FINANCIAL ACCOUNTING 2: FAC260S

IFRSs and THE CONCEPTUAL FRAMEWORK

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)

IFRSs are principles that are applied by accountants when they:

 Record transactions and other financial information (bookkeeping) and
 Prepare financial statements for external users (reporting).

IFRSs are issued by the International Accounting Standards Board (IASB). Its
predecessor was the International Accounting Standards Committee (IASC).
Standards developed by the IASC have the prefix IAS (for “International
Accounting Standard”), while standards developed by the IASB have the prefix
IFRS. The standards developed by the “old” IASC have been adopted by the
“new” IASB.

IAS’s developed by the IASC: 41 in total but only 25 of them are still in use.
(The others were replaced by newly written IFRSs.) To date, the IASB have
developed 17 new standards. IFRS 17 on Insurance contracts became effective
on January 1, 2021.

Read more about the development of exposure drafts, standards,

interpretations and annual improvements in Gripping GAAP Chapter 1.

THE CONCEPTUAL FRAMEWORK (CF)

The Conceptual Framework (CF) is the foundation on which all IFRSs are built.
The Conceptual Framework is not a Standard. Nothing in the Conceptual
Framework overrides any Standard or any requirement in a Standard.

What is the Conceptual Framework (CF)?

Definition:
The Conceptual Framework for Financial Reporting (CF) is:
 A set of accounting objectives and fundamentals,
 Developed by the International Accounting Standards Board (IASB)
 To ensure uniformity in interpretation across various accounting
methodologies.
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The Conceptual Framework for Financial Reporting:
 States the “objectives” of general-purpose financial reporting, and
 Explains the various “concepts” that underpin financial reporting.

What is the “objectives of general-purpose financial reporting?”

The objective of general-purpose financial reporting is to provide financial

information about the reporting entity that is useful to the three primary users,
so that they could make decisions about providing resources (capital) to
the entity.
The three primary users are:
 Existing and potential investors,
 Existing and potential lenders and
 Existing and potential creditors.

Thus: The CF will supply users with information which will be useful in their
decision making.
However, general purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors
need. General purpose financial reporting only supplies information about
financial information, and not information about the general economic
conditions and expectations, political events and political climate, and industry
and company outlooks.

When was the first Conceptual Framework (CF) issued and how was the
original CF revised?

The original CF was issued in 1989. During 2010, the 1989 CF was completely
revised to harmonise it amongst global stakeholders.

On 29 March 2018 the International Accounting Standards Board (IASB)

published its revised 'Conceptual Framework for Financial Reporting', which is
the one currently in use.
Significant changes in the 2018 version are:
 Revised definitions of an asset, a liability, an income and an expense.
 Revised recognition criteria.
 Improved guidance on measurement and recognition, derecognition,
presentation and disclosure.

The new Conceptual Framework does not constitute a substantial revision of

the previous version of the Conceptual Framework but instead the IASB
focused on topics that were not yet covered or that showed obvious
shortcomings that needed to be addressed.
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Why do we need a Conceptual Framework in accounting? (What is the
purpose of the Conceptual Framework?)

The CF is basically a tool that has three purposes: (Gripping GAAP Pg.35)

1. To help the IASB in developing IFRSs,

2. To help those preparers of financial statements who may need to create

their own accounting policies (when a suitable IFRS does not exist or an
existing IFRS allows an alternative policy) and

3. To help all parties to understand and interpret the IFRSs.

Concepts currently contained in the CF include the

1. Objective of general-purpose financial reporting,

2. Qualitative characteristics of useful financial statements.
3. Financial statements and the Reporting entity.
4. Elements of financial statements (Assets, liabilities, equity, income
expenses)
5. Recognition and derecognition.
6. Measurement bases that may be used when measuring the elements.
7. Presentation and Disclosure.
8. Capital and capital maintenance.

QUALITIVE CHARACTERISTICS OF USEFUL

FINANCIAL INFORMATION

FUNDAMENTAL QUALITATIVE ENHANCING QUALITATIVE

CHARACTERISTICS CHARACTERISTICS
 Comparability
 Verifiability
 Timeliness
characteristics are  Understandability
essential for usefulness.
characteristics improve
usefulness.
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THE QUALITIVE CHARACTERISTICS AND CONSTRAINTS

For financial statements to be useful to its users, it must have certain qualitative
characteristics.

