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What is the conceptual Framework:
Financial statements are prepared & presented by many entities around the world to a variety of external users.
They appear similar, but there are variations caused by different legal, social & economic circumstances of the
countries concerned. This has led to a variety of definitions, recognition criteria, measurement principles &
disclosure in the preparation of financial statements.
In 2nd Year we focus on Chapter 4: The elements of Financial Statements
→ The elements of the financial statements are:
- assets, liabilities & equity relating to an entity’s financial position; AND
- income and expenses relating to an entity’s financial performance.
Financial statements portray the financial effects of transactions by grouping them into categories according to
their economic characteristics. These categories are termed the elements of financial statements.
Financial position
The elements directly related to financial position are assets, liabilities & equity.
Assets: A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
Three components to the definition:
- right;
- potential to produce economic benefits;
- control.
Liabilities A present obligation of the entity to transfer an economic resource as a result of past events.
Three criteria must be met for a liability to exist:
- entity has an obligation;
- obligation is to transfer an economic resource;
- obligation is a present obligation that exists as a result of past events.
Assets & liabilities: Unit of account
The unit of account is the right or group of rights, the obligation or group of obligations or the group of rights &
obligations, to which the recognition criteria & measurement concepts are applied.
A unit of account is selected to provide useful information.
Example: A group of assets & liabilities may be identified as a single unit if they will be disposed of in a single transaction.
Equity: Residual interest in the assets of an enterprise after deducting all the liabilities.
Financial performance
The elements directly related to performance are income and expenses.
Income: Increase in assets or decreases in liabilities that result in increases in equity, other than those relating to
contributions from holders of equity claims.
Expenses: Decrease in assets or increases in liabilities that result in decreases in equity, other than those relating
to distributions to holders of equity claims.
Steps when answering:
- Definitions- from above
- Application- Link the definition to the question
Conclusion- Link to definition eg: Based on the definition of an asset, the machinery can be considered an asset and
recognised in the financial statements under…
NB: LOOK AT PRACTICE SOLUTIONS GIVEN AND SEE HOW QUESTIONS WERE ANSWERED,
The elements of financial statements:
Recognise an element if it:
- Meets the definition
- Satisfies recognition criteria.
This is NOT A STANDARD
therefore does NOT
override other IFRS
statements
IN CASE OF CONFLICT –
IFRS PREVAILS
The Conceptual Framework-class
notes
Tuesday, 14 March 2023 16:
LU1- Conceptual Framework Page 1
- LU1- Conceptual Framework Page
- LU1- Conceptual Framework Page
The Conceptual Framework and IAS 1: Presentation of
Financial Statements
Overview of the framework
Chapter 1: Objective of general purpose financial reporting
- PURPOSE OF CONCEPTUAL FRAMEWORK:
Assists IASB to develop new IFRS and review existing IFRS;
- Assists preparers of AFS where there is no IFRS;
- Assists in selecting accounting policies;
- Assists all parties in understanding and interpreting the AFS.
The purpose of the conceptual framework is therefore to outline the concepts that underlie the preparation and
presentation of financial statements for external users
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.
Buying, selling or holding equity and debt instruments
Providing or settling loans/ other forms of credit
Voting rights
The following information is needed in order to make decisions:
- Economic resources of the entity, claims against the entity and changes to these resources;
- how efficiently and effectively the entity’s managing/governing board have discharged their responsibilities.
Economic Resources and Claims help to identify :
- Financial strengths and weaknesses
- Liquidity and Solvency
- Success in obtaining finance
- Priorities of payments
Changes in economic resources and claims:
- Financial performance
- Issuing of debt/equity instruments
Use of Entity’s Resources:
- Assess the stewardship of the resources
Accrual Accounting: Depicts the effect of
transactions and occurrences in period in
which they occur and not on a cash basis
Past Cash Flows:
A ssess entity’s ability to generate future
cash flows and managements
stewardship of economic resources.
