Contents..................................................................................................................................................................................................................................................2
1(A)…..SHORT NOTES ON FRAMEWORK ETC......................................................................................................................................................................................................4
DEFINITIONS OF THE ONLY 5 ELEMENTS OF FIN STATS...........................................................................................................................................................................4
1: FRAMEWORK..................................................................................................................................................................................................................................................5
THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE REQUIRED TO BE ABLE TO BE ANSWERED , GIVEN NEARLY VERTABIM
BY SAICA AND UNISA, FOR STUDENTS TO BE ABLE TO ANSWER(syllabus key points):...............................................................................................................................5
1-BACKGROUND : Explain the (a) need for and the (b) application of a 1-conceptual framework and 2-standards for financial reporting.........................................5
IDENTIFY THE PURPOSE AND STATUS OF THE FRAMEWORK...................................................................................................................................................................5
2. USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS, THE GENERAL INFORMATION NEEDS OF OTHER USERS ,
specify the users and their need for information ...................................................................................................................................................................................5
3. DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS........................................................................................................................................................................6
4. DEFINE THE “UNDERLYING ASSUMPTIONS” OF FINANCIAL STATEMENTS........................................................................................................................................6
5. THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: Define and discuss, and apply them to fair presentation and measurement issues to
enhance the decision-usefulness of financial reporting..........................................................................................................................................................................6
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS................................................................................................................................................................6
6-ELEMENTS OF FINANCIAL STATEMENTS...............................................................................................................................................................................................7
7-RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS.................................................................................................................7
CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES..........................................................................................................................................................7
SPECIFY THE FOUR DIFFERENT MEASUREMENT BASES TO MEASURE THE ELEMENTS............................................................................................................................8
CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE..............................................................................................................................................................................8
LEGAL BACKING FOR COMPLIANCE..........................................................................................................................................................................................................8
KNOW OF, UNDERSTAND AND EXPLAIN THE MEANING OF FAIR PRESENTATION....................................................................................................................................9
DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE................................................9
MATCHING CONCEPT...............................................................................................................................................................................................................................9
3…..REVENUE : IAS 18 (AC111) ; SIC31(AC431); ED204; CIRCULAR09/06; IFRIC12(AC445); IFRIC13(ac446); IFRIC 15 (AC448)....................................................................10
EXAM QUESTIONS GUIDE:...........................................................................................................................................................................................................................10
BACKGROUND:............................................................................................................................................................................................................................................10
scope...........................................................................................................................................................................................................................................................10
definition:....................................................................................................................................................................................................................................................11
MEASUREMENT AND RECOGNITION REQUIREMENTS OF REVENUE: per IAS18...........................................................................................................................................11
measurement of revenue:...........................................................................................................................................................................................................................11
5. CREDIT TERMS GRANTED / TIME VALUE OF MONEY / DEFERRED PAYMENT:.............................................................................................................................13
WHICH DISCOUNT RATE TO USE? is EITHER :.......................................................................................................................................................................................13
NB : CALCULATING THE INTEREST PORTION using time value of money formula !NB!.........................................................................................................................13
2- RECOGNITION OF REVENUE....................................................................................................................................................................................................................15
(1)REQUIREMENTS FOR RECOGNITION..................................................................................................................................................................................................16
(3) RENDERING OF SERVICES:ias 18.20-28...........................................................................................................................................................................................18
INTEREST ,ROYALTIES & DIVIDENDS.....................................................................................................................................................................................................19
1 - Transaction for SALE OF GOODS AND RENDERING OF SERVICES AT SAME TIME............................................................................................................................21
5 - EXCHANGE TRANSACTIONS :............................................................................................................................................................................................................22
7-DISCLOSURES...........................................................................................................................................................................................................................................22
PER IAS 18 VERTABIM:...........................................................................................................................................................................................................................23
NOTES ON EXACT DISCLOSURES FOR REVENUE:..................................................................................................................................................................................23
FRAMEWORK.....................................................................................................................................................................................................................................................25
Note : any question which asks if something may be recognized in the accounting records MUST HAVE 3 THINGS :Remember this in any question like this (1
point per item below) this is universal, it is the ‘Framework’ recognition points.
1.1.1. Definition of elements of fin stats
1.1.2. Probability of economic benefit flow out/in
1.1.3. Must be able to be Reliably measured
1.2. Most important user of fin. stats. = shareholders : investors/equity holders/risk capital providers.
THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE REQUIRED TO BE ABLE TO BE ANSWERED , GIVEN
NEARLY VERTABIM BY SAICA AND UNISA, FOR STUDENTS TO BE ABLE TO ANSWER(syllabus key points):
1-BACKGROUND : Explain the (a) need for and the (b) application of a 1-conceptual framework and 2-standards for financial reporting.
APPLICATION of framework :
Just say : what ‘is’ a framework , and the purpose of it : ie to provide a basis / frame of reference on which the IAS ‘s are built , defining qualitative + assumptions
+ definitions of elements etc so people can use it to understand what is in the IAS’s and other statements and users understand fin stats.
IDENTIFY THE PURPOSE AND STATUS OF THE FRAMEWORK
(a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing International Accounting
Standards;
(b) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements
by providing a basis for reducing the number of alternative accounting treatments permitted by International Accounting Standards;
(c) assist national standard-setting bodies in developing national standards;
(d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form the subject of an
International Accounting Standard;
(e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;
(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with International Accounting
Standards; and
(g) provide those who are interested in the work of IASC with information about its approach to the formulation of International Accounting Standards.
2. USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS, THE GENERAL INFORMATION NEEDS OF
OTHER USERS , specify the users and their need for information .
Most important users = 1-Providers of finance eg banks 2- Equity investors, namely shareholders.
(a) EQUITY INVESTORS. : Ability of the entity to pay 1-Dividends & 2-Buy, Hold or Sell : The providers of risk capital and their advisers are concerned with the
risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also
interested in information which enables them to assess the ability of the entity to pay dividends.
5. THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: Define and discuss, and apply them to fair presentation and
measurement issues to enhance the decision-usefulness of financial reporting.
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
1. The principle 4 characteristics are :
1.1. UNDERSTANDABILITY
1.1.1.Definition : Understandable to the average user who has a reasonable knowledge of business and a willingness to study the info. with the necessary
diligence, but this does not mean any info. should be excluded because it may be too complex for certain readers to understand.
1.2. RELIABILITY
1.2.1.Definition : Info is reliable when it does not contain “material errors” and is “free from bias”.
1.2.2. Refers less to -absolute accuracy and more to : info. a user can trust.
1.3. RELEVANCE
1.3.1.Definition : Affect Decisions : Relevant info. is useful and can therefore affect the economic decision making of users.
1.3.2.Materiality : is the one characteristic of relevance.
1.3.2.1.Definition : following 3 points are to be considered in assessing the materiality of an item.
1.3.2.1.1.Omission or Misstatement affect Decisions : Material is considered to be material if it’s omission or misstatement could affect
users decisions made regarding the Financial Statements.
1.3.2.1.2.Increase usefulness : The disclosure of material items increases the usefulness of the Financial Statements.
1.3.2.1.3. In terms of whole Fin Stats : The materiality of an item is to be assessed in terms of the Financial Statements as a whole.
1.4. COMPARABILITY
1.4.1. Definition :The accounting treatment should be the same for :
1.4.1.1. The same items over time
1.4.1.2. Same items in the same period and
1.4.1.3. Similar items of different but similar companies over time and in the same period.
1.4.2. Main reason is to assist users to compare Fin stats. of different companies, and also compare different periods in one entity.
1.4.3.It is not however desirable to pursue comparability at all costs, where a new Acc. Standard is introduced or when the application of a more
appropriate accounting policy becomes necessary,the current accounting policy should be changed.
6-ELEMENTS OF FINANCIAL STATEMENTS
1. There are 5 elements. The decision as to which element something falls under depends on the rule : Substance Over Form .eg: THE Framework cites example of
finance leases ; although they are legally construed as leases, their substance is such that they are capitalized and treated as assets acquired from borrowing
proceeds.
2. The definition of the 5 elements are:
2.1. ASSETS:
2.1.1.Definition : An Asset of an Entity is :
2.1.1.1. A resource
2.1.1.2. that is under the control of the entity
2.1.1.3. that will result in future economic benefits flowing to the entity
2.1.1.4. that originated as a result of past events.
2.2. LIABILITIES:
2.2.1. Definition : A liability of an entity is:
2.2.1.1. A present obligation
2.2.1.2. Arising from past events
2.2.1.3. The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
2.3. EQUITY;
2.3.1. Definition: The residual interest in the assets of the entity after deducting all its liabilities.
2.3.2. It is not the market value of its shares – ever at all.
2.4. INCOME:
2.4.1.Definition :Income is described as
2.4.1.1. Increases in economic benefits during the accounting period
2.4.1.2. In the form of inflows or enhancements of assets or decreases of liabilities
2.4.1.3. That result in increases in equity other than those relating to contribution from equity participants.
2.5. EXPENSES:
2.5.1. Definition : expenses are defined as
2.5.1.1. Decreases in economic benefits during the accounting period,
2.5.1.2.In the form of outflows or depletion of assets or incurrance of liabilities
2.5.1.3. That result in decreases in equity other than those relating to distributions to equity participants.
7-RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS
1. In order to be recognised as an element of the balance sheet or income stat, an item must:
2. FIRST meet the definition of one of the “elements of financial statements” : either assets/liabilities/equities/expenses/ or income.
3. SECONDLY satisfy the following 2 criteria for recognition :
3.1. PROBABILITY OF FUTURE ECONOMIC BENEFIT: it should be probable that future benefits associated with the item will flow to or from the entity.
3.1.1.Para. 85 of the framework – to be based on evidence available at date of fin stats. eg debtor= “probable asset” but not completely probable so there
must be a “probable” liability” = bad debt provision
3.2. RELIABILITY OF MEASUREMENT: the item must have a cost or value that can be measured reliably.
3.2.1. Recognition of elements of fin stats : (some notes)
3.2.1.1.Recognition of Assets : eg if it is not probable that economic benefits will flow in following economic periods then item should not be
recorded as an asset.
3.2.1.2. Liabilities : see IAS 37
3.2.1.3. Income : see IAS 18
3.2.1.4.Expenses : basicly when a liability is created without recognition of any asset (in return) eg warranty liability arises.
5 ComLaw 202Law of Negotiable Instruments : Own Notes
CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES
1. There are 2 Methods of Presenting Current & Non- Current :
a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings.
b. Method 2: “Liquidity Approach” : Assets&liabilities are presented broadly in order of liquidity. However there is a rule that if any 1 amount/item
covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be specially disclosed separately as well for that
one amount/item.
c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like financial institutions.