The qualitative characteristics of useful financial information recognise:

 The types of information that are likely to be most useful to the existing
and potential investors, lenders and other creditors
 For making decisions about the reporting entity on the basis of information
in its financial report (financial information).

The Conceptual Framework separates the qualitative characteristics into

the following two types:

Fundamental qualitative characteristics

Those that are essential for financial information to be useful for users are:
 Relevance
In order for information to be relevant, one should consider whether it
could make a difference in users’ decision-making.

 Faithful representation
“Substance over form.”
In order to achieve faithful representation, the financial information given
to users must be complete, neutral and free from error.
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Fundamental qualitative characteristic: Relevance

When will financial information be relevant for its users?

Relevant financial information is capable of making a difference in the

decisions made by users.
Financial information is capable of making a difference in decisions if it has:
 Predictive value,
 Confirmatory value,
 Or both.

Financial information has predictive value if the information can be used as an

“input” and then make a prediction on future outcomes. forecast. Financial
information with predictive value is employed by users in making their own
predictions or forecasts.

Financial information has confirmatory value if it provides feedback about

previous evaluations. (Previous predictions are confirmed.) An example of
information that has confirmatory value is, when the current year’s revenue
helps users evaluate if their previous revenue predictions were correct or not.

Information that is confirmatory can also be predictive. For example: The current
year’s revenue can be seen as information that has a confirmatory value, but at
the same time can helps users predict their future revenue.

How does materiality influence relevance?

Information which is relevant is clearly affected by materiality. (Unimportant

information would have no relevance.) Although materiality is not a qualitative
characteristic, materiality does affect the decisions of users. When a user has
doubt if information is material, the user should ask the following question: “Will
omitting, misstating or obscuring the information change our primary user’s
decisions?” If the answer is “yes”, then the information is indeed material.

It is important to note that there is no one specific materiality threshold

because information that is material to one entity may not be material to another
entity. Materiality is also influenced by an entity’s specific situation. Thus,
materiality is entity specific and in deciding whether something is material
professional judgment has to be applied. (See Gripping GAAP Example 1.)
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Fundamental qualitative characteristic: Faithful representation

When will financial information be faithfully represented?

Financial reports represent economic events which is expressed in words and

numbers. To be useful, financial information must not only represent relevant
events, but it must also faithfully represent the “matter” of the event that it
intends to represent. In accounting we refer to this “matter” as the substance
of the event.

What does the term “Substance over form” mean?

In many situations, the substance of an economic event and the event’s legal
form, are the same. If the legal form is different from the substance of the
event, then we must rather portray the event’s substance and not its legal form.
We need to ask ourselves: ”What actually happens here and what does
really matter in this case?” Information should rather portray the substance
(or economic reality) since that would be a faithful representation of the
information.
(See Gripping GAAP Section 4.2.2 – Leasing of an item for its entire useful life.)
(Right-of use asset.)

What are the requirements for information to be faithfully represented?

For information to be a perfectly faithful representation, a financial report should

have three characteristics. It should be:
 Complete,
 Neutral and
 Free from error.

It is seldom achieved that information is a perfectly faithful representation.

Complete:
When will financial information be complete?

A complete representation of financial information requires that all information

(words and numbers) must be given to the users. If all necessary descriptions
and explanations are supplied, the user will be able to understand the
phenomenon being portrayed.
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Thus, if the phenomenon is an asset, the following information should be given:

 The nature of the asset, for instance it is a machine.
 Give relevant numerical information for instance the cost amount, the
accumulated depreciation amount, etc.
 Describe what the numbers mean for instance cost, accumulated
depreciation.
 Explain how we got to these amounts for instance the accumulated
depreciation is calculated at cost less depreciation and is calculated using
a nil residual value and the depreciation is calculated over a useful life of
12 years.

Neutral:
When will financial information be neutral?

For financial statements to be neutral, the information must be selected and

presented in such a way that it is not biased. If the financial statements were
manipulated so that the users interpret the information in a favorable or
unfavorable way, the information is not neutral. Financial information will be
considered unfairly presented (or prejudiced) if some parts of the information is
over emphasized or if another part of the information is under emphasized.