What is the Status of the Conceptual
Framework:
This is NOT A STANDARD
therefore does NOT override other IFRS
statements
IN CASE OF CONFLICT – IFRS
PREVAILS
NOTES FROM SLIDES
Tuesday, 21 March 2023 18:
LU1- Conceptual Framework Page 5
Chapter 4: The elements of financial statements
Recognition, measurement, presentation and disclosure
Recognise an element when it:
(NB – Exam technique)
Satisfies the
DEFINITION:
ASSET
A present economic resource controlled by the entity as a result of past events.
PRESENT ECONOMIC RESOURCE :
An economic resource is a right that has the potential to produce economic benefits
Right
Correspond to the obligation of another party:
Rights to receive cash, goods or services etc.
Rights that do not correspond: rights over
physical objects, rights to use intellectual
property
Potential to produce economic benefit:
Receiving contractual cash flows
- Exchanging ER under favourable terms
Produces cash inflows/avoid cash outflows
- Receiving cash
- Extinguishing liabilities
CONTROLLED BY THE ENTITY :
Present ability to direct the use and obtain the FEB and present
ability to prevent others from directing use and the FEB
To control – the FEB from the resource must flow to the entity,
directly or indirectly, rather then to another party
- Arises form an ability to enforce legal rights
AS A RESULT OF PAST EVENTS :
Before year end
LIABILITY
A present obligation of the entity to transfer an economic resource , as a result of past events.
OBLIGATION
Duty/responsibility that an entity
has no practical ability to avoid.
Established by contract,
legislation and legally
enforceable.
Customary practices , published
policies – constructive obligations.
TRANSFER ECONOMIC RESOURCE
Obligation must have POTENTIAL to require the entity
to transfer ER.
Potential to exist – does not need to be certain or even likely
Obligations to transfer include:
Obligation to pay cash; ○
○ To deliver goods/services;
Exchange resources under UNFAVOURABLE
terms.
PAST EVENTS
- Entity has already obtained economic benefits
As a consequence, will have to transfer the economic
resources (things happening in the past that result in present
obligation)
Assets and Liabilities: Unit of Account:
- Rights / groups of rights to which recognition and measurement criteria are applied.
- Selected to provide more useful information
LU1- Conceptual Framework Page 7
EQUITY
Residual interest in the assets of an enterprise after deducting all the liabilities.
INCOME
Increase in assets or decreases in liabilities that result in increases in equity, other than those relating to
contributions from holders of equity claims.
EXPENSES
Decrease in assets or increases in liabilities that result in decreases in equity, other than those relating to
distributions to holders of equity claims.
Chapter 5: Recognition and Derecognition
Recognition criteria
- An item can only be recognised if it meets the DEFINTION and RECOGNITION CRITERIA
An item which meets the definition of an element should be recognised ONLY if the recognition provides
users with information that is:
○ RELEVANT ; and
○ FAITHFULLY REPRESENTED
APPLY JUDGMENT and CONCLUDE.
RELEVANCE as recognition criteria
a. Existence Uncertainty
○ May result in asset/liability not being recognized.
○ Uncertainty should still be disclosed.
Low probability of inflow
○ Can exist even if probability of inflow is low.
○ Disclose relevant information (notes).
b.
FAITHFUL REPRESENTATION as recognition criteria
Measurement uncertainty
- Estimations are a normal part of accounting.
If uncertainty is so high, recognition of element might question the faithful representation of the item.
○ Include explanatory information or just disclose
- Faithful representation involves recognition, measurement, presentation and disclosure.
Derecognition
Derecognition is the removal or part removal of a recognised asset or liability from the statement of
financial position.
Asset:
- Normally when the entity loses control.
Liability:
- Normally when the entity no longer has a present obligation.
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Objective and Components of Financial Statements
IAS 1 covers the presentation of financial statements, which includes the layout of the financial statements,
as well as the considerations that have to be taken into account when preparing the financial statements.
The objective of financial statements is to provide financial information regarding the position (statement
of financial position) , the results for the financial year (statement of profit or loss and other
comprehensive income) and cash flows of the business in order to provide the end users with sufficient
information to make financial and business decisions.
