FAC2601

LEARNING UNIT 3

PRESENTATION OF
ANNUAL
FINANCIAL
STATEMENTS –
IAS 1

Financial Accounting
for Companies
CONTENTS
Page
LEARNING UNIT 3: PRESENTATION OF ANNUAL FINANCIAL STATEMENTS – IAS 1..... 1
3.1 Schematic representation of IAS .......................................................................... 4
3.2 Purpose of Annual Financial Statements.............................................................. 6
3.3 General Features .................................................................................................. 6
3.4 Structure and content .......................................................................................... 9
3.5 Structure and content: Statement of Financial position ...................................... 9
3.6 Structure and content: Statement of Profit or Loss and other Comprehensive
Income ..................................................................................................................
14
3.7 Disclosure of remuneration .................................................................................. 17
3.8 Structure and content: Statement of Changes in Equity...................................... 22
3.9 Structure and content: Notes to the Annual Financial Statements ..................... 22
3.10 Dividends .............................................................................................................. 23
3.11 Example: Presentation of Annual Financial Statements ...................................... 28
3.12 Comprehensive example 36
 Learning outcomes

Learners should be able to prepare general purpose annual financial statements

using the structure and content of IAS 1 in order to improve comparability with
the entity’s own annual financial statements of previous periods and with
annual financial statements of other entities.

Assessment criteria

After having studied this learning unit, you should be able to

 state the purpose of, and responsibility for, preparing annual financial
statements
 explain and describe the overall considerations to be taken into account
during the preparation of the annual financial statements
 prepare a comprehensive set of annual financial statements from given
information in accordance with the requirements of IAS1

Overview

This learning unit is divided into the following:

3.1 Schematic representation of IAS
3.2 Purpose of Annual Financial Statements
3.3 General features
3.4 Structure and content
3.5 Structure and content: Statement of Financial position
3.6 Structure and content: Statement of Profit or Loss and other
Comprehensive Income
3.7 Disclosure of remuneration
3.8 Structure and content: Statement of Changes in Equity
3.9 Structure and content: Notes to the Annual Financial Statements
3.10 Dividends
3.11 Example: Presentation of Annual Financial Statements
3.12 Comprehensive example

Categories of companies
STUDY

Section 8 of the Companies Act 2008 states that two types of companies may be
formed and incorporated under the Act, namely non-profit companies (reflected as
NPC) and profit companies.
Non-profit companies (reflected as NPC) are incorporated for public benefit or other
object relating to one or more cultural or social activities, or communal or group
interest.
Profit companies are incorporated for provision of financial gain for shareholders.
Profit companies have 4 types, namely, state-owned company (reflected as SOC Ltd),
public company (reflected as Ltd), private company (reflected as (Pty) Ltd) and
personal liability company (reflected as Inc).

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 OVERVIEW OF LEARNING UNIT

IAS 1 covers the presentation of annual financial statements. This includes the layout of general
purpose annual financial statements and the considerations to be taken into account when
preparing the content of these annual financial statements.
The objective of this accounting standard is to prescribe the basis of presentation of general
purpose annual financial statements in order to ensure comparability both in terms of the
entity’s own annual financial statements from one financial period to another, and with regard
to the annual financial statements of other entities.
This accounting standard (IAS 1) refers to general purpose annual financial statements and annual
financial statements, and forms the basis for the preparation of annual financial statements (i.e.
the starting point). If another accounting standard requires additional disclosure, this is in
addition to that required by this accounting standard.
This accounting standard does not apply to the preparation of condensed interim annual
financial statements, but it does apply equally to the annual financial statements of individual
entities, as well as the preparation of group annual financial statements.
It is the responsibility of the board of directors or management of an entity to prepare and
present the annual financial statements.

3.1 SCHEMATIC REPRESENTATION OF IAS 1

PRESENTATION OF FINANCIAL STATEMENTS

Prescribes the basis for preparation of general purpose financial statements. Sets out minimum
Purpose of requirements for presentation as well as guidelines for structure and content of financial
IAS 1 statements.

Objective of To provide information about the financial position, financial performance and cash flows of an
financial entity that is useful to a wide range of users in making economic decisions.
statements

Complete set of
financial Structure and content
statements

▪ Assets and liabilities should be presented as either current or non- current, unless
presentation is based on liquidity.
Statement of ▪ Certain line items should be presented on the face of the SFP (for example property, plant and
financial position equipment, inventories, provisions, etc.).
(SFP) ▪ Certain information should be presented either on the face of the SFP or in the notes (for
example sub-classifications of line items and details regarding share capital).
 ▪ All income and expense items recognised in a period are presented as either:
– a single statement of profit or loss and other comprehensive income; OR
– two separate statements (one displaying profit or loss and the other displaying other
comprehensive income together with profit or loss as an opening amount).
▪ Expenditure items should be classified either by their function or their
nature.
▪ Specific line items are required to be presented in the profit or loss section (for example
revenue, finance cost, tax expense, etc.).
Statement of ▪ The nature and amount of material items to be presented either on the face of the SPLOCI or
profit or loss and separately in the notes.
other ▪ Other comprehensive income items to be classified as either:
comprehensive – items that will not subsequently be reclassified to profit or loss; OR
income (SPLOCI)
– items that will subsequently be reclassified to profit or loss.
▪ Items of other comprehensive income must be presented as either:
– net of related tax effects; OR
– before related tax effects, with one amount shown for the aggregate amount of income tax
relating to those items.
▪ Reclassification adjustments relating to components of other comprehensive income need to
be disclosed, either on the face, or in the notes.
▪ The notion of extraordinary items has been abandoned.

▪ Reconciliation of equity at the beginning of the reporting period with equity at the end of the reporting
period.
▪ Includes:
Statement of – total comprehensive income for the period;
changes in – effect of retrospective restatements; and
equity – transactions with owners in their capacity as owners (for example issue of shares, dividends paid).
▪ Dividends paid and the related dividends per share should be presented either on the face, or in the notes.

Statement of
▪ Cash flow statement
cash flows

▪ Basis of preparation of the financial statements.

▪ Specific accounting policies applied.
▪ Present information required by IFRS not already presented elsewhere.
Notes ▪ Supporting information for items presented in the financial statements.
▪ Additional information on items not presented in the financial statements.
▪ Sources of estimation uncertainty.
▪ Disclosures regarding capital.

▪ Fair presentation and compliance with IFRSs.

▪ Financial statements are prepared on the going concern assumption.
General ▪ Items recognised on the accrual basis – when items satisfy the definitions and recognition
features criteria of the Conceptual Framework.
for the
▪ Materiality and aggregation – present each material class of similar items separately.
presentation of
financial ▪ Offsetting – not allowed unless required/permitted by an IFRS.
statements ▪ Frequency of reporting – at least annually.
▪ Comparative information – in respect of preceding period for all amounts presented.
▪ Consistency of presentation – retain presentation and classification between periods.

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3.2 PURPOSE OF ANNUAL FINANCIAL STATEMENTS

The annual financial statements are a structured representation of the

financial position of the entity and the results of the operations
undertaken by the entity.

The objective of preparing annual financial statements is to provide

information about the financial position (assets, liabilities and equity),
performance (income and expenses, including gains and losses), and
cash flows of an entity in order to provide useful information to the users
of the annual financial statements in making economic decisions. It also
serves as proof of the results of management’s stewardship of the
resources of the entity.