Neutrality is maintained by the application of “prudence”. Prudence is the

exercise of caution when making decisions where there is a level of
uncertainty about the information.

The exercise of carefulness requires that:

 Assets and income are not overstated, and thus portrays a favourable
representation of the asset and income.
 Assets and income are not understated, and thus portrays an
unfavourable representation of the asset and income.
 Liabilities and expenses are not understated, and thus portrays a
favourable representation of the liabilities and expenses.
 Liabilities and expenses are not overstated, and thus portrays a
unfavourable representation of the liabilities and expenses.
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Free from error.
When will financial information be free from error?

Useful information must be without errors. But, in this context, free from error
does not mean the information must be “accurate in all respects.”

Some amounts in financial statements are directly observable and are

consequently “accurate in all respects”. Example: On 28 February 2021 the
listed share investment’s value in the Statement of Financial Position, can be
verified as an accurate value if it is compared with the quoted share price on the
stock exchange.

However, some amounts or values in financial statements are not directly

observable and the amount or value will have to be estimated. An example
of such estimate is when there has been a provision relating to a legal matter,
were the court case is still in progress and the accountant is relying on the
lawyer’s estimations.

When estimates are made there is an element of uncertainty whether the

estimate is accurate or almost accurate. At the time an estimate is made it is
difficult to prove whether the estimate is “truthful” or “correct.” The term
“measurement uncertainty” refers to situations where an estimate is made
and there is difficulty to prove the accuracy of the value estimated. In some
cases, if the level of measurement uncertainty is high, it may be questionable
whether the estimate would provide a sufficiently faithful representation of that
event.

It is completely normal to use an estimate in financial statements, and claim

that the measurement of the estimate is a “reasonable estimate” as long as:

 The amount is described clearly and accurately as being an estimate,

 The nature and limitations of the estimating procedure are explained,
and
 No errors have been made in selecting and applying an appropriate
process for developing the estimate.

Thus, to refer to the court case again: Using the estimate will be considered
to be a faithful representation, as long as the estimate adheres to the above
mentioned three criteria.
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How do we apply fundamental qualitative characteristics?

Users will be able to make good decisions if the financial information supplied
is both relevant and faithfully represented. Information cannot be useful if it
is relevant, but not a faithful representation of the event. Furthermore, a
faithful representation of an irrelevant event will not help users to make
good decisions.

The Conceptual Framework explain that information that is both relevant and
faithfully represented can be achieved by:
Step 1: Identifying the event that has the potential to be useful to the user.
Step 2: Identifying the type of information which would be the most relevant.
Step 3: Determine whether the information is obtainable and can be faithfully
represented.

The objective of financial reporting is to provide useful information about

economic events or economic phenomena. In some cases, a trade-off
between presenting relevant information and presenting information
faithfully needs to be made in order to meet the objective of financial reporting.

If the level of “measurement uncertainty” is too high:

Then, even if the information is relevant, the information will be ignored

because presenting that piece of information, will not be a sufficient faithful
representation of that event. In such a case, the accountant will have to
choose the next most relevant information which has a lower level of
measurement uncertainty and which allow him to conclude that it is a faithful
representation of the event.
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ENHANCING QUALITATIVE CHARACTERISTICS

Enhancing qualitative characteristics (Gripping GAAP Pg. 47-49)

Explain what is meant by “Enhancing qualitative characteristics?”

If information is both relevance and faithfully represented, the information is

considered to be useful information.

To boost (or increase) the usefulness of the supplied information, the

accountant should then apply the following four enhancing qualitative
characteristics:

 Comparability
 Verifiability
 Timeliness
 Understandability

Comparability

Explain how “Comparability” will enhance the usefulness of financial

information?

Information about a reporting entity’s financial statements is more useful if it

can be compared:

 With similar information about other entities. E.g. The net profit for 2021
for Company A is R20 000 and it compares favourably with Company B’s
2021-net profit of R18 000.

 With similar information about the same entity for another period or
another date. E.g. The net profit for 2021 for Company A is R25 000 and
it compares favourably with this company’s 2020-net profit of R18 000.