2. Method 1: Current and Non – Current assets / liabilities headings:
a. A CURRENT ASSET IS :
i. Is expected to be realized in, or is held for sale or consumption in the normal course of the entities operating cycle eg inventories.
ii. Is held primarily for trading purposes ( eg some financial assets held for trading)
iii.Is expected to be realized within 12 mnths (eg non-current assets held for sale.)
iv.Is cash or a cash equivalent that is not restricted from being exchanged or used to settle a liability for the whole of at least 12 mnths
from reporting date.,( eg call account
b. A NON-CURRENT ASSET IS : all other assets are classified as non-current.
c. Definition: operating cycle is the time of acquisition of raw materials and their realization as cash . Thus if the operating cycle is longer than 12
mnths the “current assets” may include items that are not expected to be realized within 12 mnths. If operating cycle is not clearly identifiable it
should be assumed to be 12 mnths.
Framework : 46 (vertabim) Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the financial position,
performance and changes in financial position of an entity. Although this Framework does not deal directly with such concepts, the application of the principal
qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and
fair view of, or as presenting fairly such information.
DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY ACCEPTED ACCOUNTING PRACTICE.
MATCHING CONCEPT
MATCHING CONCEPT.
1.1. The asset & liability view : where expenses are not matched in the same period with related revenue ,then income/expense is seen as the general
increase in assets over liabilities in the period. eg depreciation is simply systematicly allocated in the period it occours.
1.2. Revenue&expense view: where expenses and income from similar business activities are matched – eg separate a normal from a once –off operation.
1. Bad debts : mention uncollectable amounts already recognized as revenue NOT deducted but seen as an EXPENSE – for 1 Mark ( ! even if no bad debts
happened in question! )
2. Measurement at FAIR VALUE : for all questions mention this 1 mark.
3. Discount:
a. Split into Possible discount / Revenue and only a portion is recognised as Revenue immediately ,
b. Discount only recognized permanently if Payment before final date to claim, ELSE
c. Possible Discount is reversed back into Sales recognized as Revenue because..
d.
4. Credit Terms:
a. “Installments” or / and “Later Payment” means : Split into a financing transaction , (incl. a “lower” rate than market.)
b. Discount rate determined by
i. Market Rate
ii. OR Rate Implicit in transaction
c. Interest is Recognised AS IT IS EARNED & on a TIME-PRPORTION BASIS.
5. SALES : 3 X Probability of flow + 2 X Measurement = 5 Points. 2 MARKS per point : - 1-give the rule first ,2- then how rule works in question.
a. REM : indication benefits will flow … contractual ‘installments to be paid” if this is a term in a contract(legal weight) = 1 MARK, and Deposit already
paid = 1 EXTRA MARK since incentive to not loose deposit.
6. SERVICE : 1 X Probability of flow + 3 X Measurement = 4 Points, 2MARKS per point : 1-give the rule first ,2- then how rule works in question
7. ROYALTIES/DIVIDENDS/INTEREST : just mention : Probability of Flow + Measurement at fair value , then:
a. Interest = effective interest method.
b. Royalties = per contract
c. Dividends = approval by AGM after BOD .
BACKGROUND:
1. IAS18 deals with WHEN AND AT WHAT VALUE revenue must be recognized.
SCOPE
2. IAS 18 DOES NOT INCLUDE ‘OTHER INCOME’ . “REVENUE” IS NOT “OTHER INCOME” : see definition of revenue below : it says for ‘normal operations’ and
thus DOES NOT INCLUDE any income that is not from ‘normal operations’ of entity. “Other income” like capital “gains” or interest from money lent out if it is not a
part of the core business of the entity etc is not covered by IAS18. Book says ‘income’ and ‘revenue are 2 VERY different terms here.
3. What TYPES of REVENUE DOES & DOES NOT - IAS 18 deal with ? (any income that has actually been classified as revenue, even certain types of this
revenue are covered by other IAS’s , and not IAS18 ; as follows)
3.1. It deals with the treatment of revenue arising from the following events :
3.1.1. Sale of goods
3.1.2.Rendering of services (except construction contracts eg surveyors, dealt with under IAS11.)
3.1.3.Use by others of assets of the entity,yielding interest,royalties,dividends
3.2. IAS 18 DOES NOT DEAL WITH REVENUE from :
3.2.1. Lease agreements
3.2.2.Dividends from investments that are equity accounted
3.2.3.Insurance contracts of insurance companies
3.2.4.Changes in the fair value of financial assets and liabilities, or the disposal thereof
3.2.5.Initial recognition and changes in the fair value of biological assets and agricultural produce related to agricultural activities
3.2.6.The extraction of mineral ores
3.2.7.Changes in the value of other current assets
3.2.8.initial recognititon of agricultural produce
DEFINITION:
Defiition :Revenue :
is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity (note – so ‘other income’ is not covered)
when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Definition :Fair value
is the amount for which
an asset could be exchanged
or a liability settled
between knowledgeable, willing parties in an arm’s length transaction.
1. NOTE: amounts received in an agency relationship or taxes eg vat received, are both not revenue but held for other parties.
1. RECOGNITION:
1.1. Probability of Future Economic Benefit (flowing to the entity- there must be probability of)
1.2. Requirement of Reliable Measurement (must be able to be measured)
2. MEASUREMENT:
At Fair Value of Consideration received or receivable.(see definition of fair value)
MEASUREMENT OF REVENUE:
1. Note: for barter transactions , IAS 18 revenue says to use 1st Fair value of item received , But PPE IAS 16 says to use Fair Value of item given up! ????????