A complete set of annual financial statements consists of the following:

• a statement of financial position (SFP)
• a statement of profit or loss and other comprehensive income (SPLOCI)
• a statement of changes in equity
• a statement of cash flows
• accounting policies and explanatory notes
• a statement of financial position at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its annual financial statements or when it
reclassifies items in its annual financial statements
• Comparative information in respect of the preceding periods

3.3 GENERAL FEATURES

When preparing the annual financial statements, the following general

features must be considered STUDY

• Fair presentation and compliance with IFRS

The annual financial statements should fairly present the financial position (referring to
the statement of financial position), financial performance (referring to the statement
of profit or loss and other comprehensive income) and cash flows (referring to the
statement of cash flows) of an entity. If the IFRS are properly applied, and when in
certain circumstances additional disclosure is necessary and presented, the annual
financial statements will achieve fair presentation.
 If management should conclude that compliance with a requirement in an IFRS
statement conflict with the objective of the annual financial statements set out in the
Framework (rare circumstance), then management would adopt requirements that
would ensure fair presentation and would disclose the following:
(a) that management has concluded that the annual financial statements present
fairly the entity’s financial position, financial performance and cash flows
(b) that it has complied with applicable IFRS, except that it has departed from a
particular requirement to achieve a fair presentation
(c) the title of the IFRS from which the entity has departed, the nature of the
departure, including the treatment the IFRS would require, the reason why that
treatment would be so misleading in the circumstances that it would conflict with
the objective of annual financial statements set out in the Framework and the
treatment adopted for each period presented, the financial effect of the
departure on each item in the annual financial statements that would have been
reported in complying with the requirement

• Going concern
This consideration is based on the fundamental accounting concept that the entity
will continue to exist in the foreseeable future.

When management assesses whether the going concern assumption is appropriate, it

takes into account all the relevant information for at least 12 months from the date of
the statement of financial position reporting period.

When annual financial statements are not prepared on a going concern basis, that
fact should be disclosed together with the basis on which the annual financial
statements are prepared and the reason why the entity is not considered to be a
going concern.

• Accrual basis of accounting

Annual financial statements, except for cash flow information, are prepared using the
accrual basis of accounting. When the accrual basis of accounting is used, an entity
recognises the elements of the annual financial statements when they satisfy the
definitions and recognition criteria in the conceptual framework.

Accrual basis of accounting means that all transactions are recorded when they occur
and not when cash is paid or received. This implies that revenue is recognized in the
accounting records when it has been earned as opposed to when it is received.
Similarly, expenses are recognized in the accounting records when they have been
incurred as opposed to when they are paid.

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• Frequency of presentation
It is a requirement that annual financial statements should be presented at least
annually. In exceptional cases, in which an entity’s reporting date changes, with the
result that the annual financial statements are presented for a period shorter or longer
than one year,
• the reason for using the longer or shorter period should be given; and
• the fact that the comparative amounts of the annual financial statements are not
entirely comparable, should be explained.
The annual financial statements must also be presented within a reasonable time from
the end of the financial year, otherwise the information will be of little or no use to the
users of the annual financial statements.

• Consistency of presentation
The presentation and classification of items in the annual financial statements should
be retained within each accounting period, and from one accounting period to the
next.
Consistency consists of two important aspects:
• Consistency over time and
• consistency of disclosure of similar items

• Materiality and aggregation

According to IAS 1.29, each material class of similar items must be presented separately
in the financial statements. Dissimilar items may be aggregated only if they are
individually immaterial.
Information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements, which provide financial
information about a specific reporting entity. [IAS 1.7]
• Offsetting
Assets and liabilities, and income and expenses, may not be offset unless
required or permitted by an IFRS. This consideration refers to the netting off of
assets and liabilities, and income and expenses. This is not allowed, unless
specifically required in terms of a standard or an interpretation.

• Comparative financial information

Numerical information in the annual financial statements should be disclosed with the
comparative figures for the previous period. Comparative information in respect of
the previous accounting period should also be disclosed for all narrative and
descriptive information. If either the presentation or classification of items in the
annual financial statements is amended, then the comparative amounts should be
reclassified unless the reclassification is impracticable.
 3.4 STRUCTURE AND CONTENT

IAS 1 outlines the broad disclosure requirements for preparing annual

financial statements. It is left to the specific International Financial
Reporting Standards to prescribe the specific disclosure requirements of
items in the annual financial statements.

This accounting standard requires particular disclosures to be made in the annual

financial statements.

• Identification of annual financial statements

The annual financial statements should be clearly identified. This includes information
concerning the name of the reporting entity, whether the annual financial statements
are for the individual entity or for a group of entities, the reporting date and currency,
as well as the level of rounding of the figures (for example R’000).

3.5 STRUCTURE AND CONTENT: STATEMENT OF FINANCIAL

POSITION

IAS 1 requires an entity to clearly identify the financial statements and the notes to
the financial statements, which must be distinguished from other information in an
annual report.
In addition, the following information must be displayed prominently, and repeated
as necessary:
• the name of the reporting entity and any change in the name or entity
information since the previous reporting date;
• whether the financial statements are a group of entities or an individual entity;
• the date of the reporting period;
• the presentation currency; and
• the level of rounding used (e.g. thousands, millions).

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Statement of Financial Position
In the statement of financial position, the entity should present separately, the
current and non-current assets and liabilities, unless presentation based on liquidity
provides information that is reliable.

• Current assets
An asset is classified as current when it satisfies any of the following:
• it is expected to be realised in, or is intended for sale or consumption in, the
entity’s normal operating cycle
• it is held primarily for the purpose of being traded;
• it is expected to be realised within twelve months after the year-end date; or
• it is cash or cash equivalent.

All other assets are classified as non-current.

The operating cycle of an entity is the time between the acquisition for processing
and the realisation of its assets for cash or cash equivalents.

• Current liabilities
A liability is classified as current when it satisfies any of the following:
• it is expected to be settled in the entity’s normal operating cycle;
• it is held primarily for the purpose of being traded
• it is due to be settled within 12 months after the reporting period
• the entity does not have an unconditional right to defer settlement of the
liability for at least 12 months after the year-end date

All other liabilities are classified as non-current.

If a liability has become payable on demand because an entity has breached an

undertaking under a long-term loan agreement on or before the reporting date, the
liability is current, even if the lender has agreed, after the reporting date and before
the authorisation of the financial statements for issue, not to demand payment as a
consequence of the breach. However, the liability is classified as non-current if the
lender agreed by the reporting date to provide a period of grace ending at least 12
months after the end of the reporting period, within which the entity can rectify the
breach and during which the lender cannot demand immediate repayment.
 Share capital and reserves
Regarding issued share capital and reserves, the following disclosures are required:
• numbers of shares authorised, issued and fully paid, and issued but not fully
paid
• par value (or that shares do not have a par value)
• a reconciliation of the number of shares outstanding at the beginning and the
end of the period
• description of rights, preferences, and restrictions
• treasury shares, including shares held by subsidiaries and associates
• shares reserved for issuance under options and contracts
• a description of the nature and purpose of each reserve within equity.
• Information to be presented on the statement of financial position

The following line items should be included on the statement of financial position:
(a) property, plant and equipment
(b) investment property
(c) intangible assets
(d) financial assets (excluding e, h and i)
(e) investments accounted for using the equity method
(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) the total of assets classified as held for sale and assets included in disposal
groups classified as held for sale
(k) trade and other payables
(l) provisions
(m) financial liabilities (excluding k and l)
(n) liabilities and assets for current tax
(o) deferred tax liabilities and deferred tax assets
(p) liabilities included in disposal groups classified as held for sale
(q) non-controlling interest presented within equity
(r) issued capital and reserves attributable to owners of the parent

LECTURER’S COMMENT

Financial instruments will be discussed in detail in learning unit 8, but a

basic explanation is required now to provide you with some background,
as they form part of annual financial statements.