Note: “Comparability” is not the same as “consistency.” (Refer to Gripping

GAAP Pg.48)
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Verifiability

Explain how “Verifiability” will enhance the usefulness of financial

information?

When information is “verified,” it give the user of the information the assurance
that the information is true, accurate, or justified.

In the accounting context financial information has to be verified:

 By independent knowledgeable observers and
 They have to certify that the information is faithfully represented.

Note:
1. The observers do not necessarily have to be in complete agreement,
but they will have to have consensus that the particular representation is
a faithful representation.

2. Some information may not be verifiable. (Predictions and expiations

cannot be verified.)

3. Information which cannot be verified should be identified. If financial

information cannot be verified, users should be able to decide if they
want to use this information in their decision-making.

Verification can be direct or indirect.

Direct verification means verifying an amount or other representation through

direct observation. Example:
The bank balance could be verified by comparing the bank balance with the
amount which appear on the bank statement.

Indirect verification can be done by checking inputs, make some calculations

and compare the outputs with the amount that has to be verified.
Example:
The inventory on hand balance could be verified:
 By taking the initial balance of number of units on hand and the cost per
unit, gather information on units and cost of units purchased and sold
during the period (the inputs),
 Apply the first-in-first-out calculation, and
 Compare the calculated balance with the actual inventory balance on
hand.
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Timeliness

Explain how “Timeliness” will enhance the usefulness of financial

information?

Most financial reports are published soon after the financial year end. Users
of the information contained in the financial reports needs to receive it as soon
as possible or timeously, so that they then could make informed decisions. If
the information is not available timeously, the information is less useful to the
primary users.

Note:
 Some information may continue to be useful even though the
information was received long after the end of a reporting period. Users
may find the information useful because they may need to identify and
assess trends.

 The race to submit reports on time, could have a negative influence on

the other qualities of the information. Completeness could be adversely
affected and consequently the financial reports might not be a faithful
representation of the results.

Understandability

Explain how “Understandability” will enhance the usefulness of financial

information?

Some events/phenomena are inherently difficult to understand. Suppliers of

information are therefore tempted to exclude complex events and by doing
just that, the financial reports will be easier to understand. However, those
reports would then be not complete and therefore possibly misleading.

Consequently, if something is difficult to understand, we need to take extra

care in how to present the information and even extra disclosure can be
supplied if it may improve the understandability of the information.

Finally, to achieve understandable information, the information must be

classified, characterised and presented in a clear and concise manner.
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ELEMENTS OF THE FINANCIAL STATEMENTS

(Refer to Gripping GAAP 2019 Pg. 50-62)

Transactions and events are grouped according to their economic

characteristics. These groupings are called elements. The Conceptual
Framework identifies 5 main elements: Assets, Liabilities, Income, Expenses
and Equity.

The following definitions are relevant:

An asset is:
 A present economic resource Note 1
 Controlled by the entity
 Resulting from past events
Note 1: An economic resource is defined as:
 A right that has
 The potential to produce economic benefits

A liability is:
 A present obligation Note 2
 To transfer an economic resource Note 1
 Resulting from past events
Note 2: An obligation is:
 A duty that the entity has
 No practical ability to avoid.

Equity is:
 The residual interest in the entity’s assets
 After deducting all its liabilities
(Residual interest = A - L)

An expense is:
 A decrease in assets or increase in liabilities
 Resulting in a decrease in equity
 Other than distributions to holders of equity claims.

An income is:
 An increase in assets or a decrease in liabilities
 Resulting in an increase in equity
 Other than contributions from holders of equity claims.
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Recognition criteria:

Assets, liabilities, equity, income and expenses may only be recognised in the
financial statements if they meet the definition as well as the recognition criteria.

According to the 2010 conceptual framework the recognition criteria

were:

 The flow of future economic benefits caused by this asset/liability are

probable, and
 This asset/liability has a cost/value that can be reliably measured.

According to the 2018 conceptual framework the recognition criteria

are:

Assets and liabilities, and any resulting income expenses or changes in

equity will be recognised if the information provided by the elements is useful
for the user.
Thus: An element will be recognised if the information which is provided is
 Relevant and
 A faithful representation.

Measurement of elements:

The term “measurement” refers to the process of deciding or calculating the

amount to be used in our financial statements.

