Introduction & The Conceptual

Framework for Financial Reporting

Lecture 1 (Chapter 1 & 2)
12 February – 16 February 2024
WELCOME!
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 The end goal of the
module
journalise a selection of relevant routine transactions
and events with understanding (basic level)

accumulate these in accounts and

present and disclose them in financial statements

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Admin
• Medium of communication
• Learning guide
• Lecturers’ details including consultation times
• Assessments
• Assignments
• Rules regarding passing the module
• Units on Moodle

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 Teaching and learning cycle
Pre-
reading

Assignment Lecture

Consultation Self-study

Tutorial Objective
test
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Chapter 1
Introduction

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Introduction
• History and development of financial accounting
• Fields of study
• International Accounting Standards Board (IASB)
• Development of International Financial Reporting
Standards (IFRS)
• Promote use of IFRS
• Promote & facilitate adoption of IFRS

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Chapter 2
Conceptual Framework for Financial
Reporting

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 .

These companies have

similar financial reports.
Why?

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Purpose of Conceptual Framework
(CF)
Board Preparers Users
• assist IASB in the • assist preparers of • assist all parties
development of financial to understand
IFRSs that are statements to and interpret
based on develop consistent IFRSs.
consistent accounting policies
concepts;

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Key points to note about the
Conceptual Framework
• The CF is not a standard and cannot override any
Standard. Meaning?
• Standard takes precedence (preference given to standard)
• Standard has different definitions to CF
• The IASB may depart from the conceptual framework
with reasons

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 Overview
 CF – foundation for developing accounting standards

 Accounting standards – used to prepare financial reports

 General purpose financial reports

 Financial statements
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 General purpose financial reports
.
To provide:
• financial
information About:
to users • financial position;
• financial performance and;
• the cash flow of the • that is useful to
reporting entity users
• in making economic
decisions

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General purpose financial reports

• Who are the users of this financial information

• existing and potential investors

• lenders and other creditors
• government
• employees
• customers
• community
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Financial statements
• Financial statements are a form of general purpose
financial reports
• Financial statements give info about:
• Economic resources of reporting entity (Assets)
• Claims against the reporting entity (Liabilities)
• Changes in those resources and claims (Equity)

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Financial statements components
• What does financial statements consist of

1. Statement of financial position

• Snapshot of position of entity at reporting date

2. Statement of profit or loss

• Performance of entity for a period (normally 12 months)

3. Statement of changes in equity

4. Statement of cash flows

• Notes to the financial statements

• Necessary to understand the above statements better

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Financial statements
• Reporting entity
• Entity that is preparing financial statements
• (e.g. Pick n Pay)
• Reporting period
• Time span for which company reports financial performance and
position
• (e.g. 1 March to 27 February for Pick n Pay)
• Reporting date
• Last date of reporting date
• (27 February for Pick n Pay)

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Qualitative characteristics of useful
financial information
• Remember, general purpose financial statements need
to provide useful information to users
• Useful information has the following qualitative
characteristics
• Fundamental characteristics (Important)
• Enhancing characteristics

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Fundamental Qualitative characteristics
Relevance Faithful presentation

• Makes difference in users • Complete

decision • Includes all information
• Predictive/confirmatory value necessary

• Materiality • Neutral
• No bias
• Entity specific
• Nature/magnitude • Free from error
• Does not mean perfectly
accurate

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Qualitative characteristics
• Enhancing relevance and faithful presentation
• Comparability
• Compare with other entities & trends
• Verifiability
• Direct & indirect verification
• Independent observers reach consensus
• Timeliness
• Having info on time
• Understandability
• Presenting info clearly
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Qualitative characteristics
• Info that is not relevant and faithfully presented is not
useful
• Info that is relevant and faithfully presented is useful
even if it does not have enhancing characteristics
• It costs money to provide useful financial statements

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Preparation of financial statements
• Going concern
• Financial statements prepared on assumption that
reporting entity is a going concern
• Will continue to operate in the foreseeable future
• No intention/need to liquidate
• Accrual basis
• Transactions/events are recorded in the period they are
incurred/earned not necessarily when cash paid/received
• Components of financial statement prepared on accrual
basis except for Statement of Cash flows
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Preparation of financial statements
• It starts with a transaction or event
• Transactions
• Exchange of goods or services
• Events
• Assets destroyed in a fire
• Entity sued
• Transactions or events need to be classified into
categories (elements)
• Transactions or events need to be recorded

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 Accounting cycle
1.
Transaction
or event
7. Financial 2. Source
statements Document