A financial instrument is defined as “any contract that gives rise to both a financial
asset of one entity and a financial liability or equity instrument of another entity”.

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A financial asset is defined as any asset that is:
• cash
• any equity instrument of another entity
• a contractual right:
– to receive cash or another financial asset from another financial entity; or
– to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity; or

• a contract that will or may be settled in the entity’s own equity instruments and
is:
– a non-derivative for which the entity is or may be obliged to receive a variable
number of the entity’s own equity instruments; or
– a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments. For this purpose, the entity’s own equity instruments do not
include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments.
LECTURER’S COMMENT
Please take note that derivatives are not applicable for second-year Accounting
and you should therefore only be aware of them.

Examples of financial assets are:

• cash
• deposits at financial institutions
• promissory notes receivable
• loans receivable
• bonds receivable
• investments in listed companies
• investments in unlisted companies
• investments in associates

In terms of paragraph 54 of IAS 1, financial assets other than “investments accounted

for using the equity method, trade and other receivables, and cash and cash
equivalents” are grouped together under the heading “Financial assets”.

A financial asset shall be measured at fair value unless it is measured at amortised

cost in accordance with paragraph 4.1.2 of IFRS 9.

An equity instrument is defined as any contract that evidences a residual interest in

the assets of an entity after deducting all of its liabilities. (This refers to an entity’s
investment in the equity shares of another entity.)
 The following are not examples of financial assets:
• Property, plant and equipment
• Leased assets
• Inventories
• Goodwill, patents and trademarks
• Prepaid expenses (i.e. an insurance premium paid in advance. This is not the
right to receive cash or another financial asset but the right to the receipt of
goods or services in the future.)
• Income taxes that are created as a result of statutory requirements
imposed by government

A financial liability is defined as any liability that is a contractual obligation:

• to deliver cash or another financial asset to another entity, or
• to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity; or a contract that will
or may be settled in the entity’s own equity instruments and is:
• a non-derivative for which the entity is or may be obliged to deliver a variable
number of the entity’s own equity instruments; or
• a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments. For this purpose, the entity’s own equity instruments do
not include instruments that are themselves contracts for the future receipt or
delivery of the entity’s own equity instruments. Please remember, however,
that derivatives are not covered in second-year Accounting.
In the case of preference shares, they can be classified as either financial liabilities
or equity. Where the rights of a preference share:
• provide for mandatory redemption by the issuer for a fixed or determinable
amount at a fixed or determinable future date, or
• give the holder the right to require redemption at or after a particular date for a
fixed or determinable amount, such a share meets the definition of a financial
liability and should be disclosed (classified) as such.

If the above does not apply, then issued preference shares will be classified as part
of equity.

A preference share that provides for redemption at the option of the issuer (i.e. the
company’s discretion) is not a financial liability, because the issuer does not have a
present obligation to transfer financial assets to the shareholders.

Examples of financial liabilities are:

• trade and other creditors
• promissory notes payable
• loans payable
• bonds payable

13
 In the case of financial assets and financial liabilities, one party’s contractual right to
receive cash (or obligation to pay) is matched by the other party’s corresponding
obligation to pay (or right to receive).

Information to be presented either on the statement of financial position

or in the notes

Further subclassifications of line items presented should be disclosed either on the face
of the statement of financial position or in the notes. The disclosures vary for each
item, for example:
• Property, plant and equipment are disaggregated into classes according to
IAS 16.
• Receivables are disaggregated into amounts receivable from trade
customers, receivables from related parties, prepayments and other
amounts.
• Inventories are subclassified according to IAS 2.
• Provisions are disaggregated into provisions for employee benefits and other
items.
• Equity capital and reserves are disaggregated into various classes, such as
paid-up capital, share premium and reserves.

The following items relating to share capital are disclosed for each class in the
statement of financial position or in the statement of changes in equity or in the
notes of the financial statements:

• Number of authorized shares

• Number of issued and fully paid shares
• Number of issued and not fully paid shares
• Par value shares
• Reconciliation of the number of outstanding shares
• Rights, preferences and restrictions applicable to each of capital
• Shares held by subsidiaries or associates entities
• Shares reserved for issuance under options and sales contracts.

3.6 STRUCTURE AND CONTENT: STATEMENT OF PROFIT OR LOSS AND

OTHER COMPREHENSIVE INCOME

An entity has a choice of presenting a single statement of profit or loss and other
comprehensive income, with profit or loss and other comprehensive income
presented in two sections, or two statements or a separate statement of profit or loss
a statement of comprehensive income, immediately following the statement of profit
or loss and beginning with profit or loss.
 The statement of profit or loss and other comprehensive income shall present, in
addition to profit or loss and other comprehensive income sections:
(a) profit or loss
(b) total comprehensive income
(c) comprehensive income for the period, being the total of profit or loss and
other comprehensive income
If an entity presents a separate statement of profit or loss, it does not present the
profit or loss section in the statement of profit or loss and other comprehensive
income.
In addition to the mentioned items, an entity shall present the following items as
allocation of profit or loss and other comprehensive income for the period:
(a) profit or loss for the period attributable to:
(i) non-controlling interests
(ii) owners of the parent
(b) comprehensive income for the period attributable to:
(i) non-controlling interests
(ii) owners of the parent

LECTURER’S COMMENT
Non-controlling interests and parent interest in profit are dealt with in detail in
FAC2602.

If an entity presents profit or loss in a separate statement, it shall present profit or

loss attributable to non-controlling interests and owners of the parent in that
statement.
Information to be presented in the profit or loss section or the statement
of profit or loss
In addition to items required by other IFRS, the profit or loss section or the statement
of profit or loss shall include line items that present the following amounts for the
period:

• revenue
• gains and losses arising 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
• if a financial asset is reclassified so that it is measured at fair value, any gain or
loss arising from a difference between the previous carrying amount and its fair
value at the reclassification date
• tax expense
• a single amount for the total of discontinued operations (Not covered in second-
year Accounting)

15
Information to be presented in the other comprehensive income section
The other comprehensive income section shall present line items for amounts of
other comprehensive income in the period, classified by nature (including share of
the other comprehensive income of associates and joint ventures accounted for
using the equity method) and grouped into those that, in accordance with other IFRS:
(a) will not be reclassified subsequently to profit or loss
(b) will be reclassified subsequently to profit or loss when specific conditions are
met

For second-year Accounting we will only deal with the following two
other comprehensive income items:
– Revaluation surpluses and deficits against existing revaluation surpluses
– Gains or losses on remeasuring equity instruments classified as financial assets at
fair value through other comprehensive income

Profit or loss for the period

An entity shall recognise all items of income and expense in a period in profit or loss,
unless an IFRS requires or permits otherwise.

Information to be presented either in the statement of profit or loss and

other comprehensive income or in the notes

The nature and amount of all income and expense items shall be disclosed separately
if they are material.

The following circumstances give rise to separate disclosure of income and expense
items:
• inventories written down to net realisable value and reversals of these write-
downs
• property, plant and equipment written down to recoverable amount and
reversals of these write-downs
• discontinued operations
• the settlement of litigation
• other reversals of provisions
• disposal of property, plant and equipment
• disposal of investments
• the restructuring of the activities of an entity, and the reversal of any provisions
for the cost of restructuring

LECTURER’S COMMENT
The statement of profit or loss and other comprehensive income can be
presented in two ways: either by classifying income and expenditure in
terms of the functions which give rise to them, or by classifying income
and expenditure in terms of their nature.
 This module’s preference is the classification of income and expenses according
to function.

