FINANCIAL REPORTING/

ACCOUNTING THEORY

PRESENTER: MRS. BRENDA

DHLAMINI
 BACKGROUND OF ACCOUNTING

Accounting is the practice of and knowledge of

systematically identifying, measuring, recording and
reporting of quantitative information, which is
primarily financial in nature, concerning economic
activities of entities.
Modern accounting in the form of double entry
system has its origins in Italy.
Accounting equation:
 Assets = Equity + Liabilities
 WHO IS THE IASB?

 independent, accounting standard-setting body

 was founded on 1 April 2001 as the successor to the
International Accounting Standards Committee (IASC).
 responsible for:
 developing International Financial Reporting Standards
(IFRS), previously known as International Accounting
Standards (IAS)
 and promoting the use and application of these standards.

Basic financial reporting requirements:

 The Conceptual Framework

 IAS 1 (Presentation of Financial Statements)
 WHY IFRS?

 The objective of the IFRS Foundation is to develop a single set of high

quality, under standable, enforceable and globally accepted IFRSs. The
globalisation of financial accounting principles do pose various
advantages, for example:
 A business can present its financial statements on the same basis as its
foreign competitor s, making comparisons easier.
 Companies with subsidiaries in countries that require or permit IFRS may
be able to use one accounting language company -wide.
 Companies also may need to conver t to IFRS if they are a subsidiar y of a
foreign company that must use IFRS, or if they have a foreign investor that
must use IFRS.
 Companies may also benefit by using IFRS if they wish to raise capital
abroad.
 IFRS has already become the de facto global language for financial
repor ting, with 1 22 countries (including Namibia) around the world that
have adopted IFRS and 157 countries (including Namibia) adopted IFRS
for SMEs.
 GENERAL FEATURES OF IFRS

 The focus is m ore on the Statem ent of Financial Position (SoFP)

 Measurem ent m ore at fair va lue
 Less alternative treatm ents ava ilable (consistency)
 Principles rather than rules-based (opposed to US GAAP which is rules-
based)
 Some standards include illustrative exa m ples (IE), basis for conclusions
(BC) and application guidance (AG)
 Principles are printed in bold, discussion in norm al print
 The structure of standards:
 Objective
 Scope
 Definitions
 Recognition
 Measurem ent (initial and subsequent)
 Derecognition
 Disclosure
 OBJECTIVE OF FINANCIAL REPORTING?

 The IASB summarises the answer to this question as follows:

“The objective of general purpose financial reporting is to

provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the
entity.”
 USERS OF FINANCIAL STATEMENTS?

 Shareholders / investors / potential investors

 Creditors
 Customers
 Government, e.g. Receiver of Revenue
 Public
 Employees / unions
 Providers of funds, e.g. banks
 T YPES OF DECISIONS?

 Share purchase / sale decisions (shareholders, brokers)

 Take-overs / mergers (shareholders)
 Assessing management’s performance (shareholders)
 Investment analysis (shareholders)
 Credit granting decisions & risk assessments (creditors,
bankers, loan granters)
 Assessments of financial performance for competitive change
(competitors)
 Collective bargaining, security of employment (employees)
 Assessment of economic and financial performance (customers)
 Taxation compliance, macro-economic policy, environmental
impact, financial performance (government)
 Social responsibility & environmental impact (public)
CONCEPTUAL
FRAMEWORK
 CONCEPTUAL FRAMEWORK

Theoretical basis that forms the foundation for

accounting practice.
Theory - What accounting does
Practice – How it is done
The theory and practice of accounting are contained
in a set of postulates, principals, methods,
procedures, conventions, standards and policy
factors. All these are collectively referred as
accounting concepts.
They are all set out in the IFRS (International
Financial Reporting Standards).
 CONCEPTUAL FRAMEWORK - CONT

Concept is a generally accepted view.

Postulate – Generally accepted assumption.
Principles – General rules based on economic truths.
Method – Manner in which something is done.
Procedure – Sequence of steps
Convention – Practice that relates to form and not
content.
Policy – guideline in accordance with which
situations are handled.
 CONCEPTUAL FRAMEWORK - CONT

Standard – Minimum requirement with which

something must comply.
Conceptual framework – Arrange the theoretical
concepts in a particular way so that similar terms
are structured the same way.
OBJECTIVES OF FINANCIAL STATEMENTS

Conceptual framework was issued by the

International Accounting Standards Board (IASB) in
2010 and is a guideline for developing IFRS.
The objective of the conceptual framework is to
provide financial information about the entity to
users of financial statements .
 Financial performance
 Financial position
Users of financial information are – Investors,
employees, unions, suppliers, customers, providers
of funds etc.
 ELEMENTS OF FINANCIAL STATEMENTS

 Assets
 Definition
 Liabilities
 Definition
 Equity
 Income
 Expenses

 Elements of the financial statement are recognized when they

meet the definition and the recognition criteria.
 ELEMENTS OF FINANCIAL STATEMENTS