4. SWAPPING SIMILAR GOODS When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is
not regarded as a transaction which generates revenue. Eg suppliers swap milk / oil in different regions to supply demand timeously. But if the goods are dissimilar
it IS recognized.(how will you record this is in your books?- Sale invoice = sold = 1 truck of milk , price charged =1 truck of milk. , or do you issue no invoice- what
will your General Journal entry be?)
5. DISCOUNT : trade disc./cash disc. /rebates/settlement discount : as per world standards SA had to start using new method of treating discount(+/_ 2005)
IAS18.10 & Circular 09/06
5.1. CASH DISCOUNT TRADE DISCOUNT & VOLUME REBATES : : previously cash discount was recognized in SA as a separate expense, But as per IFRS it
should be ignored completely, and thus treated as a plain reduction in the price same likea trade discount-and not shown in the books at all. Also ,incorrect
treatment of this in any previous years, if material , must also be corrected retrospectively in terms of IAS 8. Trade discounts & volume rebates are to reduce
the amount of revenue (PRICE) directly ,and are not recognized as an expense , so they just reduce the price you charge and are NOT recorded separately
anywhere in the books.
5.2. SETTLEMENT DISCOUNT RECEIVED :
5.2.1.This is not really part of revenue, but part of purchases ie cost of sales. But ….
5.3. SETTLEMENT DISCOUNT GIVEN :
5.3.1.Q – is the ‘Allowance acc.for discount’ a debtor contra account for the SFP fin stats- just to be written off directly against debtors and only debtors
nothing else at all (no end of year adjustments etc) when transferring from Trial Balance to SFP.?
5.3.2. For method 1 & 2 separately , how does it work with “5% for 30 days or 10 % for 10 days “ discount terms offered on the sale
depending when you pay , and writing back if they take the 30 days after you made (prudence) provision for 10%.
5.3.3.BIG QUESTION : pg 336& 337 descr. Acc book : For method 1 & 2 separately, how does VAT get accounted for together with the
other entries, esp. for the write back of both if the discount is not taken? REM you charge 100% VAT (without deducting the
discount)on INVOICE and must pay sars this BEFORE the customer even decides whether is is going to take the discount or not ---???
5.3.4.
See circled point in blue pen pg 337 descr. Acc book, how are sales shown at the “net” amount? – ONLY in fin stats by just
subtracting settlement disc. Granted, or is settlement disc granted a separate item in SCI (UNDER WHAT HEADING IN SCI DOES IT
GO?) – OR IS sales reduced in the general ledger by a journal entry to follow the IAS 18 revenue rule?how can it be left at pre-
discount level for this rule?
How does pastel accounting deal with this – auto or manual – how does one do manual for 100000 transactions?what about other
accounting packages?
5.3.5.Settlement Discount must be deducted from revenue at initial recognition.(per circular 09/06) it must be estimated on the selling date and be
presented as a reduction in revenue. There are several different ways to address the problem and how to jounalise it : 2 main methods are shown here
, NET method is the one chosen by UNISA. net treatment is probably more correct (initial sale but can lead to VAT problems , but gross method more
effective, from an accounting perspective.
5.3.6.VAT : note that vat is charged by you on the settlement discount in the original sale, and is charged on the possible ‘discount’ at the normal rate14%
and paid to SARS. But if the discount is then eventually taken and not forfeited, then the VAT is claimed back as a VAT input adjustment. The GROSS
method below is probably better for Vat treatment , the NET may lead to problems with vat charged on sales.
5.3.7.2 METHODS OF JOURNALISING :
5.3.7.1.NET METHOD : The “allowance account for settlement discount’ method .(Preferred by UNISA).
5.3.7.1.1. See example below. For method
5.3.7.1.2.VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
5.3.7.1.3.Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or not?)
5.3.7.1.4.WRITEING BACK : If Discount is Not taken: simple :you write ‘allowance account’ back into ‘sales’ONLY. No VAT adj. because Vat
is Originally accounted at full 100% per SARS rules - and even paid already probably.
5.3.7.2.GROSS METHOD :
5.3.7.2.1. See Example below for method
5.3.7.2.2.VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
5.3.7.2.3.Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or not?)
5.3.7.2.4.“Settlement Discount Granted Account “: this is either 1- a revenue contra account like ‘acc depr’ is to assets and never shows in
SCI , only in the books , or it is a 2- account that show in the SCI under ‘admin expenses’ and 3- is it cleared each year end to ‘trading
account’ to get profit so it is zero at begin new year (BUT what happens to transactions where it has not been decided yet if customer
takes discount or not at year end?)
5.3.7.2.5.WRITEING BACK : If Discount is Not taken: simple :you write ‘Allowance for Settlement Discount account’ off against CONTRA
‘Settlement Discount Granted ’ account ONLY. No VAT adj. because Vat is Originally accounted at full 100% per SARS rules - and even
paid already probably.
5.3.8.Matching Principle : The allowance is just written back against sales if the debtor does not pay in time- so it could cause an increase in sales in a
future year if the period allowed extended into a future period. So if the write –back to sales occours in a future period this is half logical because you
now earned “interest” of sorts in a follow up period for the guy not paying in time so you cancelled his discount ,but half not logical because this
discount cancelled which is more similar to “interest” now has to get written up into “sales” ???but it is not shown as interest but as sales so the
matching principle seems to go a bit wrong here????.