When income and expenditure are classified in terms of the functions which give rise
to them, additional information of the nature of the expenditure should be provided
in the notes to the statement of profit or loss and other comprehensive income,
including:
• depreciation
• amortisation
• employee benefit expense (Not covered in second-year Accounting)

LECTURER’S COMMENT
The remuneration of directors and prescribed officers requires additional
disclosure.

3.7 DISCLOSURE OF REMUNERATION

Information that needs to be disclosed in the annual financial statements regarding

remuneration of directors and prescribed officers are detailed in section 30(4) of the
Companies Act, No 71 of 2008. According to section 30(5) this disclosure needs to
show the amount of any remuneration or benefits paid to (or receivable by) persons
in respect of:

▪ services rendered as directors or prescribed officers of the company; or

▪ services rendered while being directors or prescribed officers of the company:
– as directors or prescribed officers of any other company within the same group
of companies; or
– otherwise in connection with the carrying on of the affairs of the company or
any other company within the same group of companies.

The Companies Act does not differentiate between remuneration for executive and
non- executive directors. Generally non-executive directors receive directors’ fees
for their attendance of board meetings and also for the provision of services as
directors.

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3.7.1 Definitions

In order to fully understand the disclosure of remuneration of directors and

prescribed officers, knowledge of the definitions below is required.
Director
Any member of the board of directors or alternate director or other person
occupying such position, by whatever name designated.

3.7.2 Prescribed officer

Any person who, despite not being a director, exercises general executive control
over, and management of, the whole, or a significant portion of the business and
activities of the company, or regularly participates to a material degree therein.

Examples of prescribed officers may include the following:

▪ chief executive officer;
▪ chief financial officer;
▪ regional manager; and
▪ general secretary.

3.7.3 Related person

In terms of the Companies Act:

▪ an individual is related to another individual if they are:
– married, or live together in a relationship similar to marriage; or
– separated by no more than two degrees of natural or adopted consanguinity
or affinity;
▪ an individual is related to a juristic person if the individual directly or indirectly
controls the juristic person; and
▪ a juristic person is related to another juristic person if:
– either of them directly or indirectly controls the other, or the business of the
other;
– either is a subsidiary of the other; or
– a person directly or indirectly controls each of them, or the business of each of
them.
 3.7.4 Remuneration

Remuneration includes the following as per section 30(6) of the Companies Act:
▪ fees paid to directors for services rendered by them to, or on behalf of, the
company, including any amount paid to a person in respect of the person’s
acceptance of the office of director;
▪ salary, bonuses and performance-related payments;
▪ expense allowances, to the extent that the directors are not required to
account for such allowance;
▪ contributions paid under any pension fund;
▪ the value of any options of rights given directly or indirectly to a past, current
or future director or any person related to any of them;
▪ financial assistance to a past, current or future director or any person related
to any of them, for the subscription of shares in the company or inter-related
companies; and
▪ in respect of loans or other financial assistance by the company (or any loan
made by a third party where the company is a guarantor of that loan) to a past,
current or future director or any person related to any of them:
– any interest deferred, waived or forgiven; or
– the difference in value between the interest that would reasonably be charged
in comparable circumstances at fair market rates in an arm’s length
transaction, and the interest actually charged to the borrower (if less).

3.7.5 Disclosure requirements

Section 30(4) contains the disclosure requirements in respect of remuneration. Any

company that, in terms of the stipulations of this Act, is required to have its annual
financial statements audited, must disclose the remuneration of directors and
prescribed officers.

The disclosure of remuneration will include the following:

▪ the remuneration and benefits received by each director or prescribed officers;
▪ the amount of any pensions paid by the company to, or receivable by, current
and past directors or prescribed officers;
▪ the amount paid or payable by the company to a pension fund in respect of
current and past directors and prescribed officers;
▪ the amount of any compensation paid for the loss of office to current and past
directors and prescribed officers;
▪ the number and class of any securities issued to a director and prescribed
officer, or any person related to them, as well as the consideration received by
the company for these securities; and
▪ details of service contracts of current directors and prescribed officers.

19
Example 18.1: Disclosure of remuneration

Alpha Ltd holds 80% of the issued ordinary shares of Ruben Ltd. The directors and
senior personnel of Alpha Ltd are as follows:

Chairman (non-executive) Mr MJ Naidoo

Director (non-executive) Mrs H Rabada
Regional manager Mr JN van Schalkwyk
Managing director (executive) Mr Z Beseti
General secretary Mrs L Lombard

Alpha Ltd identified all their prescribed officers and ensured that they meet the
statutory requirements for appointment. The prescribed officers were informed
that their remuneration will be disclosed in terms of the requirements of the
Companies Act, 2008.

The following information is applicable to the remuneration of directors and

prescribed officers for the financial year ended 31 December 20.15:
▪ Each director receives a fee of R10 000 per quarter. The chairman receives an
additional fee of R4 000 per quarter. The managing director receives a salary of
R240 000 per year, the general secretary R200 000 per year and the regional
manager R160 000 per year.
▪ Both the chairman and managing director have the use of company cars which
may also be used for private purposes. The total benefits for the use of such a
car are estimated at R60 000 per year, of which 40% is for private use and 60%
for business purposes.
▪ Entertainment allowances are as follows:
R
- Chairman 20 000 per year
- Managing director 16 000 per year
- General secretary 10 000 per year
- Regional manager 6 000 per year

▪ The widow of a past managing director (Mr AL Khoza) (executive director)

received a pension payment of R40 000 per year solely by reason of her
deceased husband’s managing directorship.
▪ The annual pension contributions (total personal and company contributions)
amount to R40 000 per year per director and R20 000 per prescribed officer.
The various companies pay 60% of these contributions on behalf of their
directors and prescribing officers. The payment of pensions arises from the
managing duties of the affected persons.
 ▪ On the last day of the financial year, Mr MJ Naidoo was relieved of his duties as
chairman of Alpha Ltd and general secretary of Ruben Ltd. As a result,
Mr Naidoo received the following remuneration:
R
- From Alpha Ltd for his position as chairman of Alpha Ltd 20 000
- From Ruben Ltd for his position as general secretary of 40 000
Ruben Ltd

ALPHA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.15

Remuneration of directors and prescribed officers

Less:
Paid by
Other subsidia-
Directors’ benefits Loss of ries and
Name fees Salary (*) Pensions office others Total
R R R R R R R
Executive
directors
Z. Beseti 40 000 240 000 64 000 344 000

Non- executive
directors

M.J. Naidoo 56 000 68 000 60 000 (40 000) 144 000

H. Rabada 40 000 24 000 64 000

Prescribed officers

J.N. van 160 000 18 000 178 000

Schalkwyk
L. Lombard 200 000 22 000 222 000

Past director
(executive)
A.L. Khoza 40 000 40 000

Total 136 000 600 000 196 000 40 000 60 000 (40 000) 992 000

21
3.8 STRUCTURE AND CONTENT: STATEMENT OF CHANGES IN EQUITY

A statement of changes in equity forms part of the annual financial statements. What
is essentially required, is a reconciliation of equity at the beginning of the financial
year with equity at the end of the financial year.

