements and annual reports are provided to enable
stakeholders to understand how the entity has performed over the periods
presented and provide information on its financial position. Management can
use narrative information to explain or highlight any balances or information in
the annual report that might require additional explanations.

Entities often also use an integrated report to explain the financial results and
balances to stakeholders, in accordance with the Integrated Reporting
Framework. The integrated report is a combined emphasis on conciseness,
strategic focus and future orientation, the connectivity of information and the
capitals and their interdependencies. An integrated report provides insight into
the entity’s strategy and how it relates to the entity’s ability to create value in
the short, medium and long term and its use of and effects on the capitals. The
report typically shows a holistic picture of the combination, interrelatedness and
dependencies between the factors that affect an entity’s ability to create value
over time.

Larger entities may also use “XBRL” as a tool to explain the financial
information to the stakeholders. XBRL stands for eXtensible Business
Reporting Language and is a technological language for the electronic
communication of business and financial data. It provides major benefits in
preparing, analysing, and communicating business information. The
introduction of XBRL tags enables automated processing of business
information by computer software, cutting out laborious and costly manual re-
entry processes and comparison. Computers can recognise the information in
an XBRL document, select it, analyse it, store it, exchange it with other
computer systems and present it automatically in various ways to users.
Consumers of financial data, including investor analysts, financial institutions
and regulators, can receive, find, compare and analyse data much more rapidly
and efficiently if it is in XBRL format. Users of financial data can then easier
adapt and tailor it to suit their needs.

o III-2.7: Maintains awareness of key ideas and principles of proposed

financial reporting standards changes

Preparers of financial statements will maintain awareness of proposed changes

to financial reporting standards by staying informed and attending various
training presented by SAICA, other professions, regulators, auditing firms, etc.
Awareness will also be maintained by reading financial reporting publications.

o III-2.8: Considers the integrity of financial information in the integrated

report

The financial information included in the integrated report is considered for

integrity by agreeing this information to the audited financial statements to
ensure consistency. Ratio analysis and other analytical reviews can also be
used to ensure that information is reliable and not contradictory. The Audit
Committee will also perform an oversight role to monitor and oversee the
integrity of the integrated report.
 III-3: Conducts specialised reporting

o III-3.1: Identifies and analyses specific reporting obligations

Specific reporting obligations will be obtained from and identified in applicable

laws, agreements, contracts and other legal documentation. These reporting
obligations can include debt covenants and agreed-upon procedures.

Management will ensure that the reporting obligations are met by calculating
specific ratios and agreeing these to the relevant reporting obligations. In some
instances, a relevant reporting structure should be developed to meet these
reporting obligations. Reporting obligations can also be met through the
financial reporting system if certain information that is needed can be extracted
from the IT system. The system will be developed to include these reporting
obligations.

o III-3.2: Identifies regulatory and other filing requirements

Public companies’ financial statements are typically available to a larger

number of users. In most jurisdictions, public companies have additional
requirements to comply with when preparing their financial statements. South
African listed entities will need to comply with all the requirements (especially
the reporting requirements) of the JSE as contained in the JSE Listing
Requirements.

To ensure that all requirements are identified and adhered to, the company
secretary can subscribe to JSE’s newsletters. These newsletters will contain all
the latest requirements.

The in-house legal counsel and the company secretary should identify any
other regulatory requirements. These functions can also be outsourced to
knowledgeable and trustworthy external experts.

o III-3.3: Identifies and analyses non-financial reporting needs

Entities prepare non-financial reports to provide background information about

the entity’s mission, vision and strategies. These non-financial reports may also
be part of the integrated report as discussed above. This helps investors
understand and grasp the inner workings of an entity’s full range of current
activities and future direction, including financial and non-financial aspects.

Non-financial reporting needs will depend on the needs of the various

stakeholders. Management should identify and analyse these needs before
developing processes to meet them. These needs can be addressed by using
an integrated report, an annual report or various management reports.
 As with financial information, systems and internal controls are implemented by
management to ensure that the non-financial information that is gathered
during a period is reliable, accurate and complete. These systems include a
range of activities such as approvals, authorisations, verifications,
reconciliations, and segregation of duties and responsibilities.

o III-3.4: Conducts external and internal non-financial reporting

By performing a materiality assessment, the type of non-financial information

that is being monitored and disclosed and the level of internal controls required
can be determined.

Non-financial key performance indicators (KPIs) are reported and reviewed

regularly by decision-makers in accordance with the materiality assessment
and strategic review processes. Non-financial information is communicated to
the whole entity regularly through various channels, i.e. e-mails, intranet,
corporate events, helpline, etc.

To enhance transparency, the entity communicates relevant non-financial

information and the interconnectivity between financial and non-financial
performance to external and key stakeholders regularly, including during
investor meetings and earnings conference calls. The abovementioned
external non-financial information is normally part of the integrated report.