5.3.9. See the 2 Methods : 1- GROSS and 2- NET method of journalizing in example below:
NB : CALCULATING THE INTEREST PORTION using time value of money formula !NB!
1. Watch out , it is a Very tricky way to do this on calc. even though it looks easy!!! There are 3 different ways a question could be asked :
a. ‘IRR’ …For Many Unequal INSTALLMENTS : rather use this easy method for everything, it will always work! but you can also use the other
2 mad methods below sometimes
i. For this method you use the IRR and NPV method on calculator(not AMRT) ??? how to do it yet.
b. ‘PV’ …For One INSTALLMENT : The full amount is paid on last minute of last day :
i. Easy : USE the calculator with sale price as FV , then PV = REVENUE (without any interest) and FV-PV= interest portion. – there is
only 1 PMT so treat it as a PV calc.
c. ‘PMT’ …For Many equal INSTALLMENTS : If the amount is paid off in installments each period : so you MUST USE the PMT function on
calculator ( annuity formula NOT PV or FV formula) to calculate the total interest paid off. THIS IS BECAUSE EACH INSTALLMENT REDUCES THE
PRINCIPLE SO THE INTEREST RATE ONLY WORKS ON THAT LEFT, NOT THAT PAID OFF ALREADY!!!!!!!. Watch out , it is a Very tricky way to do
this on calc. even though it looks easy
i. For compounded MONTHLY =!!! WATCH OUT HERE---- :Only PMT & N & I & FV = “Calc” PV works here, do not include the
principle as PV or FV , it is even impossible to get the FV ie ‘actual price charged’ from this PMT method ,because that is like saving
(1) For there to be a Probability of Future Economic Benefit there are 3 main rules in IAS 18 , only:
(a) WHEN SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP HAS PASSED :The entity has transferred to the buyer the SIGNIFICANT
RISKS AND REWARDS OF OWNERSHIP of the goods .
(2) EXAMPLES IN IAS 18 ITSELF of NO SALE RECORDED of situations in which the entity may retain the significant risks and rewards of ownership
and thus there NO SALE is recorded.
(a) When the ENTITY RETAINS AN OBLIGATION FOR UNSATISFACTORY PERFORMANCE NOT COVERED BY NORMAL WARRANTY PROVISIONS;
(b) When the receipt of the REVENUE FROM A PARTICULAR SALE IS CONTINGENT on the derivation of revenue by the buyer from its sale of the goods(if it is
stated that unless the customer sells the goods or gets a big contract to do something, he will return it)
(c) When the goods are SHIPPED SUBJECT TO INSTALLATION and the installation is a significant part of the contract which has not yet been completed by
the entity;
(d) When the buyer has the RIGHT TO RESCIND THE PURCHASE FOR A REASON SPECIFIED in the sales contract and the entity is uncertain about the probability
of return.( if you can reliably estimate the possible returns and make a provision for it then it is possible to recognize the sale – less the
provision of course)
1.
a) economic PROBABLE WILL FLOW : It is probable that the economic benefits associated with the transaction
will flow to the entity
1.2. Reliable measurement can usually take place once the following is established:
1.2.1. The enforceable rights of the parties to transaction
1.2.2. The price
1.2.3. The means of payment
EXAMPLES:
Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised on the bases set out in
paragraph 30 when the following 2 requirements are met
(a) it is probable that the economic benefits associated with the transaction will flow to the entity; and
1. When these requirements are met then the following then applies :
30 Revenue shall be recognised on the following bases:
(a) INTEREST shall be recognised using the effective interest method ONLY as set out in IAS 39, paragraphs 9 and AG5–AG8;
1. THE EFFECTIVE INTEREST RATE METHOD WORKS LIKE THIS:
i) Remember on calculator to always put a MINUS sign on the PV side when comp. for i else it gives a ERROR. (NOT ON FV SIDE, THIS
GIVES A WRONG ANSWER FOR SOME REASON!!!! NOTE)
ii) An effective rate ALLWAYS includes PER YEARLY compounded interest – as if it was compounded each year, even if there was only 1 interest payment at the end of 10 years!
iii) !!!!!! NOTE : Even if the R100 loan /etc is over 10 years with only one extra ‘premium’ payment of R20 at the end over and above the R100
principle to be repaid, you must get the ‘effective interest rate ‘ and from there work out the interest you can book as REVENUE at the end of each year.
This effective interest rate would be : as if the final premium was charged + compounded YEARLY. SO it will not be R20 / 10years = R2 interest per
year, but some fraction due to compounding.!!!!!!!!!!
iv) Method: Calculator : Enter : FV(incl.principle+premium) 120 ---- PV 100 --- PMT 0 ------ N 10 --- Comp i = 1.839%
SO : YEAR 1 :1,839%interest * 100principle = R1,83 cents first year NOT R20 / 10 = R2 .
b) ROYALTIES shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; unless, having regard to the
substance of the agreement, it is more appropriate to recognise revenue on some other systematic and rational basis. (eg :on a straight line basis
over time of contract)
(c) DIVIDENDS shall be recognised when the shareholder’s right to receive payment is established.( WHEN AGM APPROVES THE DIVIDENDS
APPROVED BY THE BOD)
32 When unpaid interest has accrued before the acquisition of an interest-bearing investment, the subsequent receipt of interest is allocated between pre-acquisition
and post-acquisition periods; only the post-acquisition portion is recognised as revenue, the pre-acquisition interest is part of the purchase price.( eg consolidated group
statements, where you incorporate a newly acquired subsidiary into your statements )(how do you journalise and FIN STAT this pre-acquisition interest IF NOT GROUP
STATEMENTS , EG FOR DIVIDENDS OR A BOND?)