The statement should include the following:

• Total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and non-controlling interest. (Not
covered in second-year Accounting)
• The effects of retrospective application or retrospective restatement recognised
in accordance with IAS 8 for each component of equity (Not covered in second-
year Accounting)
• For each component of equity, a reconciliation between the carrying amount at
the beginning and the end of the period, with each component 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

Dividends paid for the period and related dividend per share can be disclosed either
in the statement of changes in equity or in the notes.
3.9 STRUCTURE AND CONTENT: NOTES TO THE ANNUAL
FINANCIAL STATEMENTS
Notes to the annual financial statements disclose the additional information detailed
assumptions made when preparing a company’s financial statements.

The notes to the annual financial statements should:

• contain a statement that the financial statements comply with International
Financial Reporting Standards
• present information about the basis of preparation of the annual financial
statements
• present the specific accounting policies selected and applied for significant
transactions and events
• disclose information required that is not presented elsewhere in the annual
financial statements
• provide additional information that is not presented elsewhere in the annual
financial statements, but that is relevant to an understanding of any of them,
for example contingent liabilities

Notes to the annual financial statements should be:

• presented in a systematic manner; and
• each item on the statements cross-referenced to the notes.
 An entity should disclose in the summary of significant accounting policies:
• the measurement basis (or bases) used in preparing the annual financial
statements, for example, historical costs, net realisable value, fair value
• the other accounting policies used that are relevant to an understanding of the
annual financial statements

3.10 DIVIDENDS
As we mentioned previously in learning unit 1 , the profit of a company is divided
among the shareholders of the company in the form of dividends. A dividend can
therefore be defined as that portion of the profit of a company which is divided among
the shareholders (paid out to them). In other words, it indicates the pro rata portion
which each shareholder receives on his or her shares – say, for example, 10% or 5c per
share.

When dividends are declared, the rights of minority shareholders should always be
taken into account. If preference shares were issued at a fixed percentage of future
income – for example 8% preference shares – dividends for these shareholders should
always be declared at the fixed percentage. There are no restrictions on the profit
share of ordinary shareholders and the declaration of dividends will depend on the
available profit. If the profit is large, a large dividend can be declared, but if the profit
is small, the dividend will naturally also be small. Note that the preference
shareholders have preference over the ordinary shareholders as far as dividends are
concerned. If an ordinary dividend is declared or paid, the board of directors is
obliged to recommend a preference dividend and the shareholders are obliged to
approve it.

It should also be noted that any dividends declared must be proportionate, in other words
all the shareholders holding the same class of shares must receive the same dividend
amount or percentage. The size of the dividend could naturally be different for the holders
of different classes of shares, but within each class the amount of the dividends will be in
the ratio of shares held. Dividends need not necessarily be paid out in cash; they can be
in the form of capitalisation shares (bonus shares).

If there is profit available for distribution and sufficient cash flow, the dividends must still
be declared at the annual general meeting. Thereafter, the dividends become a liability
in the company’s books in that they have not yet been paid over to the shareholders and
the shareholders have the right to demand payment. The general procedure when
dividends are declared, is that the directors recommend a percentage or an amount as a
basis for declaring dividends. The shareholders have the final say in this matter, however,
and they are free to declare a lower dividend than the directors recommended.

It should be mentioned that the dividends need not be declared solely from the profit of
the current year. The profit made during previous trading periods and not yet paid out
(retained earnings) may be added to the profit of the current year to arrive at a sum on
which the dividends can be based, as long as the entity has sufficient cash flow available
to pay the declared dividend.

23
For this reason, it is always necessary to bear the cash reserves of the company in mind
when determining the amount of the dividends, because if all the available cash is absorbed
by this item, it means that the company might experience a shortage of operating capital
during the next financial period and consequently be unable to realise the same high profit.

You should bear in mind that dividends may not be paid from capital, but only from
realised profit and only after all expenses and losses that may have arisen in the past
have been redeemed.

The availability of profit for dividends has been the subject of many court cases. In many
cases it is not easy to determine the available profit, but at present we can mainly assume
that the profit is that amount that remains of the operating result after provision has been
made for all expenses and for the depreciation of assets. Provision must be made for all
losses or possible losses so that the amount which is eventually shown as profit is pure
and accurate and does not include a portion of the capital or capital profits.

Preference shareholders have a preferential right to dividends. This means that before an
ordinary dividend can be declared, preference shareholders have to receive their
dividend, which represents a fixed percentage of the nominal value of preference share
capital. If no distributable reserves are available in the particular year to declare a dividend,
both ordinary and preference shareholders forego their right to dividends, unless the
preference shares are cumulative. A cumulative preference shareholder retains his or her
right to dividends from year to year even if no dividends are declared. Therefore, when
the company has sufficient distributable reserves and cash flows available to declare a
dividend, arrear and current cumulative preference dividends have first to be paid in full
before ordinary preference dividends and then dividends on ordinary share capital can
be paid.
Since preference dividends make up a fixed percentage of preference share capital,
the calculation of the dividends is done on the same basis as the calculation of interest
–in other words, for the period for which the shares were in issue. For the calculation
of an ordinary dividend, it makes no difference how long the holder of a share
certificate has held the shares. As soon as a dividend is declared to all registered
shareholders, a shareholder is entitled to the full ordinary dividend, even if he or she
only became a registered shareholder the previous day.

There are two kinds of dividends:

Interim dividends
An interim dividend is one which is declared before the end of the year from either
(a) profit carried over from the previous year, or (b) profit which accumulated during
the current period. The declaration of interim dividends is subject to the same
requirements regarding available profit as is the declaration of annual dividends. The
right to declare interim dividends is usually reserved for the directors of the company,
but any such declaration must be ratified at the annual general meeting by the
shareholders of the company.
No interim dividends can be paid by a company before all outstanding declared
dividends from previous years have been paid.
 Annual final dividends
Dividends of this kind are declared at the end of the year from available profit, and
are therefore the kind of dividends we have been discussing so far. When the amount
of the annual (final) dividends is determined, the amount of the interim dividend
which has already been taken from the profit should be duly taken into account.

Dividends should be declared before they become a liability for the company in favour
of the shareholders.
Debit Retained earnings with
the total
amou
nt of the
Credit Dividends payable dividend declared
Debit Dividends payable
with the
Credit Bank amount paid

EXAMPLE 1
Issued
10 000 ordinary shares at R1
each Dividend declared: 10c
per share Dividend payable
10 000 x 10c = R1 000
Issued
10 000 8% preference shares at R1
each Dividend payable
10 000 x R1 x 8% = R800
or Issued
20 000 12% preference shares at R2 each
Dividend payable
20 000 x R2 x 12% = R4 800
Work through the following examples to comprehend the calculation and
treatment of dividends.

EXAMPLE 2
The issued share capital of A Ltd consists of:
• 10 000 8% preference shares at R1 each
• 20 000 12% preference shares at R2 each

Required

Calculate the dividends payable annually to preference shareholders.

25
SOLUTION 2
• 10 000 8% preference shares at R1 each:
• Dividend payable:
10 000 x R1 x 8% = R800
20 000 12% preference shares at R2 each:
• Dividend payable:
20 000 x R2 x 12% = R4 800

EXAMPLE 3
ABC Ltd’s issued share capital includes 10 000 10% cumulative preference shares
at R2 each. ABC Ltd did not have sufficient funds available to pay the preference
dividend for the financial years ended 28 February 20.1 and 20.2. However, the
directors decided on 28 February 20.3 that sufficient funds were available and
consequently declared and paid all dividends.

Required

Calculate the dividend to be disclosed in the company’s annual financial

statements for the 20.3 year.