6. Closing 3. Journals
entries

5. Trial 4. General
balance ledger
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Elements of financial statements

Assets Liabilities Equity

Income Expense

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Definition of an asset
Asset A present economic resource controlled by the entity as a result of
past events

Economic An economic resource is a right that has the potential to produce

resource economic benefits
Three requirements of the definition of an asset

Right • Arise from contracts, legislation or other means

• Right must already exist

Potential • Right does not have to be certain or even likely

• Entity has present ability to:

• direct the usage of economic resource
Control • obtain the economic benefits:
• prevent others from
• directing use of the economic resource
• obtaining the economic benefits

Past • Usually delivery of goods or services (when control is

event transferred)
 Rights

Rights based on an obligation of another

party
Right to receive cash = other party has
obligation to deliver cash
Right to receive goods/services = other party
has obligation to deliver goods/services
Definition of a liability
Liability A present obligation of the entity to transfer an economic
resource as a result of past events
Obligation A duty or responsibility that the entity has no practical
ability to avoid
Three requirements of the definition of a liability

Obligation • No practical ability to avoid

• Arises from contracts, legislation or other means

• Obligation must have the potential to require the entity to transfer an

economic resource to another party(ies).
Transfer
• Not certain nor likely = low probability
economic
• In at least one circumstance, entity will be required to transfer
resource
economic resource

Action – Entity has already:

(a) obtained economic benefits, or
Past event (b) taken action, that creates the obligation

Consequence
• Entity will or may have to transfer an economic resource that it
would not otherwise had to transfer
Other elements definitions

Equity The residual interest in the assets of the entity after

deducting all its liabilities
Income Increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to
contributions from holders of equity claims

Expenses Decreases in assets, or increases in liabilities, that result in

decreases in equity, other than those relating to
distributions to holders of equity claims
 Interaction of the elements

Assets Liabilities Equity

Income
Expense

This is what is called the accounting equation

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Elements of financial statements
Statement Elements
Statement of Financial Position Assets
Liabilities
Equity

Statement Elements
Statement of Financial Performance Income
Expenses

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Example (paragraph 157 and 163 of textbook)

Question
On 4 January 20.7, AC (Pty) Ltd received a bank loan of
R800 000. The contract was signed on 19 December 20.6.

Required
• Apply the definition of an asset and liability to the above
scenario

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Answering theory questions
• Draw up a table with two columns
• State the theory on the left
• Apply the theory to the scenario on the right (make use of the
word “because” to support the statement you are stating in the
theory)

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Answering theory questions (Asset)
• An asset is a present economic resource • Cash is a present economic resource because AC
(Pty) Ltd has a present legal right of ownership that
has the potential to produce economic benefits
because AC (Pty) Ltd can use the cash to, for
example, buy other assets, produce goods or
services, or pay expenses and liabilities.
• AC (Pty) Ltd controls the economic resource (cash)
• controlled by the entity because it has the present ability to direct the use
of the cash and obtain the economic benefits that
may flow from it. AC (Pty) Ltd has the present
ability to direct the use of the cash because it has
the legal right to use the cash in its activities.
• The past event is the shareholder’s depositing the
money into the entity’s account as its capital
• as a result of past events. contribution to the business.

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Answering theory questions (Liability)
• A liability is a present obligation of the entity • AC (Pty) Ltd has a legally enforceable duty or
responsibility towards the financial institution which
AC (Pty) Ltd has no practical ability to avoid.

• AC (Pty) Ltd has an obligation to transfer an

• to transfer an economic resource economic resource in the form of cash to extinguish
the obligation.

• The transfer of the loan amount on 4 January 20.7 in

• as a result of past events. accordance with the loan agreement, is the past
event that gave rise to the present obligation of AC
(Pty) Ltd. This is the date when AC (Pty) Ltd has
already received the economic benefits in the form
of the loan amount and as a consequence will have
to transfer an economic resource in the form of cash.

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Example (expense and income definition)

Question A (paragraph 208 and 211 of textbook)

AC (Pty) Ltd employed a number of temporary employees for two weeks and at the end of the two
weeks, on 30 June 20.7, paid them a total of R8 000 in cash.
Required
• Apply the definition of an expense to the above scenario

Question B (paragraph 217 and 221 of textbook)

On 3 May 20.7, AC (Pty) Ltd, which uses the perpetual inventory system, sold trade inventories with a cost
price of R6 000 to a customer for R14 000 cash
Required
• Apply the definition of an income to the above scenario

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