1. General Notes :
2. Remember income already recognized is treated as an expense if it later becomes uncollectable.
3. EFFECTIVE INTEREST RATE: calculation method of :SEE IAS 39.9 VERY FUNNY METHOD _YOU MUST CHECK UP ON IT!!!
4. Dividends are recognized as soon as the last date to register has passed (per IAS18 when shareholders right to receive payment is established.
Examples:
5 - EXCHANGE TRANSACTIONS :
1. As per IAS 18.12 , the following applies to any exchange transactions – incl. services for services or services for goods etc etc.:
IAS18.12 : When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a
transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to
fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is
regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any
cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value
of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.
2. Another example of similar goods exchanged is different colour cars exchanged by dealers.
3. METHOD TO BOOK SIMILAR GOODS exchanged transactions : ?????? how????
4. METHOD TO BOOK DIFFERENT GOODS : exchange transactions :
4.1. REVENUE IS BOOKED AT COST OF ITEM(+any cash) RECEIVED UNLESS THAT IS NOT DETERMINABLE, THEN COST OF ITEM GIVEN UP IS USED.
4.2. just book assets received same as you would book cash received to bank, except in the asset concerned’s account. Remember if the goods you give are
worth less than the (fair value) of goods you receive, then you just book the revenue you get as higher than the value of the goods you gave – so if your tyre
was worth R100 BUT the door you exchanged it for was worth R200, your revenue you book is R200, not R100(ie a profit)
5. lSee 2 examples below of how to account for these transactions:
2) REVENUE NOTE (ie: note number next to revenue on SCI, BUT CAN ALSO BE CALLED ‘Profit Before Tax’ , and can have the number next to both Revenue and
Profit before Tax on SCI ie both items use same note!)
3) )
total
4) ANY EXCHANGE OF GOODS : in a sentence just amount of revenue incl. PER EACH OF ABOVE CATEGORIES , of goods bartered received instead of cash for
revenue.
5) CONTINGENT LIABILITIES&ASSETS per IAS37 changing to KEY ESTIMATION UNCERTAINTIES: changing from former to latter per ED204 – this is eg:
“services revenue was only recognized value of expenses to date, since outcome of transaction cannot be estimated reliably. “
Presentation:ias 1
Cost ---------------
Accumulated Amortisation(remember to add all up extra mnths to date sold ------------------- (Brackets) (Brackets)
Carrying Amount: End of year: ( cost – acc.depreciation)
2. INVESTMENT PROPERTY:
a. This is :Property for leasing out (not financial leases though),property held for long term capital appreciation, etc it is NOT Owner occupied, used for
production admin / expressly held for sale/under construction,NOT
b) The following must be disclosed in respect of loans: (non current and current )
i) the amount of the obligation
ii) the interest rate applicable
iii) the repayment conditions
iv) that portion which is payable within 12 months of balance sheet date (to be classified as a current liability)
v) Whether it is a secured or unsecured loan and by what it is secured exactly , incl. address / erf no. etc.
3) ?Can you just have 1 heading for ALL Financial Assets , or just 1 for ALL loans or 1 for ALL debentures and then in that heading put the current AND non
current in one heading,? Or does half have to go in ‘financial assets ‘ current and the other half in financial assets n-c (Or ½ in loans current and ½ in loans
n-c or all just under 1 heading and separated for n-c and cc in that heading???
Cost ---------------
Accumulated Depreciation(remember to add/minus all up extra mnths ------------------- (Bracket (Bracket (Bracket
to date sold and minus any disposals) s) s) s)
Carrying Amount: End of year: ( cost – acc.depreciation)
4) Financial Assets :
a. Non-Current Financial assets
1. Available- for- Sale Financial Asset /Investment ( does this go to INVESTMENTS” or does it stay here ?,
UNLISTED INVESTMENTS
1000 ordinary shares (cost price 2500) 5000{market value} (you can put ‘at R20 each – but this must be the
cost , not the market value ?? confused so leave out)
LISTED INVESTMENTS
xxxxxxx
a. Current Financial Assets
1. Financial Asset at Fair Value through Profit & Loss
UNLISTED INVESTMENTS
xxxxx
LISTED INVESTMENTS
10000 Ordinary Shares in BCD(ltd) cost 20000 40000 (you seem to only put name .
for listed companies?)
2. Trade & other receivables( 43000+2000) 45000 (does this go here?)
3. Loans and Receivables:
Loan to a director(loan interest free and repayable Following year) 50
Staff Loans ( loans interest free repayable following year) 100
1) INVENTORIES:
Inventories:
a. Finished goods 10000
b. WIP 100
1)
2) PRELIMINARY COSTS AND SHARE ISSUE COSTS UNDER WHAT DOES THIS GO? EQUITY SECTION OR WHICH HEADING IN ASSET SECTION? “FINANCIAL
ASSETS” OR WHAT???
3) EQUITY:
b) IF AN ENTITY HAS RECLASSIFIED : a puttable financial instrument classified as an equity instrument, or (b) an instrument that
imposes on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and is
classified as an equity instrument between financial liabilities and equity, it shall disclose the amount reclassified into and out of each
category (financial liabilities or equity), and the timing and reason for that reclassification.