SOLUTION 3
ABC LTD
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY FOR THE
YEAR ENDED 28 FEBRUARY 2022
2022 2021
R R

Dividends declared and paid

Cumulative preference shares 6 000 –
(10 000 x R2 x 10% x 3 years)

EXAMPLE 4

The issued share capital of B Ltd on 31 December 2022 consists of:

R
Ordinary shares 5 000
 Additional information:
• All the ordinary shares were issued at R1,00.
• At the annual general meeting held on 28 December 2022, the directors decided
to issue a capitalisation share of 1 ordinary share for every 10 held at R1,00. This
transaction was not yet recorded in the 2022 financial records of B Ltd.
• After the capitalisation issue, the company declared an ordinary dividend of 5c
per share.

Required

Calculate the ordinary dividend to be disclosed in the company’s annual

financial statements for the year ended 2022.

SOLUTION 4

First calculate the number of ordinary shares at year end:

Issued: 5 000 ordinary shares
Ordinary shares issued (5 000 shares/R 1,00) 5 000 shares
Capitalisation shares (5 000 shares/10) 500 shares
Total number of ordinary shares 5 500 shares
Calculate ordinary dividend for the year:
R
5 500 shares x 5c 275

27
3.11 EXAMPLE: PRESENTATION OF ANNUAL FINANCIAL STATEMENTS
The following is an example of annual financial statements prepared in terms of the
requirements of IAS 1. Please note that this is a very detailed example and all the items
in this example are not covered in this module.

XYZ GROUP
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2022
2022 2021
R’000 R’000
ASSETS
Non-current assets X X
Property, plant and equipment X X
Investment property X X
Goodwill X X
Other intangible assets X X
Investments in associates X X
Financial assets X X
Deferred tax X X

Current assets X X
Inventories X X
Trade and other receivables X X
Financial assets X X
Cash and cash equivalents X X
Total assets X X
 2022 2021
EQUITY AND LIABILITIES R’000 R’000
Total equity X X
Equity attributable to owners of the parent X X
Share capital X X
Retained earnings X X
Other components of equity X
X
Non-controlling interest X

Total liabilities X X
Non-current liabilities X X
Long-term borrowings X X
Other financial liabilities X X
Long-term provisions X X
Deferred tax X X
Current liabilities X X
Trade and other payables X X
Short-term borrowings X X
Current portion of long-term borrowings X X
Short-term provisions X X
Other financial liabilities X X
Current tax payable X X

Total equity and liabilities X X

LECTURER’S COMMENT

Some of the above items require additional disclosure in the form of notes
to the annual financial statements and will be discussed in detail, when the
applicable item is discussed in more detail in later learning units.

29
XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
(Illustrating the classification of expenses by function – this method is preferred by
Unisa)

2022 2021
R’000 R’000
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
PROFIT FOR THE YEAR X X
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation X X
Remeasurements on defined benefit pension plans X X
Share of gain (loss) on property revaluation of X X
associates
Income tax relating to items that will not be reclassified (X) (X)
X X
Items that may be reclassified subsequently to profit
or loss:
Exchange differences on translating foreign X X
operations
Available for sale financial assets X X
Cash flow hedges X X
Income tax relating to items that may be reclassified (X) (X)
X X
Other comprehensive income for the year, net of tax X X
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
Profit attributable to:
Owners of the parent X X
Non-controlling interest X X
X X
Total comprehensive income attributable to:
Owners of the parent X X
Non-controlling interest X X
 XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 2022

(Illustrating the classification of expenses by nature)

2022 2021
R’000 R’000
Revenue X X
Other income X X
Changes in inventories of finished goods and work in (X) X
progress
Work performed by the entity and capitalised X X
Raw material and consumables used (X) (X)
Employee benefits expense (X) (X)
Depreciation expense (X) (X)
Amortisation expense (X) (X)
Impairment of property, plant and equipment (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
PROFIT FOR THE YEAR X X
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation X X
Remeasurements on defined benefit pension plans X X
Share of gain (loss) on property revaluation of associates X X
Income tax relating to items that will not be reclassified (X) (X)
X X
Items that may be reclassified subsequently to profit or
loss:
Exchange differences on translating foreign operations X X
Available for sale financial assets X X
Cash flow hedges X X
Income tax relating to items that may be reclassified (X) (X)
X X
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
Profit attributable to:
Owners of the parent X X
Non-controlling interest X X
X X
Total comprehensive income attributable to:
Owners of the parent X X
Non-controlling interest X X
X X

31
 LECTURER’S COMMENT

In a statement of profit or loss and other comprehensive income in which

expenses are classified by nature, an impairment of property, plant and
equipment is shown as a separate line item. By contrast, if expenses are
classified by function, the impairment is included in the function(s) to which it
relates, and separately disclosed in the note on profit before tax. The same
applies to employees’ costs, depreciation and amortisation.
In the above example, the individual components of other comprehensive income are
disclosed on a pre-tax basis (i.e. before taking into account their related tax effect). The
combined tax effect is then reflected as a single line item immediately following these
components. An alternative presentation would be to disclose each of these components net of
tax. In second-year Accounting, the effect of tax is not dealt with. The illustration of the tax
effect is for cognisance only.

The following notes accompany this statement to provide more useful information:

NOTES FOR THE YEAR ENDED

R
1. Profit before tax is disclosed after taking the following disclosable
items into account, amongst others

Income
Revenue consists of:
Continuing operations – turnover X
Fair value adjustment – financial asset at fair value through profit or loss
Profit on the sale of non-current assets
Profit on financial instruments X
Income from subsidiaries X
– Dividends X
– Interest X
– Management and other fees X
– Other specified income X
Income from other financial assets
Listed investments – Financial asset at fair value through profit or loss X
– Dividends X
– Interest X
– Other income X
Unlisted investments – Financial asset at fair value through other comprehensive
income X
– Dividends X
– Interest X
– Other income X
Expenses
Significant (material) items X
Fair value adjustment – financial asset at fair value through profit or loss X
Losses on the sale of non-current assets X
 Loss on financial instruments X
Depreciation on non-current assets X
Remuneration (other than bona fide employees) for:
– Management services X
– Technical services X
– Administrative services X
– Secretarial services X
Staff cost X
Auditors’ remuneration X
– Auditing fees X
– Fees for other services, e.g. accounting services X
– Expenses X

2. Income tax expense

X
SA Normal tax X
– Current year X
– Deferred

LECTURER’S COMMENT
The entity should also include notes on accounting policy to disclose the
measurement basis used in the compilation of the annual financial statements
(e.g. historical cost, current cost, net realisable value, fair value and recoverable
amount, as well as each specific accounting policy matter that is relevant to an
understanding of the annual financial statements.

An entity may choose to split the statement of profit or loss and other comprehensive
income into two separate statements. The one statement, called a statement of profit
or loss, then deals with the profit for the year, while the other statement, called a
statement of profit or loss and other comprehensive income, shows the total profit for
the year as well as the components of other comprehensive income.