Responsibility for Preparation and Presentation of Financial Statements
- Board of directors is responsible for the preparation and presentation of financial statements
Components of Financial Statements Includes:
- **A statement of financial position; (SFP)
- A statement of profit or loss and other comprehensive income;(P+L)
- A statement of changes in equity;(SOCIE)
- A statement of cash flows;**
- Accounting policies and explanatory notes;
- A statement of financial position at the beginning of the earliest comparative period.
Going concern
When preparing financial statements, management
should make an assessment of an enterprise’s ability
to continue as a going concern. Financial statements
should be prepared on a going concern basis unless
management:
Accrual basis
An enterprise should prepare its financial statements,
except for cash flow information, under the accrual
basis of accounting.
Other comprehensive income for the year(OCI)
This includes:
▫ revaluation surpluses and deficits ( also has column in SOCIE
▫ Gains on financial assets at fair value through OCI - not help for trading investments
NOTES:
Mark to Market reserve:
(QN will ask to calculate amount of shares that were bought to determine if it is a sub or not)
Income from investments:
1. Investment in Subsidiary: cost value @all times. Measured in SFP @ year end.
2. Investment in listed Company:
Currant asset- held for trading investment (usually Ltd )
Account name: Financial assets at fair value through P+L
Remeasurement of investment goes in other income / other expenses in I/S
Reflected in PBTN
3. Investments in Unlisted Company:
Non- currant asset- not held for trading(usually Pty Ltd)
Goes in Mark to market place in I/S- Gains through financial assets at FV through OCI
Mark to market reserve has its own column in SOCIE
International Accounting Standards
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LU2- IAS Page 10
Mark to market reserve has its own column in SOCIE
LU2- IAS Page 11
Expenses
Significant (material) items
Fair value adjustment – financial asset at fair value through profit or loss
Loss on the sale of non-current assets
Depreciation on non-current assets ( all for current year)
Staff cost
Auditors’ remuneration
- Auditing fees
- Fees for other services, e.g. accounting services
- Expenses
Income tax expense
R
SA Normal tax
Remuneration of directors’ and prescribed officers:
Name Directors
Fees
Salary Other
benefits
Pension
Fund
Loss of
Office
Less: Paid
by
subsidiaries
Total
Executive directors
Managing director
Marketing director etc
Non- executive directors
Chairman
Directors without specific
functions
Prescribed officers
Secretary
etc
Other benefits
Name Travel/ Entertainment Total
Note: if an employee works at the parent company and at the subsidiary their payments will be added
and it together on the remuneration note, other employees of the subsidiary who do not work for the
parent company will not be shown
LU2- IAS Page 13
Statement of Changes in Equity for year ended…(SOCIE)
OSC 10% cumulative
pref shares
125 non-
cumulative pref
shares
Retained
earnings
Mark to
Market
reserve
Revaluation
surplus
Total
Balance @beg of year
Ordinary shares issued
10% cumul. pref shares issued
12% non- cumul. pref shares
issued
Capitalisation issue (if have)
Total Comp. Income(I/S)
Dividends:
Balance @ end of the year
Note :
A Capitalisation issue occurs when a business does not have sufficient funds to pay dividends to shareholders and
therefore could give shareholders free shares in the company. This comes out of retained earnings and goes to the
type of shares they are being offered.
Ordinary dividend:
Preference dividend:
- Cumulative vs Non- cumulative pref shares
Cumulative pref: when no money is available to pay a div in one year, when money is available, div is paid for
current and previous years that were missed
Non- cumulative pref: only pay for current year
Redeemable: company has to pay back value of shares to shareholders at specific date( usually 5 years)
Non- redeemable: don’t have to pay back
LU2- IAS Page 14
Goods or services may include, but are not limited to:
- Sale of goods;
- Resale of goods;
- Resale of rights to goods or services;
- Performing a contractually agreed task;
- Providing goods or services when necessary or when requested (e.g. software updates or delivery on demand);
- Providing a service (directly or through an agent);
- Granting rights to goods or services in the future;
- Constructing, manufacturing or developing an asset for a customer;
- Granting licenses;
- Granting options to acquire additional goods or services.