There are a number of different methods (or possible measurement basis)

that may be used to measure the amounts of individual elements
(assets/liabilities) recognised in the financial statements.

Some of the different methods are listed below: (Pg. 65 - 67 of Gripping

GAAP)

The historical cost

The current value
 Fair value
 Value in use
 The current cost method (assets) or fulfilment value method (liabilities).
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NOTE:

You must keep in mind that an element may only be recognised in the financial
statements if it meets the respective definition as well as the recognition
criteria.

ASSET CHECK LIST:

Yes No
? Does a present economic resource exist? Is there a “right”
that exist?
? Does the right have the potential to produce economic
benefits?

Economic benefits could be:

 Inflow of cash, (accounts receivable)
 The right-to-use an asset, (PPE)
 the right to rent the asset out, (PPE)
 The right to sell an asset. (PPE; inventory)
? Is the right controlled by the business?
? Does the right exist at the reporting date because of a past
event?
IS THE ITEM INDEED AN ASSET?
? Is the information provided relevant?
? Is the information provided a faithful representation?
SHOULD THE ASSET BE RECOGNISED IN THE
STATEMENT OF FINANCIAL POSITION?
? Does the right have the potential to produce economic
benefits be within the next twelve months?
IS THIS A CURRENT OR A NON-CURRENT ASSET?
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LIABILITY CHECK LIST:
Yes No
? Does the entity have a present obligation?
Is there a duty to pay a supplier/a law form/ the bank?
Does the entity have no practical ability of avoiding the duty
due to …?
? Does the obligation have the potential to result in a transfer
of an economic resource?
(most cases … cash will have to be transferred)
? Did a past event happen?
What happened? (Cause)
What is the result? (Effect)

Cause: Inventory was purchased.

Effect: The potential transfer of economic resources.
IS THE ITEM INDEED A LIABILITY?
? Is the information provided relevant?
? Is the information provided a faithful representation?
SHOULD THE LIABILITY BE RECOGNISED IN THE
STATEMENT OF FINANCIAL POSITION?
? Will the anticipated transfer of an economic resource be
within the next twelve months?
IS THIS A CURRENT OR A NON-CURRENT LIABILITY?

QUESTION 1 (14 MARKS)

Sellati Limited is a retail business which has a financial year end on 31
December.
On 30 November 2018 the accountant recorded the following journal entry and
it was posted to the ledger:

Debit Credit
2018
Nov 30 Inventory 20 000

Sugar Wholesalers Ltd 20 000

The amount of R20 000 represents the purchases of merchandise from Sugar
Wholesalers Ltd, a supplier of sugar products to retail businesses.

REQUIRED:
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1.1 Identify the element of financial statements which was debited in the
above journal entry.
Element
(1)
debited:

1.2 Explain the element you have chosen in 1.1.

Your explanation/motivation should refer only to the definition criteria of
this element in accordance to the conceptual framework of 2018.
Thus, "Inventory" is a/an ………………… because:
(6)

1.3 Identify the element of financial statements which was credited in the
above journal entry.
Element
(1)
credited:

1.4 Explain the element you have chosen in 1.3.

Your explanation/motivation should refer only to the definition criteria of
this element in accordance to the conceptual framework of 2018.
Thus, "Sugar Wholesalers Ltd" is a/an ………………… because:
(6)
ANSWER QUESTION 1:

1.1 Element debited: Asset  (1)

1.2 Motivation :
Thus, "Inventory" is an asset because:
1 Inventory is a present economic resource: 
Sellati Limited has the right to sell the inventory. 
There is the potential to produce economic benefits through the inflow of
cash (or another economic resource) when the inventory is sold. 

2 The inventory is controlled through legal ownership. 

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3 There was a past event.
The inventory was purchased (cause) and Sellati Ltd gained the economic
benefits of the inventory (result/effect)  on 30 November 2018 which was
before the financial year end of 31 December 2018. 

(6)

1.3 Identify the element of financial statements which was credited in the
above journal entry.
Element
Liability  (1)
credited:

1.4 Explain the element you have chosen in 1.3.

Motivation:
Thus, "Sugar Wholesalers Ltd" is a liability because:

Sugar Wholesalers Ltd (the trade payable) is a present obligation,

1
because: 
Sellati Limited has the duty to pay the supplier. 
Sellati Limited has no practical ability of avoiding the duty due to the legal
contract of purchase. 