33
XYZ GROUP
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED
31 DECEMBER 2022
2022 2021
Revenue R’000 R’000
X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
PROFIT FOR THE YEAR X X
Profit attributable to:
Owners of the parent X X
Non-controlling interest X X
X X
XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
2022 2021
R'000 R'000
Profit for the year X X
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation X X
Remeasurements on defined benefit pension plans X X
Share of gain (loss) on property revaluation of associates X (X)
Income tax relating to items that will not be reclassified (X) (X)
X X
Items that may be reclassified subsequently to profit or
loss:
Exchange differences on translating foreign operations X X
Available for sale financial assets X X
Cash flow hedges X X
Income tax relating to items that may be reclassified (X) (X)
X X
Other comprehensive income for the year, net of tax X X
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
Total comprehensive income attributable to:
Owners of the parent X X
Non-controlling interest X X
X X
 XYZ GROUP
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2022
Share Retained Transla- Invest- Cash Revalua- Total Non- Total
capital earnings tion of ment in flow tion con- equity
foreign equity hedges surplus trolling
opera- instru- interest
tions ments
R 000 R 000 R 000 R 000 R 000 R 000 R 000 R 000 R 000
Balance at 1 January 20.21 X X X X X – X X X
Changes in accounting – X – – – – X X X
policy
Restated balance X X X X X X X X X
Changes in equity for 20.21
Dividends – X – – – – X – X
Total comprehensive
income for the year – X X X X X X X X
Balance at 31 December X X X X X X X X X
20.21
Changes in equity for 20.22
Issue of share capital X – – – – – X – X
Dividends – X – – – – X – X
Total comprehensive
income for the year – X X X X X X X X
Transfer to retained – X – – – X – – –
earnings
Balances at 31 December X X X X X X X X X
20.22

LECTURER’S COMMENT
Statement of changes in equity
IAS 1 requires disclosure of dividend per share in the statement of changes in
equity, or alternatively in the notes.
The statement of changes in equity reflects the opening and closing balances of all the share
capital and reserve accounts, the effects of changes in accounting policies/correction of prior
period errors, the total comprehensive income for the period (reported as a single line item), the
issue of shares, the repurchase of shares, dividends paid, as well as transfers between reserves.

35
3.12 COMPREHENSIVE EXAMPLE
EXAMPLE 5
The following information was taken from the books of Rainbow Ltd for the year
ended 28 February 19.4:
Dr Cr
R R
Ordinary shares (issued at R1 each) 500 000
8% Preference shares 100 000
Proceeds of 50 000 new shares issued 65 000
Share issue expenses incurred on the above shares
issued 4 000
Preliminary expenses 3 000
Debenture issue expenses 2 000
8% Debentures of R100 each (secured by a first
mortgage bond
over land and buildings) 100 000
Bank overdraft 65 000
Trade and other payables 47 000
Land at cost 50 000
Buildings at cost 500 000
Investments at cost 86 000
Long-term loan – Purple Bank 50 000
Loan to personnel 4 500
Profit before tax for the year 54 500
Retained earnings – 1 March 19.3 151 900
Trade and other receivables 43 000
Inventories – finished goods 46 000
Inventories – work-in-progress 4 000
Machinery and equipment at cost 800 000
Accumulated depreciation – 28 February 19.4
– Machinery and equipment 400 000
– Buildings 18 500
Provisional taxation payments 8 100
Dividends receivable (except received from subsidiary)
– Blue Ltd 900
– Cream (Pty) Ltd 400
1 551 900 1 551 900
Additional information:

1. On 1 March 19.3 the directors of Rainbow Ltd decided on the following, which
must still be accounted for in the following order:
1.1 The issue of 80 000 fully paid-up ordinary capitalisation shares to the amount of
R80 000.
1.2 To write off all share issue expenses, preliminary expenses and debenture
issue expenses.
 2. The existing land (owner occupied and situated at erf 14, Rooihout Park) was
purchased on 1 March 19.1 for R50 000. Buildings at a cost of R450 000 were
completed on 1 March 19.2. On 1 March 19.3 the land was revalued by a sworn
appraiser, Mr White, for R200 000 on the net replacement basis. No entry to
record the revaluation was done. Since then, the directors approved plans
to modernise the buildings for R150 000. Work to the amount of R50 000
was completed and paid for on 31 August 19.3, while contracts to the value
of R50 000 were already entered into for the following accounting period.
3. The company signed surety for a bank overdraft of Aubegine Ltd.
4. Investments consist of the following:
R
4.1 Aubegine Ltd – subsidiary of Rainbow Ltd
10 000 Ordinary shares 30 000
4.2 Blue Ltd – listed on the Johannesburg
Securities Exchange (Bought for
speculative purposes): 40 000
1 000 Ordinary shares
Market value on 28 February 19.4 was R50 per share

4.3 Cream (Pty) Ltd – unlisted company

(designated as not held for trading):
200 Ordinary shares 16 000
Directors’ valuation on 28 February 19.4 amounts to
R20 000
In previous years, the fair value of all the investments
above was equal to their cost prices.
5. The unsecured long-term loan originated on 1 March 19.3 and is repayable in
annual instalments of R10 000 on 1 March every year. Interest for the current
year at the current rate of 10% must still be provided for and is payable on
5 March 19.4. Rainbow Ltd uses the settlement basis of accounting to account
for its financial instruments.
6. Loans to personnel consist of:
6.1 A loan of R3 000 to Mr Green, the managing director. No repayment was
made during the current year.
6.2 R1 500 owing by Mr Terracotta, the company secretary. The original advance
on 1 June 19.3 amounted to R3 000. Both these loans are short-term and
.interest free.

37
7. Profit before tax for the year was determined after taking the following into
account, amongst others:
R
Income from subsidiary:
– Dividends 500
– Administration fees 3 500
Profit on sale of delivery motorcycle 750
Auditors’ remuneration (including R800 travelling expenses) 2 000
Travelling allowance of the managing director 1 900
Entertainment allowance of the managing director 1 500
Directors’ remuneration for attendance of meetings
– Managing director 1 800
(An additional R2 000 was paid by the subsidiary for attendance of meetings)
Directors’ remuneration for attendance of meetings
– non-executive directors (Mr Red) 1 800
Salaries (including R70 000 paid to the managing director, as well as the
company’s pension fund contributions of 5% on all salaries) 200 000
Bank charges 700
Depreciation
– Machinery and equipment 100 000
– Buildings 9 500
Interest on overdraft 6 900
Interest on debentures 8 000
8. Normal company taxation of R11 368 and dividends on ordinary shares of 5c per
share must still be provided for.
9. Rainbow Ltd only owned one delivery motor cycle which was sold on
1 March 19.3. The transaction was entered correctly in the books of Rainbow
Ltd. The original cost price of this asset was R20 000 and the carrying amount at
date of sale was R2 000.
10. It is Rainbow Ltd’s policy to write off depreciation on machinery and equipment
at 20% per annum according to the diminishing balance method. No purchase or
sale of machinery took place during the year.
11. Revenue for the year amounted to R4 500 000 and represents net sales to
third parties of goods purchased for resale. Rainbow Ltd maintained a 40%
gross profit percentage throughout the year.
12. Debentures are redeemable before 1 March 19.10 at par.
13. The authorised share capital of Rainbow Ltd on 1 March 19.3 was as follows:
14. 700 000 Ordinary shares
250 000 8% Preference shares
15. Buildings are depreciated at 2% per annum on the straight-line basis.
16. Included in profit before tax are distribution expenses amounting to R26 800.
 Required

Prepare the statement of financial position, the statement of profit or loss

and other comprehensive income, the statement of changes in equity and
the relevant notes thereto of Rainbow Ltd for the year ended
28 February 19.4 according to the requirements of International Financial
Reporting Standards. (Ignore accounting policy notes and comparative
figures. Show all calculations.)