Revenue is recognised when an entity has satisfied a performance obligation by transferring a promised good or
service to a customer. An asset is transferred when the customer has control of the asset. Performance obligations
may be transferred over a period of time if:
- The customer simultaneously receives and consumes the benefits; OR
- The entity’s performance creates or enhances an asset that the customer controls; OR
- The entity’s performance does not create an asset with an alternative use (to the entity) and the entity has the
enforceable right to receive payment for performance to date.
Step 3: Determine the transaction price.- selling price
Variable consideration
Time value of money
Non-cash consideration
Consideration payable to
customers
The transaction price is the amount of consideration an entity expects to be entitled to in exchange for
transferring the promised goods or services (excluding amounts collected on behalf of third parties, e.g. sales
taxes or value added taxes).
The transaction price may be affected by the nature, timing, and amount of consideration, including:
- **Variable consideration
- Significant financing components;
- Non-cash consideration;
- Amounts payable to the customer (e.g. refunds and rebates).**
Variable consideration
The entity must estimate the amount of consideration it expects to receive in exchange for transferring the goods
or services. Consideration may vary due to discounts, rebates, refunds, credits, concessions, incentives,
performance bonuses, penalties, and contingent payments.
At each reporting date the entity must estimate (and update) the amount of variable
consideration using either:
- Expected value method: based on probability weighted amounts within a range
(i.e. for large number of similar contracts);
- Single most likely amount: the amount within a range that is most likely to eventuate (i.e. where there are few
amounts to consider);
- Variable consideration is only recognised if it is highly probable that a subsequent change in its estimate would
not result in a significant revenue reversal (i.e. a significant reduction in cumulative revenue recognised).
An entity must recognise a refund liability if it expects to refund some or all of the consideration to a customer.
Significant financing components
Consideration is adjusted for the effects of the time value of money, if the timing of payments in the contract
provides either the customer or the entity with a significant benefit of financing the transfer of goods or services
to the customer. The transaction price is adjusted to reflect the cash selling price at the point in time control of
the goods or services is transferred.
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A significant financing component can either be explicit or implicit. Factors to consider
include:
- Difference between the promised consideration and the cash selling price; and
- Combined effect of interest rates and length of time between transfer of control of the goods or services and
payment.
A significant financing component does not exist when:
- The timing of the transfer of control of the goods or services is at the customer’s discretion; OR
- The consideration is variable with the amount or timing based on factors outside of the control of the parties;
OR
- The difference between the consideration and cash selling price arises for other non-financing reasons (i.e.
performance protection).
The discount rate used must reflect credit characteristics of the party receiving the financing and any
collateral/security provided. A significant financing component is not identified if the entity expects that the
period between transfer of goods or services and payment is one year or less.
Non-cash consideration
Consideration may include non-cash amounts. These are measured at fair value. If the amount cannot be
estimated the non-cash consideration is the stand-alone selling price of the goods or services promised less cash
consideration.
Amounts payable to the customer
Includes cash paid (or expected to be paid) to the customer (or the customer’s customers) as well as
credits or other items such as coupons and vouchers.
These amounts are accounted for as a reduction in the transaction price, unless payment is in exchange for a
good or service received from the customer. Such payments are treated as a normal purchase from a supplier.
If consideration payable to a customer is accounted for as a reduction in the transaction price, the reduction in
revenue is recognised when either of the following occurs:
- The entity recognises revenue for the transfer of the goods or services; OR
- The entity promises to pay the consideration.
NOTE: USE TEXTBOOK FR STEP 2&
Chapter 10
Step 4: Allocate the transaction price to the performance obligations.
Allocation based on
stand-alone selling price
Allocate discounts
Allocate variable
consideration
Step 5:Recognise revenue when performance obligation is satisfied
Control
Over a period of time
At a point in time
LU3- IFRS 15 Page 17
Step 1: Identify the contract
A contract with a customer only exists if ALL of the following criteria are met:
- All parties have approved the contract (in writing, orally, or implied);
- Each party can identify their rights in terms of goods or services to be transferred;
Payment terms can be identified;
- Contract has commercial substance;
- It is probable that the consideration receivable will be collected.
The criteria are assessed at inception of the contract & only reassessed if there is a significant change in facts &
circumstances.