The obligation has the potential to result in a transfer of an economic

2
resources.
Sellati Limited will have to transfer cash to meet the obligation. 

3 There was a past event.

The inventory was purchased (cause) and Sellati Ltd gained the economic
benefits of the inventory (result/effect)  on 30 November 2018 which was
before the financial year end of 31 December 2018. 

(6)
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QUESTION 2 (7 MARKS)

Sellati Limited is a retail business which has a financial year end on 31

December.
On 30 November 2018 the accountant recorded the following journal entry and
it was posted to the ledger:

Debit Credit
2018
Nov 30 Equipment 5 000

Bank 5 000

The amount of R5 000 represents the purchases of equipment which will be

used to manufacture inventory. The bank had an unfavourable balance at that
date.

REQUIRED:

2.1 Explain/Motivation why equipment is an asset. Refer only to the

definition criteria of an asset in accordance to the conceptual (6)
framework of 2018.

2.2 Explain/Motivation why the bank overdraft is a liability. Refer only to

the definition criteria of a liability in accordance to the conceptual
framework of 2018. (6)

ANSWER:

2.1 Motivation:
The "Equipment" is an asset because:

1 The equipment is a present economic resource: 

Sellati Limited has the right to direct the use of the equipment. 

(Direct = when, how, keep or sell the equipment)

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There is the potential to produce economic benefits through the
manufacture of inventory. (inflow of other economic resources) 

2 The equipment is controlled through legal ownership. 

3 There was a past event.

The inventory was purchased (cause) and Sellati Ltd obtained control of
the equipment (result/effect)  on 30 November 2018 which was before
the financial year end of 31 December 2018. 

(6)

2.2 Motivation:
The bank overdraft is a liability because:

1 The overdraft is a present obligation, because: 

Sellati Limited has the duty to pay the bank. 
Sellati Limited has no practical ability of avoiding the duty due to the legal
nature of the overdraft / credit granted. 

The obligation has the potential to result in a transfer of an economic

2
resources.
Sellati Limited will have to transfer cash to meet the obligation. 

3 There was a past event.

Sellati Limited obtained an economic benefit by using the overdraft facility
(cause) and it resulted in a potential transfer of economic resources
(result/effect).  The past event happened on 30 November 2018 which
was before the financial year end of 31 December 2018. 

(6)
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QUESTION 3 (3 MARKS)

Sellati Limited is a retail business which has a financial year end on

31 December.
On 30 November 2018 the accountant recorded the following journal entry and
it was posted to the ledger:

Debit Credit
2018
Nov 30 Salaries and wages 40 000

Bank 40 000
The bank had a favourable balance at that date.

REQUIRED:

3.1 Explain/Motivation why salaries and wages is an expense. Refer only

to the definition criteria of an expense in accordance to the
conceptual framework of 2018. (3)

3.1 Motivation:
The salaries and wages is an expense because:

There is a decrease in assets: Sellati’s favourable bank balance was

1
decreased. 

2 The decrease in assets resulted in a decrease in equity:

The transaction decreased the asset but did not change the liabilities, and
thus equity does decrease. 

The decrease in equity is not a distribution to a holder of an equity

3
claim:
The cash payment was made to employees and not to a holder of an
equity claim (e.g. ordinary shareholders) and thus is not a distribution to a
holder of any equity claims. 

(3)
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QUESTION 4 (3 MARKS)

Sellati Limited is a retail business which has a financial year end on 31

December.
On 30 November 2018 the accountant recorded the following journal entry and
it was posted to the ledger:

Debit Credit
2018
Nov 30 Water and electricity 130 000

Cape Town Municipality 130 000

The water bill from the municipality was not yet paid since Sellati expected that
there was an error in the water consumption calculations for November 2018.

REQUIRED:
4.1 Explain/Motivation why “water and electricity” is an expense. Refer
only to the definition criteria of an expense in accordance to the
conceptual framework of 2018. (3)

4.1 Motivation:
The “water and electricity” is an expense because:

There is an increase in liabilities: The obligation payable to Cape Town

1
Municipality increase Sellati’s liabilities. 

2 The increase in liabilities resulted in a decrease in equity:

The transaction increased the liabilities but did not change the assets, and
thus equity does decrease. 