SOLUTION 5
RAINBOW LTD
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 19.4
ASSETS Notes R
Non-current assets 1 131 500
Property, plant and equipment 1 1 081 500
Investment in subsidiary 2 30 000
Financial assets 3 20 000
Current assets 148 800
Inventories 4 50 000
Trade and other receivables (43 000 + 900 + 400) 3 44 300
Financial assets (4 500 + 50 000) 3 54 500
Total assets 1 280 300
EQUITY AND LIABILITIES
Equity attributable to owners 970 532
Share capital 5 745 000
Retained earnings 71 532
Other components of equity (150 000 + 4 000) 154 000
Total liabilities 309 768
Non-current liabilities 140 000
Long-term borrowings 6 40 000
Financial liabilities at amortised cost 7 100 000
Current liabilities 169 768
Trade and other payables (47 000 + 5 000) 52 000
Current portion of long-term borrowings 10 000
Current tax payable (11 368 – 8 100) 3 268
Dividends payable (31 500 + 8 000) 39 500
Bank overdraft 65 000
Total equity and liabilities 1 280 300

39
RAINBOW LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 19.4
R
Revenue 4 500 000
Cost of sales (4 500 000 – 1 800 000) (2 700 000)
Gross profit (40% x 4 500 000) 1 800 000
Other income 16 050
Distribution costs (26 800)
Administration expenses (calculation 1) (1 711 850)
Finance costs (6 900 + 8 000 + 5 000) (19 900)
Profit before tax (calculation 1) 57 500
Income tax expense (11 368)
PROFIT FOR THE YEAR 46 132
Other comprehensive income: 154 000
Gain on financial assets at fair value through other comprehensive
income (20 000 – 16 000) 4 000
Gain on property revaluation (200 000 – 50 000) 150 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 200 132
Profit attributable to:
Owners of the parent 46 132
Total comprehensive income attributable to:
Owners of the parent 154 000
200 132

RAINBOW LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 19.4

Ordinary Preference Revalu- Mark-to-

share share ation market Retained
capital capital surplus reserve earnings Total
R R R R R R
Balance at 1 March 19.3 500 000 100 000 – – 151 900 751 900
Total comprehensive
income for the year 150 000 4 000 46 132 200 132
Issue of capitalisation shares 80 000 (80 000) –
Issue of ordinary shares 65 000 65 000
Share issue expenses
written off (4 000) (4 000)
Preliminary expenses
written off (3 000) (3 000)
Dividends
– preference (100 000 x 8%) (8 000) (8 000)
– ordinary (630 0001 x 5c) (31 500) (31 500)
Balance at
28 February 19.4 645 000 100 00 150 000 4 000 71 532 970 532
0
1 (500 000 + 80 000 + 50 000)
 RAINBOW LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 19.4

1. Property, plant and equipment

Machinery
and Delivery
Buildings Land equipment vehicle Total
R R R R R
Carrying amount at
1 March 19.3 441 000 50 000 500 0001 2 000 993 000
Cost price 450 000 50 000 800 000 20 000 1 320 000
Accumulated depreciation (9 000)2 – (300 000) (18 000) (327 000)
Revaluation surplus
for the year – 150 000 – – 150 000
Depreciation for the year (9 500)3 – (100 000) – (109 500)
Additions at cost 50 000 – – – 50 000
Disposals at carrying amount – – – (2 000) (2 000)
Carrying amount at 28 February
19.4 481 500 200 000 400 000 – 1 081 500
Cost/Revaluation 500 000 200 000 800 000 – 1 500 000
Accumulated depreciation (18 500) – (400 000) – (418 500)

100 6 6
1
400 000 x 80 = 500 000 (450 000 x 12 x 2%) (500 000 x 12 x 2%) = 9 500
3

2
450 000 x 2% = 9 000

On 1 March 19.3 land, with a building, situated at erf 14, Rooihout Park, was revalued
by Mr White, a sworn appraiser, according to the net replacement basis for R200 000.
Additions during the year amounted to R50 000. The land and buildings serve as
security for the debentures. (See note 6.)

2. Investment in subsidiary
Shares at cost 30 000
R
3. Financial assets
Non-current financial assets 20 000
Financial assets at fair value through other comprehensive income Unlisted
– 200 Ordinary shares (cost R16 000) 20 000
Current financial assets 98 800
Trade receivables (43 000 + 900 + 400) Loans 44 300
and receivables 4 500
Loan to a director (The loan is interest free and repayable in the 3 000
following year)
Staff loans (The loans are interest free and repayable in the following year) Financial 1 500
assets at fair value through profit or loss – held for trading Listed
– 1 000 Ordinary shares in Blue Ltd (cost R40 000) 50 000

118 800

41
 R
4. Inventories
Finished goods 46 000
Work-in-progress 4 000
50 000
5. Share capital R
Authorised
700 000 Ordinary shares
250 000 8% Preference shares
Issued
630 000 Ordinary shares 645 000
100 000 8% Preference shares 100 000
745 000
During the accounting period, 50 000 ordinary shares were issued for
R65 000.
R
6. Non-current liabilities
Long-term borrowings:
Long-term loan 40 000
Total long-term loan 50 000
Current portion of long-term loan (10 000)
The long-term loan is unsecured, carries interest at 10% per annum and is
repayable in annual instalments of R10 000 on 1 March each year.
R
7. Financial liabilities at amortised cost
1 000 8% debentures of R100 each at amortised cost 100 000
The debentures are secured by a first mortgage bond over land and buildings with a carrying
amount of R681 500 and are redeemable at par before 1 March 19.10. (See note 1.)
R
8. Commitments for capital expenditure
Contracted 50 000
Approved by the directors not yet contracted 50 000
100 000
These expenses will be financed from … .

9. Contingent liability
The company signed a suretyship for a bank overdraft for its subsidiary company.
10. Profit before tax

Profit before tax is disclosed after taking the following disclosable items into account:
R
Income
Revenue consists of sales of goods 4 500 000
Profit on sale of non-current asset 750
Fair value adjustment – financial asset at fair value through profit or loss 10 000
Dividend income 1 300
– Financial assets at fair value through profit or loss – listed investment 900
– Financial assets at fair value through other comprehensive income
– unlisted investment 400
Income from subsidiary 4 000
– Dividends 500
– Administration fee 3 500
Expenses
Staff cost 200 000
Auditors’ remuneration 2 000
– Audit fees 1 200
– Expenses 800
Depreciation 109 500
Write-off of debenture issue expenses 2 000

11. Remuneration of directors and prescribed officers

Less:
Paid by
Directors’ Other Pension Loss of sub-
fees Salary benefits fund office sidiaries Total
Name R R R R R R R
Executive director:
Mr Green 3 800 70 000 3 400 3 500 – (2 000) 78 700
Non-executive director:
Mr Red 1 800 – – – – – 1 800
5 600 70 000 3 400 3 500 – (2 000) 80 500
Other benefits Entertainment
Trav allowance Total
Name el R R R
Mr Green 1 900 1 500 3 400

12. Income tax expense R

SA normal taxation
– Current 11 368
 CALCULATION 1
R
Gross profit (4 500 000 x 40%) 1 800 000
Profit before tax (57 500)
Profit before tax per list of balances 54 500
Fair value adjustment – held-for-trading financial assets 10 000
[(50 x 1 000) – 40 000)]
Interest on loan still to be provided (50 000 x 10%) (5 000)
Write-off of debenture issue expenses (2 000)
1 742 500
Interest paid to be disclosed separately (6 900 + 8 000 + 5 000) (19 900)
Other income to be disclosed separately 16 050
(10 000 + 750 + 3 500 + 500 + 900 + 400)
Distribution expenses disclosed separately (26 800)
Administrative expenses 1 711 850

The United Nations Global Compact (UNGC) was launched in 2000 and consists of ten
principles to improve corporate citizenship amongst public, private and civil-society entities.
Specifically applicable to this module, is the principle on anti-corruption, in that businesses
should work against corruption in all its forms, including extortion and bribery. The annual
financial statements that are prepared should therefore be a true reflection of activities and
comply with all relevant ethical principles.