Step 2: Identify the performance obligations
A performance obligation is a promise in a contract to transfer to the customer either:
A good or service that is distinct; OR
A series of distinct goods or services that are substantially the same & have the same pattern of transfer to
the customer.
To be distinct both of the following criteria must be met:
The customer can benefit from the good or service on its own or together with other readily available
resources;
The promise to transfer a good or service is separable from other promises in the contract.
Step 3: Determine the transaction price
The transaction price is the amount of consideration an entity expects to be entitled to in exchange for the goods
or services.
The nature, timing, & amount of consideration may affect the transaction price including:
- Variable consideration;
- Significant financing components (time value of money adjustment if > 1year);
- Consideration payable to a customer (e.g. refunds & rebates);
- Non-cash consideration (measured at FV);
Variable consideration:
Variable consideration encompasses any amount that is variable under a contract. The amount of
consideration received under a contract can vary due to discounts, rebates, refunds, credits, incentives,
performance bonuses, penalties, contingencies, price concessions (including concessions due to doubts about the
collectability based on the customer’s credit risk) and other similar items. If the consideration of a contract is
variable, then the entity has to estimate the amount to which it will be entitled to after delivering the promised
goods or services. An entity estimates an amount of variable consideration by using either the expected value
(probability weighted method) or the most likely amoun t (single most likely amount in a range), depending on
whichever has the better predictive value. This estimate is however limited to the extent that it is highly
probable that its inclusion of this estimate in revenue will not result in a significant revenue reversal in the future
as result of a re-estimation.
To be distinct both of the following criteria
must be met:
The customer can benefit from the good
or service on its own or together with
other readily available resources;
The promise to transfer a good or service
is separable from other promises in the
contract.
LU3- IFRS 15 Page 19
Variable consideration continued:
Variable considerations include that an entity shall recognise a refund liability if the entity receives consideration
from a customer and expects to refund a portion of, or all of, the consideration to the customer.
The time value of money :
In determining the transaction price, the entity has to adjust the amount of consideration for the effects of the
time value of money if the contract includes a significant financing component. Revenue is therefore recognised
at an amount that reflects the price that a customer would have paid for the goods and services if the customer
had paid cash when the goods and services transfer to the customer.
Determining if the financing component is significant :
Even though the contract has a significant financing component, it is not necessary to separate the financing
component if the period between transfer of the goods or services and receipt of payment is expected to be less
than one year.
Measuring and recognising the financing component :
The discount rate to be used is the rate that would be reflected in a separate financing transaction between the
entity and the customer at contract inception. The discount rate should reflect the customer’s credit risk. After
the contract inception, the discount rate is not adjusted for changes in interest rates or other circumstances. The
effects of financing (interest) are presented separately from revenue in the statement of profit or loss and other
comprehensive income. Interest is accrued from the date that the entity recognised a contract asset (i.e. when the
right to receive consideration is recognised).
look at 10.7 in TB
Non-cash consideration
If the consideration received by the entity is not in cash, then the entity measures the non cash consideration at
fair value (IFRS 13, Fair Value Measurement). If the entity cannot reasonably estimate the fair value of the non-
cash consideration, it measures the considerations indirectly by reference to the stand-alone selling price of the
goods or services promised to the customer.
Step 4: Allocate the transaction price to each performance obligation
The transaction price (step 3) is allocated to each performance obligation (step 2) based on the stand-alone selling
price of each performance obligation.
If the stand-alone selling price(s) are not observable, they are estimated.
A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a
customer.
Step 5: Recognise revenue as each performance obligation is satisfied
Transaction price allocated to each performance obligation (step 4) is recognised as & when the performance
obligation is satisfied, either:
Over time OR at a point in time.
This occurs when control of the goods or service is transferred to the customer through:
Ability to obtain substantially all the remaining benefits from the asset.
Factors to consider when assessing transfer of control:
- Entity has present right to payment for the asset
- Entity has physically transferred the asset
- Legal title of the asset
- Risks and rewards of ownership
- Acceptance of the asset by the customer.
LU3- IFRS 15 Page 20