The decrease in equity is not a distribution to a holder of an equity

3
claim:
This payable involves an amount owed to the municipality and not to a
holder of an equity claim (e.g. ordinary shareholders) and thus is not a
distribution to a holder of any equity claims. 
(3)
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QUESTION 5 (3 MARKS)

Sellati Limited is a retail business which has a financial year end on 31

December.
On 30 November 2018 the accountant recorded the following journal entry and
it was posted to the ledger:

Debit Credit
2018
Nov 30 Bank 8 000
Rent income 8 000

Sellati Limited had an operating lease agreement with a tenant whereby the
tenant had to pay each month an amount of R8 000 for the next month.

REQUIRED:
5.1 Explain/Motivation why “Rent income” is an income. Refer only to the
definition criteria of an income in accordance to the conceptual
framework of 2018. (3)

5.1 Motivation:
The “Rent income” is an income because:

There is an increase in assets: The cash payment was made into the
1
bank account and consequently there was an increase Sellati’s assets. 

2 The increase in assets resulted in an increase in equity:

The transaction increased the assets but did not change the liabilities, and
thus equity does increase. 

The increase in equity is not a contribution from a holder of an equity

3
claim:
This cash receipt involves an amount received from the tenant and not
from a holder of an equity claim (e.g. ordinary shareholders) and thus is
not a contribution from to a holder of any equity claims.  (Shareholders
did not buy any shares)
 24

QUESTION 6 (9 MARKS)
IGNORE VAT

BB Limited started a business doing renovating jobs.

EXTRACT FROM THE PRE-ADJUSTMENT TRIAL BALANCE OF BB

LIMITED FOR THE FINANCIAL YEAR ENDING 30 JUNE 2018

2018 2018
DEBIT CREDIT
Service fee income 800 000
Cost of sales 400 000

Additional information:

During May 2018 BB Ltd was awarded a R200 000 contract for work to be done.
BB Ltd agreed to start on 1 June 2018 and the contract stated it would take 4
months to complete the job and that one quarter of the contract would be
completed each month. On 30 June 2018 BB Ltd received a cheque for the full
amount of R200 000 which was deposited in the bank. The full R200 000 was
recorded as service fee income.

REQUIRED:
1.1 Prepare the adjusting general journal entry that BB Limited
should process relating to the R200 000 cash received by BB
Limited on 30 June 2018 from their client. (Dates and narrations (3)
are not required.)

1.2 Explain the element you have chosen to credit in the journal
entry in 1.1 above. Refer only to the definition of the element in
accordance to the Conceptual Framework of 2018. (6)
 25
QUESTION 6 - ANSWER

6.1

2018 Debit Credit

JUN 30 DR Service Fee income () 150 000 (½)
CR Income received in advance () 150 000 (½)
(3)
Cr Income received in advance with R150 000.
R150 000 of the R200 000 received on 30 June 2018 was a payment in respect
of services still to be provided during July, August and September 2018.

6.2 "Income received in advance" was credited.

" Income received in advance" is a liability because:

1 Income received in advance is a present obligation, because: 

BB Limited has the duty to deliver the services/
or to pay back the amount to the client 
BB Limited has no practical ability of avoiding the duty due to the legal
enforceable contract which was signed. 

The obligation has the potential to result in a transfer of an economic

2
resources.
BB Limited will have to supply the services (or transfer/refund cash) to
meet the obligation. 

3 There was a past event.

BB Ltd has already gained the economic benefits (cash) for the services
not yet performed.  The cash was received on 30 June 2018 which falls
within the financial year ending 30 June 2018. 

(6)
 26

FINANCIAL ACCOUNTING 2 /25

CLASS TEST (A) 18 FEBRUARY 2019 45 MINUTES

SURNAME: ………………….……..………………….. INITIALS: ……………..……...

STUDENT NO: ………………….…………….............. CLASS GROUP: …………….