RESERVES
Reserves should be classified under two main headings, namely:
1) non-distributable reserves
2) distributable reserves
3) The movement on each reserve during the current year must be disclosed in the statement of changes in equity. The nature and purpose
of reserves need to be disclosed.
6-Other Reserves:
Non-Distributable reserves
CRRF 10000
Distributable Reserves
Reserve on revaluation of property 15000
STATEMENT OF COMPREHENSIVE INCOME for The YEAR ended 28 Feb 2007 (over a specific period)
Distribution Expenses. ( sales staff salaries , depreciation on delivery vehicles, Advertising costs!!!delivery costs etc.) (BRACKETS)
1- REM : salaries of all sales staff are ALLWAYS included here .( in the notes they go in normal place ie “profit before tax
note” , but here they go in here, and not with other salaries in “administration expenses”!)
2-depreciation on delivery vehicles goes in here, but other depreciation goes in other headings, not here.
3-Advertising costs go in here!!!!
Discount Allowed (where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxx
Depreciation(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Carriage on "Sales" (not purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other Xxxxxx
Packaging (also not in purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other Xxxxxx
Advertisements(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxx
Wages and salaries(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxxx
Water and lights(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxxx
Administrative All other depreciation that does not go elsewhere . Expenses what goes in here?
Other Expenses
Share of P/L of Associates & Joint Ventures accounted focusing the equity method
Share of P/L of Associates & Joint Ventures: (a separate line for other comprehensive income must also be shown , ???don’t
know where? somewhere)
Discontinued Operations : post tax gain /OR loss , incl. assets sold or value of to be sold.(where does this go: ie it is supposed
to be post tax!)
Finance Costs (BRACKETS)
Interest on Long term Loan: MUST apart Xxxxxxx
Interest on Bank Overdraft: Must apart Xxxxxxx
Interest on Debentures Xxxxxxx
OTHER COMPREHENSIVE INCOME( the tax for this can be shown as a total like here ,or not shown and just pre-deducted from TOTAL
each item shown below )
Reclassification adjustments (see IAS 1.93-97 for more)
Gains on Property Valuation (Changes in revaluation surplus relating to PPE)
Actuarial gains/losses on defined benefit plans (recognized outside P/L)
Exchange differences on translating foreign operations
Available for sale financial Assets (Gains/Losses on remeasuring available for sale financial instruments. )
Cash Flow Hedges : (Effective portion of gains/losses on cash flows )
Share of other Comprehensive Income of Associates
INCOME TAX EXPENSE relating components of other Comprehensive Income.(or items can also be shown net of tax and leave
this heading out)
PROFIT ATTRIBUTABLE TO
NON-CONTROLLING INTEREST
NON-CONTROLLING INTEREST
total
i. (For Revenue) ANY EXCHANGE OF GOODS : in a sentence just amount of revenue incl. PER EACH OF ABOVE CATEGORIES , of goods
bartered received instead of cash for revenue.
ii. (For Revenue) CONTINGENT LIABILITIES&ASSETS per IAS37 changing to KEY ESTIMATION UNCERTAINTIES: changing from former
to latter per ED204 – this is eg: “services revenue was only recognized value of expenses to date, since outcome of transaction cannot be
estimated reliably. “
iii.
TAX
1. ON INITIAL RECOGNITION AFFECTS NEITHER ACCOUNTING PROFIT NOR TAXABLE PROFIT : EG : Land & other Assets that SARS does not
grant an Allowance For: : This can happen if you buy any asset , (asset exchange – money for asset –no profit) AND SARS does not grant
any deductions for this type of asset in ALL future periods (so taxable profit is never to be affected-no deductions allowed from taxable profit) . THE
a. THE RULE HERE IS : you must ignore this entire thing for temp. diff. purposes . No deferred tax may be raised. Also for any future depreciation
of asset or revaluation /impairment , the change resulting from any of these may also NOT be recognizes for Defreed tax purposes (write in the
tax base but put a line in Temp.Diff space , with the words ‘exempt ‘ or something. ( even though the future “economic benefits” eg rent , OF
THE ASSET will be taxable, this rule still applies
2. REVALUATIONS : any revalauation changes the carrying amount of asset , so the tax base must change as well!
3. SPECIAL CASE : certain amounts that for accounting purposes go to income statement, are ‘DEEMED’ by sars to be ASSETS or LIABILITES for the purpose
of TAX. When you do these amounts , the tax base will be calc. as normal , but REM that the ‘carrying amount’ of the item MUST BE TAKEN EXACTLY AS IT
STANDS IN THE BOOKS. Do not just deem it to be an asset – if it was written off as an expense/income then it is gone – the CARRYING AMOUNT in your calc.
must be 0 ….so Temp.Diff will be (negative) whereas one would imagine it to be Positive.!!!
a. EG RESEARCH COSTS WRITTEN OFF AS PERIOD COST IN FIRST YEAR, WHERE SARS ALLOWS A 50/30/20 DEDUCTION.
Tax Base = 10000 – 50% aleady written off, leaves 5000 deductable in future.
Carrying Amount Zero (it was written off as period costs)
Less : Tax Base R5000
=Temp.Diff (5000) negative - 5000, where if you had said ‘carrying amount was 10000 and not 0, you
would have had positive +5000 .
4. WHERE TAX RATE DEPENDS FUTURE USE OF ASSET : An asset tax base must be determined , per ias 12, depending on what mngmnt indends the
use of asset to be : ie either on a will be sold basis (14% CGT rates used) or on a will be used basis rented out or own use -(28% normal tax rates will
apply) (see ias on ‘held for sale basis)or on a “held for sale basis” (no depreciation) or to use (depreciation counts).