 Assets
 An asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.
 Resource – Source from which a benefit is derived.
 Controlled – The entity will exclusively benefit from the
asset.
 Past event – The asset was purchased before the reporting
date.
 Future economic benefits – benefits that will directly or
indirectly contribute towards the inflow of cash or cash
equivalents.
 ELEMENTS OF FINANCIAL STATEMENTS

 Liabilities
 Is a present obligation of the entity arising from a past events,
the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
 Present obligation – The entity is liable at the reporting
date.
 Past event – the event occurred before the reporting date.
 Outflow of resources – Settlement of the liability will result
in an outflow of resources.
 ELEMENTS OF FINANCIAL STATEMENTS

Equity
 Residual between assets and liabilities.
 Companies equity comprise of various items such as
Share Capital, Retained earnings, and reserves.
 Equity is obtained from two sources for a sole trader:
 Contributions by the owner
 Profits for the year.
 ELEMENTS OF FINANCIAL STATEMENTS

Income
 Definition include both revenue and gains.
 Revenue include: Sale of goods, rendering of services,
interest received, dividends received, royalties and
rental of properties.
 Is defined as: Increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases in liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
 ELEMENTS OF FINANCIAL STATEMENTS

Expenses
 Includes losses
 Expenses - value which has been consumed.
 Expenditure – value not yet consumed.
 Expenses are decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those
relating to distributions to equity participants.
 ELEMENTS OF FINANCIAL STATEMENTS

Recognition criteria for assets/liabilities.

 It is probable that future economic benefits will flow to
the entity.
 The cost or value van be measured reliably.
Recognition of Income:
 Dependent on the realisation concept.
 Income must be earned before it can be recognised.
 Recognition criteria:
 There must be an increase in future economic benefits.
 Income must be measured reliably.
 ELEMENTS OF FINANCIAL STATEMENTS

Recognition of expenses
 Accrual concept – recognised in the period in which an
asset decreases or liability increases, not when cash
flows.
 Decrease in economic benefits can be measured reliably.
 Matching concept – An expense is recognised when the
related income for which the expense was incurred,
realises.
 ELEMENTS OF FINANCIAL STATEMENTS

Measurement bases for elements of financial

statements:
 Historical cost
 Current cost
 Realisable value
 Settlement value
 Market value
 Present value
ELEMENTS OF FINANCIAL STATEMENTS

RECOGNITION
DEFINITION Measurement
(probability)

Presentation (SoFP/
Disclosure (Notes) Statement of P/L &
OCI)
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
For information to be useful, it must comply with the
qualitative characteristics:
Fundamental qualitative characteristics.
Relevance – Information is capable of making a
difference in the decisions of users.
 Must be predictive or confirmatory or both.
 Material – if its omission or misstatement will influence
the decision of users. Entity specific.
 Faithfull representation- complete, neutral, free
from error.
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
Enhancing qualitative characteristics.
 Comparability – Choose between alternatives.
 Verifiability – different knowledgeable and
independent observers should reach consensus.
 Timeliness – in time to influence decisions.
 Understandability – Information should be presented
clearly and concisely.
 UNDERLYING ASSUMPTION

Going concern – That an entity is a going concern

and will continue in operation for the foreseeable
future.
 FINANCIAL STATEMENTS

A complete set of financial statements comprises:

 Statement of financial position as at the end of the
period.
 Statement of profit or loss and other comprehensive
income for the period.
 Statement of changes in equity for the period.
 Statement of cash flows for the period.
 Notes and Significant accounting policies.
 Comparative figures
 STATEMENT OF FINANCIAL POSITION

Current assets
 To be consumed in the entities normal operating
cycle.
 Held primarily for trading.
 Expected to be realised within 12 months.
 Cash or cash equivalents with unrestricted use.
 Examples of current assets?
 STATEMENT OF FINANCIAL POSITION

EQUIT Y
 Funds provided by the owners.
 Profits earned not yet distributed- retained earnings.
LIABILITIES
 Amounts owed to creditors.
 Current - settled within a year and
 Non-current - settled more than a year after the
reporting date.
 FINANCIAL PERFORMANCE

Aim of a business entity is to increase owners equity

with profits.
 Owners contributions
 Profits
Owners equity is decreased by
 Capital withdrawals by owners
 Withdrawals of profits by owners
 Losses
Revenue
Expenses
 IAS 1
PRESENTATION OF
FINANCIAL STATEMENTS
 IAS 1

 The standard requires a complete set of financial statements to

comprise of [IAS 1 .10]:
 a statement of financial position (balance sheet) at the end of
the period, AND
 a statement of profit or loss and other comprehensive income for
the period (presented as a single statement, or by presenting the
profit or loss section in a separate statement of profit or loss,
immediately followed by a statement presenting comprehensive
income beginning with profit or loss), AND
 a statement of changes in equity for the period, AND
 a statement of cash flows for the period, AND
 notes to the financial statements, comprising a summar y of
significant accounting policies and other explanator y notes, AND
 comparative information prescribed by the standard.
 IAS 1

 Fair presentation [IAS 1.15]