WORK DONE IN PENCIL WILL NOT BE MARKED

QUESTION 1 (8 MARKS)

With reference to the following statements (1.1 to 1.8) select for every statement the most
suitable answer and circle the answer on the following table:

1.1 (a) (b) (c) (d)

1.2 (a) (b) (c) (d)

1.3 (a) (b) (c) (d)

1.4 (a) (b) (c) (d)

1.5 (a) (b) (c) (d)

1.6 (a) (b) (c) (d)

1.7 (a) (b) (c) (d)

1.8 (a) (b) (c) (d)

1.1 Which one of the following statements is correct?

(a) The fundamental qualitative characteristics are consistency of presentation

and compliance with IFRSs.
(b) The fundamental qualitative characteristics are comparability and faithful
representation.
(c) The fundamental qualitative characteristics are faithful representation and
understandability.
(d) The fundamental qualitative characteristics are faithful representation and
relevance.
 27
1.2 Which one of the following statements is correct?

(a) Enhancing qualitative characteristics are those characteristics that improve

usefulness.
(b) Enhancing qualitative characteristics are those characteristics that are
essential for usefulness.
(c) Some of the enhancing qualitative characteristics are accrual basis and
materiality.
(d) There are eight enhancing qualitative characteristics.

1.3 Which one of the following statements is incorrect?

(a) The Conceptual Framework for Financial Reporting is technically not an

IFRS but simply the foundation on which all IFRSs are built.
(b) The revised Conceptual Framework of 2018 replaced all previous standards
and interpretations and in all cases where the new Conceptual Framework
conflicts with an IFRS the new Conceptual Framework will override the
IFRS.
(c) The Conceptual Framework of 2010 has now been replaced by the
completely revised Conceptual Framework in 2018. However, a Conceptual
Framework will always be a work-in-progress and thus further revisions may
be needed from time-to-time.
(d) The Conceptual Framework states what the objective of financial reports is
and explains various concepts.

1.4 Which one of the following statements is incorrect?

(a) The Conceptual Framework assists the IASB to develop new IFRSs.
(b) The Conceptual Framework assists prepares of financial statements who
may need to create accounting policies.
(c) The Conceptual Framework assists all parties to understand and interpret
IFRS.
(d) The Conceptual Framework assists IFRSIC to write economic and other
non-financial reports.
 28
1.5 Which one of the following statements is correct?

(a) The object of “General-purpose financial reporting” is to give users the ability
to draft their own financial statements.
(b) The Conceptual Framework explains that “General-purpose financial
reporting” is designed to supply reports to three primary users. These users
are management, potential and exciting investors and creditors.
(c) The Conceptual Framework explains that “General-purpose financial
reporting” is designed to supply reports that need only to supply financial
information.
(d) The Conceptual Framework explains that “General-purpose financial
reporting” is designed to supply reports which will enable users to make
informed political and economic decisions.

1.6 Which one of the following statements is incorrect?

(a) Financial information is capable to making a difference in users’ decision-

making if it has the following or both characteristics: Predictive value and
confirmatory value.
(b) Relevance is not affected by materiality but by “substance over form.”
(c) For financial statements to be useful, the information contained therein must
be relevant and must be a faithful representation.
(d) There is no one specific materiality threshold because information that is
material to one entity may not be material to another entity and information
could also be dependent on the situation. Thus, it would be fair to say that
materiality is entity specific.

1.7 Which one of the following statements is correct?

(a) Information that is regarded to be “free from error” is “accurate in all

respects.”
(b) In some cases, amounts do not have a directly observable price and the
amount will have to be estimated. Such an estimated amount will never be
recorded since it is not “free from error.”
(c) Exercising prudence means that overstated assets and incomes may be
recorded since the information is still neutral.
(d) Information that is “manipulated” so that users will interpret the information
favourable, will not be a faithful representation since it is not “neutral.”
 29
1.8 Which one of the following characteristics is incorrect?

For information to be faithfully represented it should be:

(a) Understandable
(b) Complete
(c) Neutral
(d) Free from error.

MEMO:
1.1 (a) (b) (c) (d) 

1.2 (a)  (b) (c) (d)

1.3 (a) (b)  (c) (d)

1.4 (a) (b) (c) (d) 

1.5 (a) (b) (c)  (d)

1.6 (a) (b)  (c) (d)

1.7 (a) (b) (c) (d) 

1.8 (a)  (b) (c) (d)