5. NOTES:
a. What is Income & expenses for tax base : liability or asset? Like : depreciation for deferred tax quick calc., or income from
dividends, etc. on page 39 tut 1, see c4 calc, if deferred tax had been calculated on the building , would you still put
depreciation in this calc. again? And if an asset is not recognsed on initial recognition because eit does not affect acc or tax
profit , next year for depreciation on that asset , how do you d the Temp.Diff and tax base for it?? Where does that depreciation
go fpr tax?
b. Land always has a tax rate of 14% , so as if it were CGT, never 28%. Special rule.It is also not ‘taxable’ in use.check some more
about this.
c. If it says : The related expense will be deducted for tax purposes on a cash basis, it means it will be deducted when it is paid in cash ie: when
money actually changes hands
d. FOR ASSETS & EXPENSES: Brackets stay normal at “temporary difference column ” & “Movement of deferred tax column” to SCI but turn
around at ‘Deferred tax to SFP’ : UNDER ALL CONDITIONS THIS HAPPENS
e. Assets:
-The tax base of an asset is dependent on whether the future economic benefits arising from the recovery of the carrying -amount of the asset are
taxable.
-If the future economic benefits are taxable, the tax base is the amount that will be deductible for tax purposes.
-Where the economic benefits are not taxable, the tax base of the asset is equal to its carrying amount, such as trade receivables where the
sales have already been taxed (lAS 12 (AC 102)07).
1. SPECIAL CASE : certain amounts that for accounting purposes go to income statement, are ‘DEEMED’ by sars to be ASSETS or LIABILITES for the purpose of TAX.
When you do these amounts , the tax base will be calc. as normal , but REM that the ‘carrying amount’ of the item MUST BE TAKEN EXACTLY AS IT STANDS IN THE
BOOKS. Do not just deem it to be an asset – if it was written off as an expense/income then it is gone – the CARRYING AMOUNT in your calc. must be 0 ….so
Temp.Diff will be (negative) whereas one would imagine it to be Positive.!!!
1) FOR LIABILITIES & REVENUE RECEIVED IN ADVANCE: Brackets TURN AROUND (because the carrying amount liability is actually in brackets itself at
the time you see ,& tax base amount too – so answer must be in brackets too!. But the first 2 are just not shown in brackets in exam- as a type of way
they write it down-although they should be!) at “temporary difference column ” & “Movement of deferred tax column” to SCI but go/become opposite to
“Movement –SCI Column” ie: TURN AROUND when they go to the ‘Deferred tax to SFP’ column. UNDER ALL CONDITIONS THIS HAPPENS
2) Definition : TAX BASE OF LIABILITY: The tax base of a liability is its carrying amount, less any amount that will be deductible[ future tax deduction :
you can deduct it from your future taxable income eg for a future warranty costs liability , you can deduct any actually paid future warranty costs from
future taxable income ] for tax purposes in respect of that liability in future periods ..[when that liability is settled] . In the case of revenue which is
received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future
periods.
3) Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in advance, the tax base of the resulting
liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.
4) “Deductable for tax purposes in the future” means if say ‘leave pay accrual’ is only deductable as an expense when it is paid out in cash: so any ‘leave
pay accrual’ will not be deductable this year but only in a ‘future period’ : that amount is then : “deductable for tax purposes in the future” and must be
subtracted from ‘carrying amount’ to get the ‘tax base’
1. There are 2 major differences between Taxable income and Profit before Tax : Permanent and Temporary differences.
2. Permanent differences are for differences for items that are found EITHER in the tax calculation or the accounting calculation, BUT not in both.ie : it
does not relate to a deferred tax at all, it only applies to current year (you just leave it out or include it , one of the 2, then its gone for ever. Example ?????
put some here.
3. Temporary Differences are differences for items that are found BOTH in the tax calculation AND the accounting calculation but in different periods,
they are differences that arise between the tax base and the carrying amount of assets and liabilities on reporting date.
3.1. TEMPORARY DIFFERENCE MEANS “YOU OWE THIS TO SARS.” IF IT IS IS POSITIVE IT MEANS YOU OWE THAT TO SARS(one day in the
futureyou will pay) AND IF IT IS NEGATIVE IT MEANS YOU OWE NEGATIVE :ie SARS OWES YOU.
3.2. Temporary differences are divided into two categories, namely
3.2.1.1-Taxable Temporary Differences= Deferred Tax Liability = Acc Profit>Taxable Income , SARS tax acc. Debited(???Y/N), Deferred
Tax acc. credited. (TAXABLE in the future - you pay less/leave out some this year, so you ‘owe’ them) = ACCOUNTANTS BELIEF THAT TAX HAS
BEEN INCURRED BUT WHICH HAS NOT YET BEEN CHARGED BY THE TAX AUTHORITY. IT THEREFORE SHOWS THE AMOUNT THAT WILL BE
CHARGED BY THE TAX AUTHORITY IN THE FUTURE ie PAYABLE EXPENSE.
Per Accountant Per SARS Read YOU OWE ( ‘minus‘ If temp diff = (-) then this is ONLY EVER [this
= they owe you) DR (owe you)@ years answer –less-
last years]
Carrying Amount Tax Base Temporary Difference *29% = Deferred Tax Movement in P/L for
Year
Property & Plant 1000 700 300 (87) cr (87) cr income