 Explicit and unreserved statement of IFRS compliance in the
notes. [IAS 1.16]
 Management is required to make an assessment of an entity's
ability to continue as a going concern:
 If management has significant concerns about the entity's
ability to continue as a going concern, the uncertainties must
be disclosed.
 If management concludes that the entity is not a going
concern, the financial statements should not be prepared on a
going concern basis, in which case IAS 1 requires a series of
disclosures. [IAS 1.25]
 IAS 1

Accrual basis [IAS 1.27]

The presentation and classification of items in
the financial statements must be consistent
from one period to the next. [IAS 1.45]
Off-setting of Assets & Liabilities are
generally not allowed [IAS 1.32]
Comparative information [IAS 1.38]
At least annually
 IAS 1

SoFP [IAS 1.54]:

 property, plant and equipment
 investment property
 intangible assets
 financial assets
 investments accounted for using the equity method
 biological assets
 inventories
 trade and other receivables
 cash and cash equivalents
 IAS 1

SoFP [IAS 1.54]:

 assets held for sale
 trade and other payables
 provisions
 financial liabilities
 current tax liabilities and current tax assets
 deferred tax liabilities and deferred tax assets
 liabilities included in disposal groups
 non-controlling interests, presented within equity
 issued capital and reserves attributable to owners of the parent.
 IAS 1

Statement of Profit or Loss & OCI:

Profit or loss: "the total of income less expenses,
excluding the components of other comprehensive
income".
Other comprehensive income: comprising "items of
income and expense (including reclassification
adjustments) that are not recognised in profit or loss as
required or permitted by other IFRSs".
Total comprehensive income: "the change in equity
during a period resulting from transactions and other
events, other than those changes resulting from
transactions with owners in their capacity as owners".
 IAS 1

Statement of Profit or Loss & OCI [IAS 1.82-82A]:

revenue
gains and losses from the derecognition of financial
assets measured at amortised cost
finance costs
share of the profit or loss of associates and joint
ventures accounted for using the equity method
gains or losses associated with the reclassification of
financial assets
taxation expense
total of discontinued items (single amount)
 IAS 1

Statement of Profit or Loss & OCI:

 Expenses either by nature / function [IAS 1.99]
 Disclosed separately, including: [IAS 1.98]
 write-downs of inventories to net realisable value or of property,
plant and equipment to recoverable amount, as well as reversals
of such write-downs
 restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring
 disposals of items of property, plant and equipment
 disposals of investments
 discontinuing operations
 litigation settlements
 other reversals of provisions
 IAS 1

Statement of changes in equity [IAS 1 .106]:

 total comprehensive income for the period, showing separately
amounts attributable to owners of the parent and to non-controlling
interests
 the ef fects of any retrospective application of accounting policies or
restatements made in accordance with IAS 8, separately for each
component of other comprehensive income
 reconciliations between the carr ying amounts at the beginning and
the end of the period for each component of equity, separately
disclosing:
 profit or loss
 other comprehensive income
 transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries
that do not result in a loss of control
 IAS 1

 Notes to the financial statements must: [IAS 1.112]

 present information about the basis of preparation of the
financial statements and the specific accounting policies used
 disclose any information required by IFRSs that is not presented
elsewhere in the financial statements and
 provide additional information that is not presented elsewhere
in the financial statements but is relevant to an understanding
of any of them
 Presented in a systematic manner and cross-referenced from
the face of the financial statements to the relevant note. [IAS
1.113]
 IAS 1.114 suggests that the notes should normally be presented
in a certain order.
 IAS 1

Other disclosures:
judgements, apart from those involving estimations,
that management has made in the process of
applying the entity's accounting policies that have the
most significant effect on the amounts recognised in
the financial statements. [IAS 1.122]
key assumptions concerning the future, and other key
sources of estimation uncertainty at the end of the
reporting period, that have a significant risk of
causing a material adjustment to the carrying
amounts of assets and liabilities within the next
financial year. [IAS 1.125]
 IAS 1

Other disclosures [IAS 1.137]

the amount of dividends proposed or declared
before the financial statements were
authorised for issue but which were not
recognised as a distribution to owners during
the period, and the related amount per share
the amount of any cumulative preference
dividends not recognised.
 IAS 1

Other disclosures [IAS 1.138]

domicile and legal form of the entity
country of incorporation
address of registered office or principal place of
business
description of the entity's operations and principal
activities
if it is part of a group, the name of its parent and the
ultimate parent of the group
if it is a limited life entity, information regarding the
length of the life
 HOMEWORK!!

Look for a recent set of illustrative IFRS financial

statements on one of the well-known audit firm’s
websites, and see if you can trace the requirements of
IAS 1 and the Conceptual Framework to the set.
DO NOT PRINT THESE FINANCIAL STATEMENTS FROM
THE WEBSITES. These reports consist of hundreds of
pages, and you will just waste paper. Just review them
electronically.
Please note, setting up a full set of IFRS financial
statements falls outside the scope of this module.
Only basic principles are covered in this module.